Once you have paid off your consumer debt, built up your emergency fund, and started saving for retirement you might be thinking about the best way to tackle that last major hurdle, your mortgage. Mortgages have become what most people see as a necessary evil and just accept it, why not it pay it off, think about what you could do if you didn’t have a mortgage. An important thing to understand when you start thinking about how to pay off your mortgage is that the amount of interest you pay every month is directly proportional to the outstanding principal balance. You will only achieve your goal by reducing the principal balance above and beyond the scheduled amount in your amortization schedule.
Every Two Weeks
This is one of the most popular methods people use to pay off their mortgage early. Essentially you just pay one half of your mortgage payment every two weeks. With 52 Weeks in a year that is 26 half payments or 13 full payments. You get one extra payment every year because two months out of the year you actually make 3 half payments. If you have a $200,000 mortgage financed for 30 years at 5.8% you would pay a total of $222,460 in interest. Using a biweekly scheduled payment you save a total of $44,996 in interest and pay your loan off in 24.8 years with bi weekly payments.
Extra Every Month
Unlike the bi-weekly payments this method would allow you to reduce the principal balance of your account every month. Take your mortgage payment and divide by 12, then pay that amount extra at the end of every month. This would seem to provide the same result as the biweekly method, you pay 13 payments every year, but it doesn’t really work out that way. Because of the way you pay interest on the outstanding principal you actually are going to save more by paying extra every month. Using the same $200,000 example from above you end up saving $52,428 and pay off your mortgage in around 24 years. You end up saving yourself over $7,000 in interest by paying extra monthly.
In addition to the two main ideas I covered above you can use some additional methods to decrease your interest and accelerate paying off your mortgage.
Found money: I consider found money to be anything you weren’t expecting to get, like gifts, bonus’ and that $20 you found laying in the street. Take any of this found money and throw it at your mortgage, every time you reduce your principal balance beyond a regular payment you are decreasing the interest and moving that payoff date closer.
Raises: If you are lucky enough to get one of these increasingly elusive perks at your job, look at it and see if you really need it. If you don’t need it go ahead and start paying that increase straight to your mortgage and get rolling to true financial freedom.
Side Hustles: These are those little side jobs you do that earn you some extra money. Anything from CashCrate to blogging or more traditional side hustles like hanging Christmas lights or mowing yards can earn you extra cash you can use towards paying off your mortgage, or any other debt for that matter.
Obviously with both the biweekly and monthly methods you aren’t limited to just paying 1 extra payment per year and the more you can pay the quicker you are going to get get it paid off. If you combine these methods with the found money and raise theories you are going to kick your mortgage companies ass. Be careful though and watch out for those payment plans with the mortgage company they usually are going to charge you extra for anything other than the single monthly payment.