If you’re like most people, you have one last piece of debt to pay off, besides those pesky credit cards.
Most likely, it’s a 30-year home mortgage loan.
You don’t need to earn a high income to pay off your mortgage faster, there are several ways to own your house sooner. We’ll cover some of these shortly.
Being mortgage-free has many benefits.
Firstly, you have the peace of mind that comes with having one less monthly bill payment.
Secondly, you have more money to save and invest for future goals.
Thirdly, you pay less total interest that’s basically “free money” you give to the mortgage lender each month for up to 30 years. Who doesn’t want extra money?
It’s for these three reasons I decided to pay off my mortgage early.
There are several different repayment strategies you can pursue that fit any income situation. Remember, the sooner you adopt these strategies, the more money you can save.
A Quick Note About Extra Mortgage Payments
Before you make your first extra mortgage payment, make sure your bank applies the extra amount to your current principal. By default, some banks apply and excess payment to your next monthly payment.
That means your loan balance doesn’t reduce the day the bank receives payment. Instead, payment might take effect on your next payment due date.
A short phone call or logging into the bank’s website usually resolves this issue in a few minutes.
Once you confirm where your extra payment goes, it’s time to choose which strategy is best for you.
Another tip is to make sure there are no prepayment penalties. This is a fee that some mortgage loans do incur.
Try These Mortgage Repayment Strategies First
The median U.S. mortgage payment is $1,030 for principal and interest payments. Adding escrow charges to that like insurance and taxes, causes the median payment to jump to $1,492.
We’ll go over an example, bearing in mind your mortgage situation will clearly be different to the figures used here.
Let’s see how much you can save with the following accelerated payment options.
Our benchmark is going to be a starting mortgage balance of $220,000 with a 4% interest rate for a 30-year fixed rate mortgage.
If you do nothing, you will pay $1,050 in principal and interest each month for 30 years. After your final payment, you will pay $158,114 in interest payments.
To save the most money, start making extra payments as soon as possible. Remember, the more you pay upfront, the more you save.
Therefore, the question you need to ask yourself is how much interest can you save with extra payments? To save the most money, start making extra payments as soon as possible. Remember, the more you pay upfront, the more you save.
Pay an Extra $100 Each Month
An extra $100 principal payment a month doesn’t seem like much on a $220,000 loan balance, but the savings add up. When your monthly payment is less than $1,200, you’re also making additional payments and then some.
Even if you can only pay an extra $20 or $50 per month, that’s better than nothing. The savings are still larger than your initial extra payment. To find an extra $20 or $50, cancel your cable tv subscription or go out to eat at least one less time a month. It’s really that easy.
Make Half-Mortgage Payments Every Two Weeks (Biweekly Payments)
One of the most manageable strategies is to make a half-mortgage payment twice a month to make 26 biweekly payments each year. This means you end up making one extra monthly payment each year.
On a $1,050 monthly mortgage payment, you pay $525 every two weeks. In most months, you pay the same amount you currently do. But, in two months, you make an extra half payment. Since you’re already in the habit of sending your mortgage company a check every two weeks, you might not realize you’re making the extra payments.
Double Your Monthly Payment
After you repay high-interest debt, you might decide to use your extra cash flow to double your monthly mortgage payment. For instance, you pay $2,100 instead of $1,050 each month. This is the fastest repayment option since you reduce the loan principal quickly. The lower your principal, the less interest amortizes over the life of the mortgage debt.
Refinance to a Shorter Term Loan
Now that mortgage interest rates appear to be in a rising trend, mortgage refinancing isn’t as attractive as it used to be. But, the current refinance rates for a 10-year or 15-year loan term can still be better than your current 30-year term.
Shorter loan terms usually have lower interest rates, but your monthly payment will be higher. With a 15-year term, you must repay $225,000 in half the time. While your monthly payment is more than a 30-year mortgage, you pay a fraction of the interest because of the lower interest rate and the higher monthly payments.
Before you refinance, keep in mind that you have to pay closing costs again. Our refinancing fees were roughly $2,000. Unless you’re at the start of a 30-year mortgage or your interest rate is notably lower, the cheaper option can be sticking with your 30-year mortgage and making extra payments.
To compare your savings, use a mortgage refinancing calculator.
How Much Can You Save With Extra Mortgage Payments?
Here’s a quick summary of how much your interest savings can be if you follow one of these strategies:
- Do Nothing: $0
- Extra $50 Per Month: $15,052
- Extra $100 Per Month: $27,345
- Biweekly Half-Monthly Payments: $25,719
- Double Monthly Payments: $107,048
- Refinance to a 15-year mortgage: $97,000 (with 3.375% annual interest rate)
These projections all assume you make changes in the first year of a 30-year mortgage. The savings amounts will be less the longer you wait to make extra payments.
To see how much you can save with these different strategies, use a mortgage payoff calculator. By using a mortgage payoff calculator you’ll get a better understanding of how the payment is defined so that you can get a clearer understanding of the principal balance as well as the interest on the mortgage payment.
How We Found Money to Make Extra Mortgage Payments
My wife and I paid our mortgage off early in mid-2018. As of this writing, we’ve been mortgage-free for roughly six months. Although we started with making the minimum monthly payment, we refinanced our mortgage and incrementally increased our monthly payments until we were making two full monthly payment a month as our disposable income increased.
While our story isn’t going to be identical to yours, there will be several parallels to how you can find ways to make
Spend Less Money Each Month
The first thing we did was spend less money on things we didn’t need. My wife and I wrote every expense on paper for a month. Then, we decided where we could cut spending. Easy saving hacks for us were cooking meals instead of going out to eat. Also, buying used items on Craigslist instead of buying new.
Another tool we enjoy using to save money is Trim. This is a free service that monitors your cell phone, internet, and cable TV subscriptions for lower prices. In our case, it’s reduced our internet and phone bills. Additionally, they can also cancel your unwanted subscriptions.
By reducing your spending, you can put that money towards the principal balance of your mortgage instead.
Make One-Time Lump Sum Payments
My wife and I are both self-employed and earn a variable income. During our leaner months, we wouldn’t make as large of an extra payment. Therefore to make up the difference, we made more substantial, lump-sum payments on the months when our income picked up.
If you earn a steady income, you might consider these other options instead:
- Income Tax Refunds
- Salary Increases
- Holiday Bonuses
Of course, we only made extra payments with a fully-funded emergency fund, investing at least 10% of our income, and we didn’t have other large upcoming expenses that would force us to go further into debt.
After all, if you pay off your mortgage early but don’t have enough liquid cash to cover financial surprises, you may have to sell your house or go back into debt. Neither situation is good and can erase the interest your saved.
Get a Side Hustle
Most people have two ways to improve their money metrics: make more money and reduce expenses.
Since you can only cut expenses so far, unless you stop eating and sell your house, increasing income is usually the easier option for most people.
Pursuing a side hustle is how we increased our income since we earned as much as we could with our day jobs. For instance, my side hustle was freelancing online in my free time. Without this extra income, we couldn’t have made extra mortgage payments.
Rent Your Spare Bedroom on Airbnb
One benefit of owning a home is that you can rent it out to travelers on Airbnb penalty-free. If you rent, your landlord most likely includes a clause where you can’t sublet or run a home-based business.
Renting your spare bedroom or finished basement gives you extra income each month. You can use that extra money for extra mortgage payments.
Then, you can still use your regular day job income to make the regular monthly payment. Any rental income is a pure extra payment.
Summary
When you decide to pay off your mortgage early, it’s not an all or nothing situation. You can make small extra payments and gradually increase your payment amount. The important thing is that you do something. The sooner you start, the more money you save.
