Kathleen Finnegan

tips for paying off your mortgage early

The stories of people who pay off 30-year mortgages after 30 years in the same home are indeed rarer than they once were. But the recent foreclosure crisis did serve as an incentive for homeowners to pay off their loans sooner rather than later – and some have actually given it a try.

While living mortgage-free may sound like an enviable goal, paying off your mortgage early isn’t always the best use of your money. If you have high-interest credit card or student loan debt, you’re much better off paying those off before making extra mortgage payments. Saving for your child’s college education and funding your 401(k) at least to the point of getting the maximum employer match – and maybe more – may also be more important than getting ahead on your mortgage.

Beyond that, you want to make sure you have enough cash on hand for emergencies because drawing from your home equity isn’t always easy.

1 – Add something to every month’s payment. The advantage to extra payments is that all that money goes toward principal. Early in a mortgage, most of your regular payment goes toward interest. According to calculations by Bankrate.com, if you added an extra $100 to your payment of a new $100,000 30-year mortgage at 4.5 percent interest, you’d pay off the mortgage eight and a half years early and save more than $26,300 in interest.

2 – Make a payment every two weeks. There are companies that volunteer to set this up for you, for a fee, but you can do it yourself for nothing. You’re effectively making a full extra payment each year. Paying half your mortgage payment every two weeks, on that same $100,000, 30-year mortgage at 4.5 percent, would cut just under 5.5 years off the term and save roughly $14,000. Splitting your mortgage payment into two pieces produces minimal savings.

3 – Make one extra payment a year. This provides about the same savings as making half a payment every two weeks. When you make the payment isn’t always important. You could make it at the end of the year or wait until you get a tax refund or a bonus.

4 – Refinance your mortgage to a lower rate, and keep making the higher payment. The amount this will save depends on the exact figures, but it should shave years off your mortgage and save you thousands in interest.

5 – Refinance your mortgage to a shorter term. This cuts the amount of interest you pay significantly as well as getting you out of debt sooner.

6 – Cut expenses and put the savings toward your mortgage. Change to a cheaper cellphone plan, cut the cable cord or otherwise cut living expenses and devote that extra money to extra mortgage payments. Living a frugal lifestyle may be difficult in the moment, but it’s worth the struggle if your ultimate goal is to be debt-free.

This entry was posted on Thursday, October 8th, 2015 at 1:51 pm and is filed under Homeowner Misc. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.