Four ways to pay off your mortgage faster – and save money
Buying a home is a major expense – and a major debt. It’s said it’s the biggest purchase you’ll make in your life. A traditional mortgage loan is repaid over the course of 30 years, but today, some terms call for up to 40 years of repayment. To some, three or four decades seem like an interminable amount of time to take to pay off a debt.
For those who aren’t looking to change the terms of their mortgage loan, such as refinancing to a lower interest rate or converting a 30-year loan to a 15-year loan, there are a few ways you can put a dent in the principal and lowers the amount of interest paid in the following months and years.
While some folks claim that paying down the principal reduces the mortgage interest available to deduct on your federal tax return if you itemize, in the long run, you’ll still come out ahead. Take into consideration that your tax liability will likely increase incrementally if you’re already in the middle of paying off your mortgage.
Another argument against is that the extra money could be put into investments – but you’d have to make at least the same percentage return as your interest just to break even. Right now, that means playing the stock market or putting money into less-risky savings vehicles, such as CDs, which are barely paying 2% in some places. But don’t forget, these investments are taxable. Your mortgage interest can be used to reduce your tax burden.
If paying off your mortgage early is your aim, always ask if your lender allows prepayments, without penalty. You don’t want to pay toward the principal and get penalized for it. Also be sure your extra money is being put toward the principal, rather next month’s mortgage payment. That won’t reduce your interest payments.
Starting to pay off principal at any point during the term of the mortgage loan will help save you money, but start early on to make the most difference – the first half of the payments go toward interest. After the halfway point, the majority of your monthly payment goes to the principal.
Strategies for paying down the principal:
1. Add principal payments monthly.
Just tacking on an extra $25, $50 or $100 each month can shave years off your mortgage.
Example: For simplicity’s sake, say you’ve just purchased a home for $250,000, and put 20%, or $50,000, down. That leaves you with $200,000 to finance, which you do through a 30-year conventional mortgage at 6% interest. Plug those numbers into Bankrate.com’s mortgage calculator, and the monthly payment is $1,200. The mortgage would be paid in 360 monthly installments over the course of 30 years.
You don’t have to add a ton of money to your monthly payment to make a difference. Making an extra principal payment of $50 monthly, from the very beginning of your loan period, shaves three years off the length of your mortgage. Instead of paying $231,676 in interest (that’s more than the original loan of $200,000!), it will be $203,797 – a savings of $27,879 over the life of the loan. Similar savings can be realized if you start prepayments at any point of the loan.
2. Make yearly principal payments.
Pay a larger chunk of money toward the mortgage once a year. This is even easier if you plan it around your tax refund or annual work bonus, if you get either.
Example: A payment of $1,000 made once a year reduces the term of that same 30-year mortgage by 56 months – almost five years – and saves you a whopping $42,760 in interest.
3. Move to bi-weekly payments.
This has become a popular, simple option. Available through lenders, bi-weekly mortgage payments occur every two weeks, resulting in 26 payments over a year, rather than the traditional monthly payment. It equals a full extra payment each year, but it’s spread out.
Example: Using the same $200,000 loan at 6%, biweekly payments take six full years off your 30-year mortgage, and save you $51,284 in interest.
4. Make lump-sum payments when you can.
Even if you don’t follow a set schedule of making prepayments, throw money at the loan when convenient. If you inherit money or get a tax refund, think about putting it toward your mortgage. Every little bit helps!
Find the mortgage prepayment plan that works best for you, and you can pay off your mortgage sooner rather than later, leaving you sitting pretty and freeing up funds for other things, such as travel, kids’ college tuition, savings, and retirement.
This article was a guest post from Nicole Canfora. Nicole is a freelance writer and editor in the publishing industry with a keen interest in helping others navigate the world of personal finance. Find out more about her at her blog Rainy-Day Saver.
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Thank you for a simple and straightforward summary of some easy ways to pay off mortgage debt more quickly. With what is typically a large amount of principal and long terms, a little extra payment goes a long way!
I’m glad it was clear — my husband and I have just bought our first home, and we’ve been looking for ways to pay down the principal faster than outlined in the terms of our 30-year mortgage. Right now, we’re going with making an extra payment on the principal monthly, and hope to add yearly sums on top of that.
