Make Extra House Payments
Lets say you have a $220,000, 30-year mortgage with a 4% interest rate. Our mortgage payoff calculator can show you how making an extra house payment every quarter will get your mortgage paid off 11 years early, and save you more than $65,000 in interestcha-ching!
But before you start making extra payments, lets go over some ground rules:
- Check with your mortgage company first. Some companies only accept extra payments at specific times or may charge prepayment penalties.
- Include a note on your extra payment that you want it applied to the principal balancenot to the following months payment.
- Dont shell out your hard-earned cash for a fancy-schmancy mortgage accelerator program. You can accomplish the same goal all by yourself.
What Does Paying Your Mortgage Biweekly Do?
Some mortgage lenders allow you to sign up for biweekly mortgage payments. This means you can make half of your mortgage payment every two weeks. That results in 26 half-payments, which equals 13 full monthly payments each year. Based on our example above, that extra payment can knock four years off the 30-year mortgage and save you over $25,000 in interest.
Are Biweekly Mortgage Payments a Good Idea?
Clark Howards Key Takeaway
Every homeowner with a mortgage should print out an amortization schedule to track the exact progress of their mortgage, Clark says. Theyre free and easy to find online.
Loans are sold a lot and routinely the balances are messed up when the loan is sold. If youre someone whos interested in prepaying on your mortgage, an amortization schedule gives you the ability to make sure your prepayments are properly applied and reflected in your new remaining balance. In addition, homebuyers who have PMI because they put down less than 20% can use the schedule to know when they can remove the PMI.
Use Credit Card Rewards
Wouldnt it be great if you could use credit card rewards to pay off your mortgage faster?
We had our last mortgage through Wells Fargo and one day when I logged into our account, I saw a note about their Home Rebate Card.
For the first six months, you earn 5% cash back on gas, groceries and drugstore purchases and 1% on everything else.
After the six months are up, you earn a flat 1% on purchases.
The nice thing about the card is that there is no annual fee and the cash back is automatically transferred to your mortgage principal.
If you dont have a mortgage through Wells Fargo, you can still do this mortgage pay off trick and pay off your mortgage fast.
Here is the process.
You make the transfer from checking to savings since you never had to pay the amount you took a statement credit for.
If you spend $150 a week on groceries and $50 a week in gas, you would earn $625 a year in cash back.
Apply this to your mortgage once a year and you knock off over 3 years and save more than $20,000 in interest!
Of course, you dont want to go into debt when doing this, otherwise the point of paying off your mortgage early is lost.
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Look Into Mortgage Recasting
A mortgage recast is when a lender recalculates a new loan balance and puts forth a new payment schedule, usually after the borrower makes a large payment toward the loans principal balance.
This new payment or amortization schedule will detail principal and interest percentages in each payment due from that point until the loan is scheduled to be paid off.
Since the new loan balance is naturally lower, a mortgage recast results in lower monthly payments for the borrower.
That all depends on your financial goals. But if you’re looking to save money, then an early mortgage repayment can be a smart move. Not having to pay interest for even one year will make a considerable difference. That said, your lender may charge you a prepayment penalty.
These aren’t necessarily dealbreakers, but do your research and consult a financial planner to determine if paying your mortgage off early is the best move for you.
The Power Of Compounding
One of the reasons for such a difference between the investment gains and the interest saved from paying the loan off early is the power of compounding. If the $100,000 investment is not withdrawn during the ten years, the interest earned each year is reinvested, leading to interest being earned on interest, which can magnify the investment gains.
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If You Decide To Pay Your Mortgage Off Before You Retire
Ideally, you would accomplish your goal through regular payments. However, if you need to use a lump sum to pay off your mortgage, try to tap taxable accounts first instead of retirement savings. If you withdraw money from a 401 or an individual retirement account before 59½, youll likely pay ordinary income taxplus a penaltysubstantially offsetting any savings on your mortgage interest, Rob says.
How To Pay Your Mortgage Off Early And Why You Might Want To Consider It
According to the National Association of REALTORS®, 87% of home buyers used a mortgage to finance their home in 2020. But mortgages can be daunting to take on, considering that theyre often 30-year commitments.
