Pay Your Mortgage Off Early

Houses at Dawn

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.

Other Ideas

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.

Additional Thoughts

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.

Photo: (vauvau)

{ 11 comments… read them below or add one }

1 Matthew Pryor July 8, 2009 at 10:06 am

Pre-payments are another excellent option. Kind of like “extra every month” you essentially add the principal portion of your coming month’s payment to your current payment. When you do this, you will never pay your coming month’s interest!

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2 Craig @ Money Help For Christians July 8, 2009 at 10:13 am

We are currently trying to get our house paid off as it is the only debt we have. We have decided that ANYTHING we have extra each month will go towards the mortgage (including some extra payment we budget each month). Any time we come into some EXTRA money in a month we automatically add it to the house. Deciding what to do BEFORE you have extra money makes it easier to put towards the mortgage when you get it.

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3 lrgche July 8, 2009 at 10:16 am

I use a combo:
Put biweekly payments into savings account with automatic monthly payments on the mortgage. Then every 6 or 12 months make a principal only payment with the extra money.

With “today’s economy” it provides a little peace of mind that the extra money would be available all the way until I pull the trigger on the principal payment, 12+ months later.

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4 sekishin July 8, 2009 at 1:06 pm

Currently, we round up to the nearest $100 on our 15yr loan. It is almost an extra payment per year . . .

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5 JerryB July 9, 2009 at 9:57 pm

When I refinanced the last time, I kept up the same payment that I had previously had. Once I finished paying off my consumer debt I upped that to $1k of principal each month. If I get an extremely good bonus I’ll add some of that to my payment as well.

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6 Mama Bird July 13, 2009 at 10:30 am

I want to start paying extra on our mortgage each month. Does anyone have a good spreadsheet or tracking system to make sure the extra you pay is coming off the principle? Frankly, I don’t trust my mortgage company to do it right.

Thanks!
mb@flyawayfamily.com

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7 Kyle August 13, 2009 at 10:57 am

The best thing you can do to make sure the principal is being reduced is to check your monthly statements. They will go back and correct it, and the interest payments. You are right to not trust them as more often than not they will apply the payment as a payment and not to principal.

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8 Bret July 13, 2009 at 5:20 pm

I’ve been using the Pay Extra Every Month plan and hope to cut 10 years off of my 30 year mortgage.

This is the easiest and most convenient method I have found. And, if you have a tough month, you can just pay the regular amount.

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9 Doug August 12, 2009 at 9:58 pm

I would also like the spreadsheet as we have talked about paying extra but feel we will lose track and the bank will mess up (they have already messed up and that was just regular payments). djbarry98@care2.com

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10 Sean November 23, 2009 at 1:06 pm

True – most people are unaware that interest is compounded weekly on mortgages, not monthly. If you have the ability to make weekly payments it can add up.

Mama Bird – http://www.mortgage101.com/mortgage-principal-calculator go to this website and you can calculate what the principle would be. I’m not aware of any useful spreadsheets…

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11 Beau May 21, 2010 at 7:12 pm

If you are going to deviate from the agreed to payment plan. You need to inform your mortgage holder of what you are doing. Sometimes, they will hold the checks in an account, until the end of the month, without putting the funds towards the mortgage. Thus eliminating any interest reductions you would have realized. You will have to watch your statement to make sure they are properly calculating the interest rate.
.-= Beau´s last blog ..Home Loan Remortgage – Home Remortgage Basics =-.

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