Hey Nicole,
Fortunately, we have no mortgage, but really enjoyed the article. You are
one smart cookie!!! I’m passing the site on to Judy, and maybe it’ll help her.
We love you——-
My wife and I allocate every extra dollar to our mortgage so every month we just add to the monthly payment. It is easy for us and we seem to be making some good progress.
Good easy steps. I think it’s important to only pay off the mortgage with extra money you will never miss.
All is good, but… We are the family with 5 children (ages 1-11) and we built up the house for our family. My husband is attorney, his wage was 2200$ by month, we have to pay for mortgage 1200$. But now his wage is downed to 1600$… We have only 400$, and we must pay for electricity 120$, for water and sewerage – 90$. Our boys are talanted and three eldest attend the music school, and we must pay for the music school 60$ (we hadn`t pay for 3 months…), and we have to pay for telephones, too. We need the fuel, too… In the result we have not any money for food… We are eating only potatoes and bread and it takes 180$ by month, therefore we cann`t pay all bills. How we can pay off our mortgage?!…. But from January the wage of my husband will be downed to 1000$… I didn`t say, that we live in Latvia. And we have the another situation with mortgages. Our mortgage is 150 000$, but now all houses costs less. Bank can sell our house for 60 000$, but the rest sum we had to pay to the bank. Therefore we can stay without the house ant with the debt… WHAT TO DO????????
My wife and I are automatically making better than double house payments each month. We made it a goal of ours to get the house paid for before I turn 50. We used to think that we would be better off with a low interest 30 year fixed mortgage, and put as much as possible into retirement savings. Well we decided that we should just put enough into our 401k’s to get the company match until the house is paid off, and then go back to maxing out our retirement savings. This plan will only work as long as we both keep our jobs, and these days living in Michigan, everyday with a job is a blessing. We have recently become distributors for an online greeting card company as a side business. Please click on my name to go to our websight and send someone a FREE greeting card on us. Any profits from this venture will also go right into our plan of paying off the house, and building our retirement savings so that one day we an do the volunteer work that the Lord has called us into full time.
@sanita.
It sounds like you are in quite a difficult situation. As you pointed out the numbers you are working with are impossible to balance. Your house is too much of your income. I wouldn’t think about paying off the house early. Keeping up with the payments is enough in itself. I think you and your husband will need to decide what should go – music, house, or phones. Either that or increase the income. Unfortunately, there is not something you are missing financially. The facts are clear, the option now is what to cut from the budget. I’m so sorry to hear about your situation.
This is a great article, and I would love to point out that if you can do more than one of the things on the list you will be even better off. One of the easiest things to do is to simply round your mortgage payment up to the closest $50 or $100 increment. My husband and I did this and we are paying a little over $50 extra per month. I also get a yearly Christmas bonus every year and we have been putting extra towards it that way too. Its amazing what $50 a month will do, especially since we live in a LCOL area and our payment only ends up being $800/month.
@ Samurai — I absolutely agree. Only put extra money toward the mortgage if you can afford it. Don’t do it at the expense of other bills, debt reduction or even retirement funding.
@Mrs. DFx40 — That is a great way to easily add to your principal payment. It does make a difference! Great that your mortgage payment is so low, too. Hard to even rent a 1BR here in Northern New Jersey for $800/month.
Great article and always interesting blog- thanks!
Just a heads up though, number three is not always available. We have been making payments on the bi-weekly plan for nearly a year, it is easier to just make a payment when I get paid. There is no other financial incentive at my institution though. They let it sit unapplied, until the rest of the full payment is received. This is a recent development, and will certainly factor when we are able to refinance.
I remember that when we bought our house, our realtor mentioned something like:
*Year 1: add $15 to your monthly payment
*Year 2: add $30 to your monthly payment
*Year 3: add $45 to your monthly payment
The idea being that you would probably receive raises each year and adding this amount each month wouldn’t be that big of a deal. He said if you did so you’d pay off the house in 17 years! It all gets back to the same idea: once you get serious about paying extra, you can really off your home significantly faster than just following the amortization schedule to a tee. I can’t wait for no house payment!