You may need to take out a loan to purchase your home, but do you want to be in debt for the next 3 decades? The good news is that in many cases, you can pay off your mortgage early. But before you decide to do that, there are some things you should know about the proper procedure.
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Get A Loan Modification
If your mortgage payments are unaffordable but you want to get back on track and potentially pay the loan off early, consider a home loan modification. Generally reserved for borrowers experiencing financial hardship, a loan modification entails the lender adjusting the interest rate or loan term to help bring the loan current.
With this option, you could save on interest and pay the loan off faster. There could be consequences for your credit, however, depending on how your lender or servicer reports it to the credit agencies, so be sure to discuss this with your lender upfront.
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Good Debt Vs Bad Debt
Some people think of all debt as bad, but thats not really the case. Experts refer to both good debt and bad debt. A mortgage lands squarely in the good debt column.
How a loan is secured determines whether its good or bad, says Stanley Poorman, a financial professional with Principal®. A mortgage is secured by an assetyour housewhich gives it an advantage. Personal loans and credit cards are not.
Think of good debt this way: Every payment you make increases your ownership in that asset, in this case your home, a little bit more. But bad debt like credit card payments? That debt is for things youve already paid for and are probably using. Youre not going to own any more of a pair of jeans, for example.
Theres another key difference between purchasing a home and buying most goods and services. Very often, people can pay cash for things like clothes or electronics. The vast majority of people couldnt pay cash for a home, Poorman says. That makes a mortgage all but necessary to buy a house.
How To Pay Off Your Mortgage Early And Save Thousands
Editors Note: This story originally appeared on The Penny Hoarder.
If you own a home, your mortgage payment is probably your biggest monthly expense.
But what if you could eliminate that huge financial obligation ahead of schedule and own your home free and clear?
There are a few tried-and-true ways to pay off your mortgage early simple changes like making an extra monthly payment as well as more complex and expensive options like refinancing.
Paying off your mortgage early doesnt make sense for everyone. Its important to consider your individual circumstances, including your monthly budget. But if your top priority is paying off your mortgage faster, these tips can help you make it a reality.
Most loan servicers let you pay off your mortgage early without penalty but this isnt always the case.
Some companies only accept extra payments at specific times. Others may charge prepayment penalties.
Check with your loan service provider to see if any restrictions apply to extra mortgage payments.
You also need to clarify that you want your extra payments applied to the principal of your loan not to interest or the next months payment. By hacking away at the principal, you reduce how much you shell out in interest over time.
Lenders usually give you the option online to apply extra payments to the principal only.
If this option isnt clearly marked, reach out to your loan company for instructions.
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The Biggest Downside To Paying Off Your Mortgage Early
There are several studies citing the psychological benefits of paying off debt early, such as emotional relief and the strength to avoid slipping back into debt.
All of that is true. But the biggest downside that no one talks about is the complete loss of motivation to take on calculated risks and to work as hard as you can to grow your wealth.
After being mortgage-free, my and wife and I lived comfortably off the severance checks that we negotiated when we quit our six-figure jobs in finance , and the $150,000 in annual passive income mostly from real estate, dividend stocks and bonds.
But my entire attitude slowly changed once I sent that final mortgage check. I stopped aggressively looking for new freelance consulting work. I went from taking on three contracts per month to just one. So instead of working 60 hours, I was only working 20 hours. At around $10,000 per contract, I was losing out on $20,000 of monthly income.
To reward ourselves for paying off the mortgage, my wife and I also took a month-long trip to Asia. We visited friends overseas and saw the Ruins of Angkor in Cambodia, then spent weeks camping in Yosemite. After that, we flew to New York for two weeks to watch the U.S. Open. We spent more than $10,000 on the entire trip.
It was a lot of time off so much, in fact, that I was behind by $50,000 on my goal to reach $200,000 in annual passive income. The plan was to grow our money so we could feel financially secure by the time we had a baby.
Why Pay Off Your Mortgage Early
Few people keep a 30year loan for its full term. In fact, homeowners stay put just 13 years on average and their loans might have an even shorter lifespan if they refinance at some point.
