Pay Off Your Mortgage Early: Easy Tricks Anyone Can Use

In Partnership With 

There are two ways to own your home. Either you can pay cash upfront or you can pay little by little, year after year. For most us, monthly mortgage payments are really the only feasible option. Nonetheless, there are a few simple strategies you can put into place now and pay off your mortgage early.

Why Pay Off Your Home Mortgage Early?

When you pay off your home loan faster, you end up paying less for your home than if you were to pay the minimum required payment for the term of the loan. Paying off your house early will literally save you thousands, tens of thousands of dollars and possibly more, over time. Consider the following hypothetical example.

Let’s say you get a $300,000 home loan based on a 30-year term and at a fixed rate of 4.46% (current average APR as of 10/1/2019). If you were to pay the minimum, your monthly mortgage payment would be $1,512.93 every month for 30 years. However, by the time you pay your house off, you would not have paid $300,000 for your home but significantly more, in fact, almost double.

In this example, we can see that the amount paid in interest is nearly equal to the original home loan. But what can you do? Many of us do not have the $300,000 to buy a house outright. Luckily, here are some simple tricks you could use to knock years off your mortgage while saving you a ton of money in the process.

Set Up Bi-Weekly Mortgage Payments

This strategy could reduce a 30-year mortgage to 25 years and save you tens of thousands of dollars in the process. Essentially, you will take your monthly mortgage payment (including taxes and insurance), divide that in two, and then pay it every two weeks rather than once a month. In effect, this strategy will have you make the equivalent of 13 monthly payments per calendar year instead of 12. The result is significant as you can see below.

If we were to use our $300,000 mortgage example from above and apply a biweekly payment of $765.47 (which is half the mortgage payment) instead of the full monthly payment of $1,512.93, this would be the result:

Not only do you reduce your mortgage by 5 years but also you end up saving $42,835.37 in the process. However, you should check with your lender to see if they accept bi-weekly payments without charging a fee before implementing this strategy. If they do charge a fee, this may not be the best tactic to use to reduce your mortgage and you should possibly look to one of the other strategies below.

Refinance Your Mortgage

This strategy is highly relative to your situation. If you have a high interest rate but you have been in your home for a few years and have built up some equity, you might want to consider refinancing your mortgage before interest rates go up. Even a 1% decrease in your APR can save you a considerable sum of money. Alternatively, if you feel financially capable to handle a larger mortgage payment, a 15-year mortgage over a 30-year would save you tens of thousands of dollars. Again, using our hypothetical example from above, we get these results:

Typically, with a 15-year home loan the APR is lower than a 30-year term; however, even with keeping the APR the same we can still see that the difference in interest is substantial. Not only would you be paying $132,663 less in interest but also you would have effectively eliminated 15 years of paying on a mortgage. However, your monthly mortgage would have also increased to $2,289.

A Little Extra Goes a Long Way

You may think that little amounts don’t count for much in the larger picture of a 30-year home loan; such as the money you spend on your morning cup of coffee. However, what if I tell you that you could shave off years from your home loan by skipping your coffee and putting that money toward your mortgage. Even a hundred extra bucks each month could save you thousands of dollars in interest payments.

Let’s say you didn’t buy your morning cup of coffee, and instead saved that $5 to put toward your mortgage (in this hypothetical situation, we are estimating that a morning cup of coffee is more than just drip coffee and with a tip should equal to about five dollars). At $5 a day, we are looking at an additional $100 month that could be going toward your mortgage. Again, referring back to our hypothetical situation of a $300,000 home loan but adding an additional $100 a month against your mortgage we would get this as our results:

In this scenario, we have not only effectively knocked off a few years of your mortgage payments, but also reduced what you would be paying in interest by $33,640. Don’t worry, you can keep drinking your coffee, however, the main takeaway is that a little extra towards your home loan can go a long way.

Monetary Windfalls

The main strategy for those wanting to pay off their mortgage early is to focus on reducing the overall principal of their home loan as fast as possible. Monetary windfalls are any form of extra money that comes your way and is unplanned for. This could include things like gifts, bonuses at work, overtime, inheritance, tax refunds, and lottery winnings, among others.

As we saw in the prior example that even paying an extra $100 a month, or $1,200 a year, you can reduce your mortgage payment by years. Just imagine how many years you could reduce your mortgage by if you were to start putting all your extra money against your home loan.

Speak to Your Lender

Make sure you speak with your mortgage lender about your intentions. You don’t want to begin a strategy to pay off your mortgage early only to find out that your lender has penalties for early payments. Also, some lenders may only allow extra payments to be made within a specific timeframe. You should also make it clear that when you are applying an additional payment that it needs to go against the principal of your home loan, and not towards any future mortgage payment.

Take Time to Build Your Strategy

Paying off your mortgage early is all about having the right strategy. Take your time to explore your options and pursue the strategy that best fits your situation.

This post was originally written for Redfin by Jeff Anttila.