The Simplest, Nearly Painless Way to Pay Off Your Mortgage Early

This method takes discipline, but it really works.

Apr 20, 2014 at 12:33PM

Houses
Source: Flickr / woodleywonderworks.

Do you dream of paying off your mortgage ahead of time? Perhaps you want to be mortgage-free when you retire, when the mortgage interest deduction packs less of a wallop. Or, maybe you can't help but grit your teeth at the thought of all that money you'd be paying in interest charges throughout the life of the loan.

While there are several ways to accomplish this goal, one particular method stands out as the easiest and least disruptive way to pay off your loan early. Let's take a look at some of the options available, and compare.

Traditional methods work, but cost you
If you are looking to shorten your mortgage term once and for all, you can refinance into a 15-year loan. You'll pay a lower interest rate, and fork over thousands less in interest payments, as well.

But, this method is expensive, since it incurs all the usual fees associated with obtaining a mortgage loan. Also, it's probably not worthwhile unless your 30-year loan is very new, since payments in the earliest years of a mortgage are skewed more toward paying interest than principal. With a new, 15-year mortgage, you'll be starting that scenario all over again, with higher monthly payments, to boot.

You can also sign up for a bi-weekly mortgage payment plan with your lender – often for a fee – which usually entails you making one-half of your monthly payment every two weeks. This method results in 13 yearly payments instead of 12, something you can replicate on your own, if you are disciplined.

DIY accelerated mortgage payoff
There are two basic ways to accomplish the early payoff goal: each year, pay the equivalent of an extra monthly payment – emulated in the bi-weekly payment plan – or add a set amount to your regular monthly payment.

Which style you choose depends upon your financial situation. For example, if you can afford an extra $100 or so each month, you may find it convenient to just tack on the extra amount to your monthly payment. On the other hand, people who have tighter budgets and receive yearly bonuses or tax rebates may want to pay just one extra payment. Of course, if you are really in a hurry, and you have the financial wherewithal, you could do both!

Using calculators like this one from Bankrate.com, it is easy to see how your plan might work. If you began adding $100 to your monthly payment on a 5%, $200,000 30-year loan five years into the loan schedule, you will shave nearly four years off of the term, while saving over $24,000 in interest. By adding one yearly mortgage payment, you will shorten the term by a little over three years, while saving slightly more than $23,000.

If you are planning to have the mortgage paid by the time you retire, you can increase payments accordingly. No matter which scenario you choose, be sure to check first with your lender to make certain that there will be no prepayment penalty. You'll also want to alert the lender that the additional payments should be applied to the loan's principal balance.

Paying down your mortgage quickly can be a bit of a hardship, but if you are disciplined, you will succeed. After all, knowing that you will own your home free and clear while pocketing thousands of extra dollars is a strong motivating factor, don't you think?

Owning a home isn't the only tax "loophole"
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