We just bought our house a little over a year ago and since we took out a thirty year mortgage to pay for it I still have about 29 years of payments remaining. I’ll be 65 then and I’d rather not have to worry about making a monthly mortgage payment when we’re in our sixties.
We don’t want to be making mortgage payments in 2042 so one of our financial goals is to pay off the mortgage early. If you’re thinking of doing the same, there are several different methods you can use to pay the balance down quicker.
Putting a little extra towards your mortgage each month is a painless way to pay down the balance ahead of schedule. Even small amounts can make a big difference over time but the key is to make sure the overage is applied to principal. If you don’t provide specific instructions your lender might apply it to future interest or to your escrow account.
I’ll use my own mortgage to give you an idea of how much you can save by rounding up. Our monthly payment is $1,039.34. That’s just the mortgage; I don’t like escrow so I pay the property taxes and home insurance myself.
I ran some numbers through the amortization calculator and found that if I round the payment up to $1,050 we’ll have the loan paid off six month ahead of schedule and save almost $3,000 in interest.
If we go a little further and pay $1,100 a month we’ll shave off almost three years of payments and save over $14,000 in interest!
With interest rates still near historical lows, it’s not too late to save some money by refinancing. The key is to not pull out any additional money because that will just put you further into debt. Refinance for the same amount but at a lower interest rate so your monthly payments will decrease and you’ll pay much less in interest.
If you can afford it, you might want to consider a 15 year mortgage. Interest rates are even lower than a 30 year mortgage, though the payments will be higher because you’re paying them off over a shorter period of time.
Of course, you could always just calculate what your payment would be with a 15 year mortgage and add the extra money to your payment each month. The interest rate would still be a bit higher but it would give you some wiggle room if you had a tight month or two and couldn’t afford the higher amount.
Let’s say your mortgage payment is $800 a month. Over twelve months you’ll pay a total of $9,600. If you switch to a biweekly mortgage you’ll make 26 payments a year at $400 each. At the end of the year you would have paid $10,400, effectively making one additional payment.
Biweekly mortgages can save you thousands of dollars a year over the course of the loan, but keep in mind many lenders will charge a setup or account maintenance fee if you go this option. You could easily do it all on your own by calculating how much extra you should pay each month and simply sending in along with your regular payment.
Another option is to periodically send in additional money and have it applied towards principal. If you get a big tax return or a yearly bonus at work, just take a portion of it and send it in to your mortgage lender. Depending on the size of your extra principal payment, you could have your loan paid off years ahead of schedule.
Mike Collins is a freelance writer and blogger who specializes in personal finance topics. He’s also a husband and father of three children who keep him very busy. You can read more about his quest to achieve finance freedom for his family at WealthyTurtle.com