Sanita you and your family are in a very tough situation and I think this will take some VERY hard decisions to survive but it can be done.What I love is numbers never lie so….More income has to come in-here are ideas 1) ask yourself what can generate more income think radical like cleaning houses/babysitting/petsitting/cutting hair/doing laundry…the bottom line What will people pay for? 2) Next who else in the family can earn money? can the children return bottles? pick up firewood?babysit? tutor?How about husband-can he do anything like tutor law students,teach a class,give a talk on financial-divorce etc he specialty of law? or just make money for chores like raking leaves/lawn care/painting?Of course ANY expenses that can be cut would be prudent.Best of luck and don’t give up.
We did all of the above (except for the bi-weekly thing. our mortgage company just held onto the initial payment, too) and we did 3 more things.
1: We switched from living every 2 weeks to once a month. In other words, our bills are $3k a month. we saved up $3k. On the first of every month, we pay ALL the bills. It doesn’t matter when they’re due. they get paid on the first. this way, every 3 months we get an extra paycheck (we get paid every 2 weeks and there are 26 pay periods a year per person, not 24). Those extra checks go straight to the mortgage.
2: we live on less than we earn. our bills are $3k, but our take home is $5k (we’re contributing 8% to retirement right now). So $2k per month plus $5k a year with the extra paychecks is $29k a year. Not counting snowflaking and bonuses (from me) and teacher stipends (like soccer coach — from his salary). Living in our condo is so much cheaper than living in a house. we would not be able to save that much if we were in a house (extra property taxes/insurance/maintenance/buying crap for the house like shovels, flowers, shelving for the garage, etc. — knowing we’re only going to be here 5-6 years curbs our appetite for purchasing stuff to “fix-up” the condo).
3: we bought below what we could afford. While everyone else in our salary range is buying $150k homes, we bought an $80k condo. we paid it off in 3 years. We will live here hopefully till we can pay cash for a $150k house (meaning saving up $80k plus closing costs since we’re thinking we’ll get $80k out of the condo–this should take another 3 years. And we think we’ll get $80k after closing costs since the values have gone up a little. They’re adding a train stop at our complex). If we cave and buy a house before we can pay cash, we’ll have more than 20% to put down and then when the condo sells, that will knock down the house mortgage even more. But I think we’ll make the 6-year wait. So a 6-year wait to have the house paid for in full? No brainer.
This is how we did your number 1 above: for the first year we were married, our entire raise went to the mortgage. Then every year thereafter, half goes to the mortgage and half goes to living expenses. So my $30 per paycheck raise, we now pay an extra $30 per month to the mortgage and $30 goes to living expenses. We do this for both salaries.
So am I understanding this correctly. If I decide to make a yearly principle payment once a year, every year, at the begining of the year, I can possibly knock off 6yrs every year I make a payment?
example:
2010-(1) yearly principle payment=6yrs
2011-(1) yearly principle payment=6yrs
2012-(1) yearly principle payment=6yrs….
Using the above example I’ve reduced my 30yr mortgage by 18yrs. Is this what you’re saying?
@kBlack
No. paying one extra payment a year for 24 years will knock off 6 years.
If you have a $100,000 mortgage @ 5% with a $537 mortgage and you pay an extra $1000 a month, you will pay it off completely in 6.5 years. If you have a $200,000 mortgage, you could pay it off completely in 10.33 years with the same numbers. If you have a $150k mortgage @ 5% paying $1037 total a month will have your house paid off in 18.5 years.
The calculator I use is http://www.hughchou.org/calc/prepay.cgi
I fill out A (B makes no sense to me). If you want to make a once a year payment, just divide by 12 and put that amount in the “Additional Monthly Pre-Payment* ” field. it comes out almost exactly the same. It’s fun to play with it.
Another strategy which I use on my primary home and my rental property is to divide the payment by 12 and add that amount on every month. For example, my primary home mortgage is $2,000. If you divide that by 12 you get $166.67. I send $2,166.67 per month with the additional $166.67 going toward the principal. By years end this amounts to an extra payment of $2,000 towards the principal.
Could you tell me if you have any information on the news that Obama put out about lowering home mortage?I catch it on t.v but can’t get it all.My father is retired and for the most part disabled,he’s lost almost everything except his home.Just wondering if you had any information,or ideals at this.Thank you oh so much,and keep up the excellent careing you do.
@sanita Its called get a job and help with some bills and stop complaining when your not pulling your on weight!!!!