Homeowners who plan to sell their home or refinance soon usually arent concerned about paying off their mortgage early.
But what about homeowners who stay put for the long haul? Those 30 years of interest payments can start to feel like a burden, especially compared to the payments on todays lowerinterestrate loans.
You may find yourself wondering how to pay your mortgage off faster so you can live debtfree and have full ownership of your home.
Here are five strategies you can use to meet those goals.
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Lump Sum Or Extra Payments
But the real key to paying off your mortgage debt faster is to get a mortgage that allows you to make extra payments. Most mortgages allow borrowers to make annual prepayments of 10% to 20% of principal, without extra fees. These extra payments go directly towards paying down the principal. If possible, try to avoid a mortgage that only allows you to make extra or lump sum payments on the mortgage anniversaryas this can reduce the likelihood of making the extra payment.
Put Any Windfall Toward Your Mortgage
If youre serious about getting out from under the major monthly expense of a mortgage payment, consider putting unexpected cash toward the principal.
Tax refunds, work bonuses, and inheritance payments give you a chance to pay off a chunk of your mortgage without significantly impacting your monthly budget.
Other windfalls can include profits from selling a car, gaining access to trust money, cashing out an investment, or winning the lottery.
Since VA and FHA loans cant be recast, making a big payment toward the principal yourself is a nice alternative. Plus, you wont pay any closing fees.
Youll need to decide if stashing your newfound cash in an illiquid asset is the right move for your finances. But its a good option if youre laser-focused on paying your mortgage off early.
Just make sure to coordinate with your loan servicer so the money goes toward reducing your principal, not paying off interest.
Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.
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How Does Paying Off Your Mortgage Early Fit Into Your Retirement Plan
The answer to this question will be different for everyone.
If you know you want to stay in this house during retirement, paying it off now so you don’t have to make monthly payments in retirement might be the right move.
But if you’re, say, 10 years away from retirement and haven’t started investing yet, investing will be a better use of the money than paying off the mortgage early.
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Recap Of Ways To Pay Off Your Mortgage Faster
If you decide you want to pay off your mortgage early, ask your mortgage lender about:
Whatever you choose, make sure youve weighed all your options to find the best use for your hardearned cash.
Make One Extra Payment Each Year
If the thought of bi-weekly payments seems daunting but you like the idea of making an additional payment each year, you can accomplish the same goal by committing to just one extra payment a year. This way, you’ll only feel the squeeze once a year and you’ll still shorten the life of your loan by several months, or even years. Use a work bonus, tax refund, or another windfall to make that once-a-year payment.
Another easy way to make that extra payment is to spread it out throughout the year. Divide your monthly payment by 12 and then add that cost to your monthly payments all year long. You’ll be making a full extra payment over the course of the year while hardly feeling the pinch.
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Interest Saved From Paying Off Mortgage
For the mortgage with the 3.5% interest rate, the total interest cost for the 30-year loan would be $123,312, and the borrower would save $20,270 by paying it off 10 years early.
Although saving more than $20,000 in interest is significant, the interest amount saved represents only 17% of the total interest cost for the 30-year loan. In other words, $103,042 in interest has already been paid in the loan’s first 20 years , representing 83% of the total interest over the life of the loan.
As mentioned earlier, the structure of the amortization schedule for a mortgage leads to most of the interest being paid in the early years.
Rent Out Extra Space In Your House
If you want to make extra payments but dont know where to find the money in your budget, consider putting your house to work.
Some examples of what you could do include:
- Renting out an extra room
- Turning an accessory dwelling unit into an Airbnb
- Renting out space in your garage for storage
- Renting out a parking spot
- Renting your pool or backyard out to someone for an event
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Pay Down Your Other Debts
A crucial rule of debt repayments is: clear the most expensive debts first, suggests Martin Lewis, founder of MoneySavingExpert.com. Do so and the interest doesnt build up as quickly, saving you cash and giving you more chance of clearing debts earlier.
As a rule of thumb, Clear high-interest credit cards and loans before overpaying your mortgage, as theyre usually more expensive.