Are housing costs your biggest monthly expense? For most American families, they are. But, there's a way to drop your housing bills dramatically: Pay off your mortgage early. Mortgage-free homeowners have median housing costs almost $1,000 per month below their mortgage-holding counterparts, leaving a lot more spare cash to invest or to do fun stuff like traveling the world.
Paying off your mortgage early is undeniably a challenge, and it shouldn't take priority over repaying higher interest debts like credit cards. But, if you follow one of these easy strategies for early mortgage payoff, you could save more than $70,000 on a $200,000 house -- or more if your abode is a more costly one.
Check out a few different ways to repay your mortgage loan early to benefit from thousands in savings...and to get the psychological and financial perks of being debt-free faster.
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1. Refinance to a shorter term
One surefire way to repay your mortgage early is to opt for a shorter mortgage term. While a traditional 30-year mortgage is often the default choice of homebuyers, you could get a 15-year mortgage instead. A 15-year loan would save you substantially, not just because you'd be paying back your loan over a much shorter time, but also because shorter term mortgages typically have lower interest rates.
Mortgage rates at the end of September 2017 were 4.00% for a 30-year fixed rate mortgage and just 3.375% for a 15-year mortgage . If you buy a $200,000 house and borrow $160,000 after making a 20% down payment, your monthly payment on a 30-year fixed rate mortgage would be $764 monthly and you'd pay $274,991 total over the life of the loan. If you borrowed that same $160,000 and took a 15-year mortgage, you'd pay $1,134 monthly and the total loan cost would be $204,123. You'd pay $70,868 less for your home and be debt free in half the time.
Despite the cost savings, there are some downsides to a shorter loan. Higher monthly payments could be harder to make if something happens, like a job loss, so your risk of falling behind or even foreclosure is higher. You also don't want to forego other goals, like saving for retirement, just to make higher mortgage payments. But, there are mitigating factors that mean these downsides may not be so bad. Because you build equity much more quickly, you'd likely to be able to refinance if you really cannot make the higher payments. You're also more likely to have your mortgage paid off before retirement, so you won't have housing costs to worry about.
As long as you can afford it, and doing so won't compromise your other goals, the benefit of reduced interest and a shorter repayment period make choosing a shorter term mortgage a great option if early mortgage payoff is a priority.
2. Make bi-weekly payments
If you don't want to commit to a short mortgage term, you can opt for biweekly payments to effortlessly repay your mortgage faster. Most people get paid every two weeks, but pay their mortgage just once a month. If you instead make half your mortgage payment every two weeks, you end up making 26 biweekly payments -- since there are 52 weeks per year -- and you'll thus make 13 mortgage payments instead of 12.
If you borrowed $160,000 at 4% and took a 30-year loan, biweekly mortgage payments would save you $18,702.00 in interest over the life of the loan .
Some mortgage lenders have biweekly payment programs to make this process easy. Others don't, and if you try to send two checks your mortgage processor may hold the first check until the second one comes or may not correctly apply your extra payments to reduce the principal -- either of which would negate your efforts to make extra payments.
There are services that make biweekly payments for you, but these services charge unnecessary fees and some lock you into contracts. You don't need a service-- just deposit the appropriate amount each paycheck into a separate bank account and pay your mortgage out of that account. When you've got extra cash above-and-beyond the balance due because you've made your "extra" payments, add it to the payment you make to your lender. Include instructions specifying you want the extra applied to reduce the principal and check the next month to make sure the payment was correctly applied.
3. Make an extra payment a little at a time
If setting up biweekly payments sounds impractical or inconvenient, there's another choice with a similar effect-- you can make one extra mortgage payment each year by dividing up the payment amount due and adding that amount to your payment each month. If your monthly mortgage payment is $764 and you want to make one extra payment each year, divide $764 by 12. This calculation reveals you can make the equivalent of an extra mortgage payment by tacking just $63.66 to your monthly bill.
If you send a total payment of $827 every month, with a note to apply the extra payments to your principal, you'll pay a total of $257,099 for your mortgage on your accelerated payment schedule, as opposed to $274,991 if you only pay the amount due. You'll save about $17,892 in interest over the life of the loan and shorten your repayment time by four years and one month .
This small extra amount you'll pay each month is unlikely to make a huge difference in your household budget -- but it will make a big difference over the long-term by helping you to pay less in interest and become free of debt sooner.
Which option is right for you?
The best choice for your early mortgage payoff will depend upon your available cash and the level of commitment you want to make. The good news is, if you pick any of these options, it will put you on the fast-track to a home that is truly yours and not shared with the bank. Jut think how great it will feel to go to sleep at night in a home that no one owns but you!
