When interest rates are low, you should consider refinancing your mortgage. But even if you can’t refinance your loan, there are steps you can take that will enable you to pay your loan off earlier and save you tens of thousands of dollars in interest.
You may be wondering, “How should I pay off my mortgage earlier to save money?”
Luckily, there are multiple ways you can do this, so it’s easy to find an approach that will work in your particular situation. Pick one (or more) of these five ways to pay off your mortgage early and make it happen!
For each example below, we’ll assume you have a 30 year mortgage for $200,000 at 4%, with a monthly payment of $955. Use this mortgage calculator to see how this will work for your particular situation. YOU CAN ALSO USE THIS MORTGAGE CALCULATOR FROM ZILLOW!
1. Make your payment based on a 15 year loan
Some people are hesitant to take a 15 year mortgage due to the higher payment, and opt for a 30 year term instead. The difference in payment is substantial, so it’s understandable why you’d want the longer term. But what if you take a 30 year loan but still want to pay it off in 15 years?
You still can.
You don’t have to have a 15 year loan to pay your mortgage off in 15 years. You can simply pay your 30 year loan based on a 15 year payoff.
Using the loan numbers above, by increasing your payment from $955 a month to $1,479 (the monthly payment for a 15 year mortgage) you’ll not only pay your loan off in 15 years, but you’ll also save over $77,000 in interest.
2. Increase your monthly payments a little
If you can’t afford to make your payment based on a 15 year loan term, you can still pay off your mortgage early by making smaller additional payments. You can increase your monthly payment by a flat amount that’s comfortable for you and that will still allow you to shorten the loan term.
Let’s say that you decide that you can afford to add $100 to your payment each month, increasing it from $955 to $1,055. By doing this, you can shorten your loan term by 3 years and 9 nine months, effectively reducing your loan from 30 years to 26 years and three months.
3. Make one extra payment each year
By making one extra payment on your mortgage each year, an extra $955 based on our example, you can reduce your loan term from 30 years to less than 23. You’re not increasing your monthly payment, you’re just making one extra payment each year.
4. Make periodic lump sum payments
Maybe you don’t like being locked into a higher monthly payment. That’s fine. You can still shorten the loan term.
If instead of going the higher payment route you decide to save up your money and make a lump sum additional payment once a year, or any frequency you choose, you will still pay your mortgage off faster.
By making a single lump sum additional payment of $2,000 each year, you can shorten your mortgage from 30 years to less than 23 years. Seeing what lump sum payments can do to shorten your loan term can be a real incentive to pay as much as you can, and pay off the mortgage even sooner.
5. Apply windfalls to your mortgage
Let’s say you aren’t much of a saver and you can’t afford to make higher monthly payments–there’s still a way pay your loan off early.
Whenever you get a windfall, apply it toward your mortgage.
Let’s say you get a $5,000 income tax refund, and you decide to put it toward your mortgage. How much would it shorten your loan term with just a single, one-time payment? One year and four months. Just for making a single payment in year one of the mortgage term.
What if you did the same each year? Let’s say the tax refund is only $3,000, but each year you faithfully used it to prepay your mortgage. You’d reduce your mortgage term by nine years and seven months. Just by applying your tax refund to your mortgage each year! Not a bad deal!
Of course, there may be some downsides to applying lots of extra cash strictly to your mortgage. If you aren’t already investing, you should consider those benefits as well. You could miss out on potential higher returns from other investments.
>>Related Post: Big Picture Investing: Why You Need to Get in the Game Now!
So, is paying off your mortgage early worth the extra effort?
Imagine your life without a mortgage: you’d have more money to spend, more money to save, more money to invest, more money for…everything! The sooner you can make it happen, the sooner you can do all those things.
Once you start thinking this way, you have real incentive to make it happen. You can even combine one or more of the strategies above to make it happen faster!
If you hope to be financially independent one day, or maybe even retire early, it’s critical to have this kind of mindset.