The idea of paying off your mortgage in full can be pretty daunting. After all, we're talking about hundreds of thousands of dollars. Paying that much money off today would likely be impossible (unless you've won the lottery or had a rich uncle die). However, it's actually quite easily to shave years or even decades off the payment schedule, increasing your equity and saving you plenty of money in interest payments.
1. Switch to a biweekly payment
Instead of making one monthly payment, you can make a half-sized payment every two weeks. In other words, if your usual mortgage payment is $1000 a month, you would instead pay $500 every other week. This will have the nearly the same impact on your budget as one monthly payment, but because there are 52 weeks in a year, a biweekly payment schedule will result in 13 full-sized payments a year instead of the normal 12. You'll be making an entire extra payment every year without having to scrounge around for the extra money. To look at some real-life numbers, if you have a 30-year $200,000 mortgage at an interest rate of 5%, making biweekly instead of monthly payments would save you $34,328 in interest and allow you to pay off the loan almost five years early.
2. Make extra principal payments
When you send in your monthly payment, most mortgage lenders will allow you to make an extra payment and mark it "principal only," meaning that this payment will go to pay down the principal rather than both the principal and interest on the loan. Paying down even a little bit of extra principal early on in the loan can save you quite a lot in interest charges, not to mention getting you out of the loan several years ahead of schedule. So consider sending just a little extra to the loan holder every month as an extra principal payment. For example, if you have an odd payment amount such as $1046 per month, you can round it up to $1100 and dedicate the extra bit as a payment on the principal. Even if it's just an extra $50 or so a month, the principal payments will add up faster than you'd believe.
3. Refinance into a shorter-term loan
Got a 30-year mortgage? Refinancing it as a 15-year loan will blast you through that mortgage a whole lot faster, and will probably get you a better interest rate as well -- shorter loan terms are typically paired with lower interest rates. And thanks to the shorter time frame, you'll pay a lot less in interest -- so the payments on a 15-year loan are not double the payments of a 30-year loan; they're significantly less. Pull up a mortgage calculator and play around with the numbers to see how much you'd have to pay to do a 15-year refinance. And if the monthly payment for such a loan would be more than you can afford, consider a 20-year loan instead.
4. Put your windfalls into your mortgage
Many taxpayers get a tax refund every year. If you use most, or all, of that money as an extra payment on your mortgage, you can make serious progress in getting your house paid off. Other potential windfalls include a bonus from work, a successful garage sale, or a gift from a relative. And if you get a raise, consider putting all the extra income into your mortgage. For example, let's say your monthly take-home pay was $4,000 and your 3% raise means that you're now getting $4,120 per month. Put the extra $120 into your mortgage every month and you won't even miss the money, since you're not used to having it.
Should you pay off your mortgage early?
I have a 30-year mortgage, but I'm not trying to pay it off early. Why not? Because the interest rate on my mortgage is 3.25%, and I can get a better financial payoff by putting all my extra money into investments instead. If you're in a similar situation, by all means direct your extra cash into retirement accounts or other investments and let the mortgage run out on its own.
You may also have other needs for your money, such as credit card debt or financing an emergency savings account; these financial issues should definitely have a higher priority than paying down your mortgage. Once you've dealt with them, you can go back to getting rid of your house payment.
And, unlike other forms of debt, if you itemize deductions you can deduct the interest you pay on your mortgage from your income taxes -- so you'll get at least part of your money back from the federal government. That's not enough of a reason by itself to make stretching out your mortgage fiscally wise, but combined with other factors it can be a nice extra benefit.