How to Pay Your Mortgage Off Early
Owning a home is something everyone dreams of, but owning a home outright comes in a close second.
Paying off your mortgage faster is a smart move, from a financial perspective.
Being mortgage-free decreases your monthly expenses dramatically and enables you to fund other expenses like retirement, college funds, and day-to-day savings more easily.
The majority of your mortgage payment goes towards interest in the first few years.
Here are some tips to reduce or avoid that interest-trap altogether, working your way towards living the mortgage-free life you deserve:
1. Opt for a 15-year fixed rate mortgage
Most homebuyers choose 30-year fixed rate mortgages because they allow them monthly savings of several hundred dollars. This may seem like a sensible option up front, but if can afford the extra $400 in monthly payments, choose a 15-year fixed rate for a quicker payoff.
- If you take out a 30-year, $200,000 loan at an interest rate of 6%, your monthly mortgage payment is $1,199 and you’ll be paying over $231,000 in interest over the life of your mortgage.
- If you take out a 15-year, $200,000 loan at an interest rate of 6%, your monthly mortgage payment will be $1,688, but you’ll only pay $103,000 in interest over the course of your mortgage.
- The 15-year term forces you to pay a higher amount each month, but you’ll mortgage-free in just 180 months and you’ll have saved over $100,000 in interest payments.
- Lenders assume a lower risk with 15-year fixed rate mortgages, so they pass on savings by lowering the interest rates on the loan.
2. Make regular lump sum payments
You can also make an extra lump sum payment towards your principal at the start of every year. You’ll want to specify that this check should be applied to “principal only,” because if you don’t, the lender automatically apply the extra payment to interest.
- Use your Christmas bonus to make this extra lump sum payment. If you don’t get one, set aside $25 each week throughout the year, and you’ll have an extra check of $1,300 to apply in addition to that month’s mortgage payment.
- Of course, you can make lump sum payments any time of the year. Most lenders have restrictions, however, as to how many lump sum payments you can make each year.
3. Send out a second check each month
As we indicated earlier, the majority of your mortgage payment each month goes towards the interest, not the principal. In fact, up to 75% of your monthly payment can consistently go towards interest.
One strategy you can employ to minimize this expense is to send an extra payment each month to be applied only towards your principal.
- Doing this drastically reduces the amount of principal you owe, while you continue to pay interest as well.
- Budget the amount you can afford to send. Even if it’s only $50 to $300, make sure you’re sending money you can afford to live without. Sure, paying off your mortgage faster is a priority, but it makes little sense to dig yourself a financial hole that only increases your long-term burden.
- Another approach is to send biweekly payments towards the principal of your mortgage, something you’ll need to arrange with your broker in advance. There’s a measure of security in this approach, because if your income decreases or other expenses increase, you can stop making extra payments at any time without penalty.
Still other options f or paying your m
ortgage faster include refinancing your home or opting for a balloon mortgage. These more complicated processes are somewhat of a hassle to manage, though, so working strategically with your existing mortgage is the best strategy for most people.