Paying off your mortgage early can save you tens of thousands of dollars in interest. But don’t you need to have a lot of extra money coming in? Not necessarily.
You can pay your mortgage off early without putting any extra strain on your budget, and without even paying a ton of extra money every month. Sometimes, it’s as simple as paying half your mortgage payment amount every two weeks instead of the whole amount every month. Here’s how to pay off your mortgage a few years early, save yourself a lot of money over the life of your loan, and enjoy the freedom that comes with not having a house payment.
Pay Biweekly Instead of Monthly
Most mortgages are structured so that you make a payment each month, for a total of twelve payments a year. But if you split that monthly payment in half and make a payment every two weeks, you’re still paying the same amount of money every month, but at the end of the year, you’ll have made an entire extra mortgage payment.
How does that work? Well, there are 52 weeks in the year, so if you make a payment every two weeks, you’ll make 26 payments a year. What’s 26 divided by two? Thirteen. That’s the number of full payments you’ll be making every year, and you won’t even have to scrimp and save to find the extra money. You could pay off your mortgage years early, and save thousands. Use a mortgage calculator to determine exactly how much you’ll save, and how long it will take to pay off your mortgage if you pay biweekly instead of monthly.
Put a Little Extra Toward Your Principal Each Month
The principal of your mortgage loan is the amount you actually borrowed, while the interest is the extra amount you pay for the privilege of having borrowed. Early in your loan, much of your monthly payment goes toward paying down your loan interest, while later in the loan, more of your monthly payment goes toward paying down your principal. But the more of your loan principal you can pay down at the beginning of the loan, the more money you’ll save in interest over the life of your loan, because there will simply be less principal on which to charge that interest.
You don’t need to come up with hundreds of extra dollars a month in order to pay off your mortgage early and save money in interest. An extra $50 a month can go a long way towards paying down your principal and could save you thousands, especially if you’re able to make those extra principal payments at the beginning of the loan. Again, you can use a mortgage calculator to determine how much of an impact paying a small amount extra each month can have on your mortgage. Just make sure to note on your payment that additional funds should be applied to the principal of your loan, not to the next month’s payment
Earmark Windfalls for Paying Off Your Home
Whether you get a good tax return, a bonus at work, or an inheritance from a rich relative, you can pay down your mortgage quickly by earmarking financial windfalls for paying down your mortgage. Of course, you should only do this if you have plenty of money set aside for emergencies -- an emergency fund of three to six months’ worth of living expenses is ideal. If you don’t have emergency funds set aside, top those off first and then start putting extra money you receive toward your mortgage. Remember to specify that the extra funds should be paid toward your loan principal.
Refinance Your Loan
If you have a 30-year mortgage, you can pay it off in half the time by refinancing it to a 15-year loan. You might think that would mean doubling your payment, but that’s not necessarily true. You may be able to get a reasonable payment along with a lower interest rate, since shorter-term loans do tend to offer better interest rates. If a 15-year loan isn’t feasible for you, consider refinancing to a 20-year loan instead.
Few things are better than owning your own house, free and clear. Just think of what you could do with the extra money every month -- not to mention the freedom of stepping off the debt treadmill. Even if you can only pay a little extra each month, you could save thousands by paying off your mortgage early.