Buying your first home is a huge commitment and an even bigger accomplishment. Everyone will remember their first home and the experience that came along with it, whether you got a great deal on your first home, had a nightmare of a realtor, or any other situation, you’ll never forget it. Now, paying off your mortgage is also one of the most satisfying and financially liberating accomplishments. You do not necessarily have to wait until the original amortization schedule of the loan has run its full course, either, because there are strategies you can use to accelerate your payoff timeline. By paying off the loan early you automatically relieve yourself of having to make additional interest payments, and that gives you the potential to save thousands or even tens of thousands of dollars.
Take a standard fixed rate, 30-year loan as an example:
- In the beginning, almost all of your payment goes toward paying interest. Very little is applied to paying down the principal. Only as the loan matures will you gradually start to pay larger chunks of the principal.
- Since paying off the principal is the key to erasing your debt, voluntarily increasing the amount of your principal payments is the most straightforward way to speed up the process.
- Figure out how much extra you can afford and apply that to the principle whenever you can. Maybe you can use a year-end salary bonus, for instance, or dedicate your tax return to helping repay your mortgage.
Just be sure to let the mortgage service company know that you want those extra funds used exclusively to pay principal, not interest.
The 13-Month Year Technique
One good tactic is to pay the equivalent of an extra monthly payment each year that you have your mortgage. Just divide your normal payment into twelve parts and add one of those parts to each payment. If your monthly payment is $1,200, for instance, one-twelfth of that is $100. Rather than paying $1,200 per month, pay $1,300 a month with the extra $100 devoted to principle. Following this plan, you will effectively make the equivalent of an extra payment per year. Do that for 12 years and you lop an entire year off your mortgage.
Make 2 Payments Per Month
Sending a payment every two weeks is perhaps an even simpler way to implement that kind of 13 payment-year plan. There is no need to keep track of adding anything extra to your payment, for instance, as we had to do in the previous example where we intentionally overpaid by $100 a month. You don’t double the amount you pay, either, but simply divide your normal payment into two increments. That way the grand total amount you pay each month remains unchanged.
Here’s an example to show you the magical math:
- Assume that the monthly mortgage payment is $1,000. Instead of paying $1,000 once a month for a total of $12,000 per year, you will pay $500 every two weeks.
- There are 52 weeks in the year, so paying every two weeks means you pay $500 twenty-six times per year( 26 X 500 = $13,000).
Just be sure your mortgage company allows this kind of thing. In some rare exceptions the lender may want to tack on a handling fee every time one of your payments is processed. You don’t want to incur those kinds of pesky fees each time you send in an additional check. Many homeowners also elect to pay a fee to have their lender set up an official biweekly payment program. That makes it all easier, but can cost you in service fees, defeating the purpose of saving money. If you don’t have the discipline to pay bi-weekly, setting up a plan may be justified, but in most cases it’s a waste because you can put the plan in motion for free by yourself. Also, check to be sure there is no pre-payment penalty clause built into your mortgage contract. A prepayment penalty is a fee charged to a borrower who pays off their loan early, and those can be substantial.
Jeff’s Note: These are both really great techniques to pay down your mortgage sooner. H and I opted for a 15 year note on our house, and it has worked out well so far. Once we pay off our two remaining debts, we will begin prepayment on the mortgage, and what we were planning on doing was doing a bi-weekly payment that would amount to more than the total monthly payment. For instance, our payment is ~$1,100 per month, and we will probably set up automatic withdraw payments for ~$600 or $650 every other week when the time comes.
Tom Kerr writes for Comparecards.com in addition to others. He has been an avid writer for years, even winning awards for work he’s done.