Praying for a windfall isn't the only way to get rid of a mortgage. You can painlessly pay off your biggest debt faster than you would think.
How would you like to pay off your home and run the mortgage contract through the shredder a lot faster than the 30 years for which most homeowners sign up?
There are a number of ways to painlessly pay off your home loan sooner. You can choose to do it a little faster or a lot. In some cases, you’ll scarcely notice the added expense.
1. Make biweekly mortgage payments
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Since there are 12 months in a year, homeowners make 12 monthly mortgage payments. But if you make half-sized payments every two weeks (biweekly), you’ll make 26 half-payments, the equivalent of 13 full payments.
Essentially, it is like making 13 monthly payments every year rather than the usual 12.
To go this route, call your lender and ask the best way to do it. Some lenders will set you up with biweekly payments. Or you might simply prefer to send in the extra payments by mail or electronically. Whenever you make any extra payment, however, be sure to designate it “Apply to principal.” Otherwise, the lender may treat the extra as a prepayment of your next regular monthly payment.
Use a biweekly payment calculator like this one from KS State Bank to view the savings. For example, according to this calculator, if you have a 30-year fixed-rate mortgage of $200,000 at 4.5 percent interest, making biweekly payments would save $28,037 in interest over the life of the loan and pay off your mortgage four and a half years sooner. That’s a big bang for your bucks.
Caution: Avoid “mortgage acceleration” products and plans. Paying down your mortgage is easy and free. No expertise or pipeline to a higher authority is required and there’s no need for expensive mortgage “acceleration” plans, programs and products. (Learn more about these gimmicks here.)
2. Pour every bit of extra cash into your mortgage
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Dedicate every windfall you receive — a bonus, raise, or holiday or graduation gift — toward paying down debt. Obviously, the highest-interest debt takes priority. But if you have an adequate emergency savings fund and your mortgage is your only debt, don’t even ask yourself what you’ll do with extra money when it falls into your hands: Add it to your mortgage payment, designating it as additional principal.
It’s possible you’ll find better uses for extra cash than paying down your mortgage. For example, if your mortgage rate is 3.8 percent, but you can earn 5 percent on your money elsewhere, you’re obviously going to be better off earning the 5 percent. Read Money Talks News founder Stacy Johnson’s discussion about the pros and cons of using extra cash to pay down your mortgage.
3. Round up your payments
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The monthly payment on a $200,000 mortgage at 4.5 percent fixed over 30 years is about $1,013 a month. Get into the habit of rounding up that amount to $1,030. Or $1,050, or even $1,100. Do it on a regular basis, and you’ll shave years off your mortgage while feeling little pain.
4. Make one extra payment a year
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At the end of the year, give yourself a holiday gift by making an extra payment. Heck, do it at any time. Or, if you’d rather, just add an amount equal to one-twelfth of your mortgage payment to each month’s payment.
For instance, with the $1,013 monthly payments in the example above, one-twelfth is $84. MortgageCalculator.org’s extra mortgage payments calculator shows that adding $84 to the normal payment saves $27,571 in interest on a 30-year mortgage and pays it off four years and three months sooner.
5. Refinance into a shorter loan
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Monthly payments are lower on longer-term loans than on shorter-term loans. But interest rates are lower on short-term loans. Borrowers choosing shorter terms — such as a 15-year fixed-rate loan instead of a 30-year fixed-rate loan — can save a great deal of money.
Follow these three steps to find out what you would save:
- Find current mortgage rates. A good general source is the Freddie Mac weekly mortgage market survey, updated every Thursday. You can also see real-life rates available in your area by visiting our mortgage search page.
- Decide if you want a fixed-rate or adjustable-rate mortgage. ARMs are typically cheaper, but riskier. Here’s how to decide if an ARM is right for you.
- See what you could save. KS State Bank’s mortgage comparison calculator helps you compare the costs with a 15-year mortgage versus a 30-year one.
When I researched this story, the average 30-year fixed-rate mortgage was 4.1 percent. The average 15-year, fixed-rate mortgage carried an interest rate of 3.32 percent.
I compared costs of each on a $200,000 mortgage using a mortgage calculator from HSH.com, which tracks mortgage markets across the country:
- 30-year fixed-rate mortgage (4.1 percent): Monthly payments — including principal and interest — were $966. After 30 years, you’ll have repaid the $200,000 plus $147,901 in interest, money you could have spent on a college education for your kids or to help you retire.
- 15-year fixed-rate mortgage (3.2 percent): Monthly payments — including principal and interest — were $1,412. You pay $446 more each month, but you’ll own the home in half the time and pay just $54,187 in interest — saving a whopping $93,714. That’s nearly $100,000 that stays in your pocket rather than going to a lender.
Want to shorten your mortgage term but find that 10 or 15 years feels too tight? Payments on a 20-year loan might be more comfortable. Use the HSH calculator to adjust the repayment term.
6. Refinance and pretend it’s a shorter loan
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If locking into a shorter mortgage with higher monthly payments feels scary, you can get much the same effect by refinancing — if rates are low enough to justify a refinance — into a cheaper 30-year mortgage but paying it off on a 15-year (or 10-year or 20-year) schedule.
You won’t enjoy the lower rates offered for shorter-term loans, but you’ll still save heaps of money on interest. Sticking with the mortgage rates in the example above, your payment on a $200,000 (4.1 percent, 30-year fixed-rate) mortgage is $966. Go ahead and pretend you’re on a shorter schedule. Your monthly payment would be:
- $1,223 to pay it off in 20 years
- $1,489 to pay it off in 15 years
- $2,034 to pay it off in 10 years
Do the math yourself using the HSH calculator, or any number of other free calculators.
This option requires willpower, because you must choose a higher payment than you are required to make each month. But it gives you the flexibility of falling back to your smaller required payment if you need extra cash.
7. Decide if refinancing is cost-effective
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Options 5 and 6 involve refinancing your home. Before considering those options, decide if refinancing is a good move for you.
Whether refinancing is worth it depends on the associated costs and how long you’ll stay in the home. For that to be a good deal, you’ll need to stay long enough to more than recoup your costs.
Refinancing is loaded with costs including but not limited to:
- A lender’s origination fee
- A title search fee and title insurance
- A settlement professional’s fees
- The cost of pulling your credit report
- An appraisal fee
- State or county tax and/or transfer fees
You can pay for these costs out-of-pocket at the time you refinance. Many lenders encourage borrowers to have the fees added (“rolled in”) to their loan balance. But if you do, your monthly payment will grow and you’ll pay additional interest.
The Federal Housing Administration explains how to tell if refinancing is worthwhile.
Get a rough idea of your own costs using MyFICO’s refinance calculator. Also, you can shop around by telling several mortgage lenders how much you want to borrow and asking for their estimates of fees. Again, our mortgage search tool is a good place to start.
Tip: Don’t give lenders consent to pull your credit history until you’re ready to actually apply for a loan.
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