4 Steps On How To Pay Off Your Mortgage Early And Save Money

It is said that your home is your biggest expense in your lifetime. Since it is your biggest debt, how can you pay it off early? The traditional mortgage loan was paid off in 30 years, but as expensive as homes are today they are being paid up to 40 years. To some of us 30-40 years seems like a lifetime. So why not focus on doing a few things to speed up the process.

 

For those of us who don’t want the aggravation of refinancing there are a few ways to lower the amount of interest being paid remaining on your principle. But for those willing to refinance you can convert from a 30 year loan to a 15 year loan.

While some folks claim that paying down the principle reduces the mortgage interest available to deduct on your federal tax return if you itemize, in the long run, you’ll still come out ahead. Take into consideration that your tax liability will likely increase incrementally if you’re already in the middle of paying off your mortgage.

Another argument against is that the extra money could be put into investments – but you’d have to make at least the same percentage return as your interest just to break even. Right now, that means playing the stock market or putting money into less-risky savings vehicles, such as CDs, which are barely paying 2% in some places. But don’t forget, these investments are taxable. Your mortgage interest can be used to reduce your tax burden.

If paying off the mortgage early is your aim, always ask if your lender allows prepayments, without penalty. You don’t want to pay toward the principle and get penalized for it. Also be sure your extra money is being put toward the principle, rather next month’s mortgage payment. That won’t reduce your interest payments.

Starting to pay off principle at any point during the term of  the mortgage loan will help save you money, but start early on to make the most difference – the first half of the payments go toward interest. After the halfway point, the majority of your monthly payment goes to the principle.

Strategies for paying down the principle:

1. Add principle payments monthly.

Just tacking on an extra $25, $50 or $100 each month can shave years off your mortgage.

Example: For simplicity’s sake, say you’ve just purchased a home for $250,000, and put 20%, or $50,000, down. That leaves you with $200,000 to finance, which you do through a 30-year conventional mortgage at 6% interest. Plug those numbers into Bankrate.com’s mortgage calculator, and the monthly payment is $1,200. The mortgage would be paid in 360 monthly installments over the course of 30 years.

You don’t have to add a ton of money to your monthly payment to make a difference. Making an extra principle payment of $50 monthly, from the very beginning of your loan period, shaves three years off the length of your mortgage. Instead of paying $231,676 in interest (that’s more than the original loan of $200,000!), it will be $203,797 – a savings of $27,879 over the life of the loan. Similar savings can be realized if you start prepayments at any point of the loan.

2. Make yearly principle payments.

Pay a larger chunk of money toward the mortgage once a year. This is even easier if you plan it around your tax refund or annual work bonus, if you get either.

Example: A payment of $1,000 made once a year reduces the term of that same 30-year mortgage by 56 months – almost five years – and saves you a whopping $42,760 in interest.

3. Move to bi-weekly payments.

This has become a popular, simple option. Available through lenders, bi-weekly mortgage payments occur every two weeks, resulting in 26 payments over a year, rather than the traditional monthly payment. It equals a full extra payment each year, but it’s spread out.

4. Make lump-sum payments when you can.

Even if you don’t follow a set schedule of making prepayments, throw money at the loan when convenient. If you inherit money or get a tax refund, think about putting it toward your mortgage. Every little bit helps!

Find the mortgage prepayment plan that works best for you, and you can pay off your mortgage sooner rather than later, leaving you sitting pretty and freeing up funds for other things, such as travel, kids’ college tuition, savings, and retirement.

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