30 years is a long time. Paying off your mortgage ahead of schedule has many financial benefits, including a potential savings of thousands of dollars over the life of the loan. The sooner you pay off your mortgage, the sooner you’ll be free of expensive monthly obligations and the less money you’ll wind up paying over the life of the loan.
To pay your mortgage off earlier, use the 5 tips below:
Round Up Your Payments
If your monthly mortgage payment is $1,878.88, why not just pay an even $1,900? If you do, you’ll save a pretty penny.
A 30 year loan of $350,000 at 5% will yield payments of $1,878.88. If you instead pay $1,900 a month, you will pay off your house 9 months early and save a whopping $9,678.68!
Make A Lump Sum Payment Every Year
If you’re able to, make a lump-sum payment to apply directly to your mortgage principal. Applying your yearly income tax return or an inheritance to your mortgage is a great way to reduce the principal and pay off your mortgage faster.
If your mortgage doesn’t have a prepayment penalty, you can make as many lump-sum payments as you want.
Using the same example (30 yr loan, $350k @ 5%), making an additional $1,000 payment every year will trim your loan 10 months and save you $14,784.86.
Make Payments More Frequently
Instead of making monthly payments, make biweekly payments. With a monthly payment schedule you make 12 payments per year, but with a biweekly payment schedule you wind up making the equivalent of 13 payments per year. The extra payment goes directly towards the principle and can take years off your mortgage.
Ideally, you should be able to change to biweekly payments for free, but if not you can just save the extra payment over the course of the year and apply it all at once.
You get paid every two weeks, so why not pay your mortgage every two weeks as well?
Using the same example (30 yr loan, $350k @5%), paying bi-weekly will shorten your loan by 4 years and 9 months. This will save you a total of $44,967.60 over the life of your loan.
Double Your Payments
If you can afford it, double up your mortgage payments. This will significantly reduce the principal amount. If you double your mortgage payments, you can take as much as 19 years off the life of your loan, letting you pay off your mortgage in just 11 years.
If you can’t double your payments, adding just a couple hundred dollars each month will still help significantly.
Refinance Your Mortgage
You might think that refinancing your existing mortgage will only lengthen, not shorten, the time it takes to pay off your loan. But this is only true if you get another 30 year loan. There are other options like a 10 or 15 year loan.
Consider this scenario. Your current interest rate is 6% and you’ve got 22 years left on your loan. If you can refinance at 4% on a 15 year loan, your payments may stay the same yet you manage to knock off 7 years off your loan.