4 Great Strategies to Pay Off Your Mortgage Early

For most people, their mortgage is the number one expense in their budget. According to data from the U.S. Census Bureau’s American Housing Survey, the median monthly mortgage payment is $1,609.

Think for a moment how awesome that would be if you were able to pay your house off early? Not only would no longer having a mortgage free up a ton of monthly cash flow in your budget, but it would also help bring you that much closer to achieving financial freedom.

The good news is that you’re not stuck making payments for the next 30 years. If you’d like to say goodbye to your lender sooner rather than later, then here’s how to pay off your mortgage early using four of my favorite time-tested strategies.

1. Switch to Biweekly Payments

Did you know that instead of making a monthly mortgage payment, you have the option to split it into two and pay every two weeks? This is something many lenders offer called “biweekly payments”.

What’s the advantage of biweekly payments? The answer: One extra payment per year.

Obviously with monthly payments, since there are 12 months, you’ll make 12 payments. But when it comes to biweekly payments, you pay every two weeks. Since there are 52 weeks in a year, that works out to 26 payments or 13 effective monthly payments. And that extra payment can really make a difference.

Consider this example from Bankrate:

  • Assume you’ve got a 30-year, fixed-rate mortgage for $250,000 with a 3.2 percent interest rate. 
  • Under a normal monthly payment schedule, your principal and interest would be $1,081. That works out to $139,260 in total interest over 30 years.
  • With a biweekly payment plan, you’d pay around $540 every two weeks. However, you’d pay your loan off in 26 years and the total interest would reduce to $119,369. That’s a savings of $19,800. 

Mentally, biweekly payments make sense because they are simply half of what you’re paying for your mortgage right now. However, you need to make sure that your budget can support this “extra” effective monthly payment before you sign up for it.

2. Refinance to a 15-Year Term

If you originally choose a 30-year loan for your mortgage, then a great way to pay if off early is to simply refinance into a 15-year term.

15-year mortgages are extremely common and even desirable to both lenders and borrowers. Lenders like them because they’ll be repaid the principal faster, and this is why they offer a slightly better interest rate. Borrowers like them because in addition to the accelerated timeline they also save tens or even hundreds of thousands of dollars in interest off the life of the loan.

The reason for this is the way mortgages are calculated. Remember that the amortization table (the amount of principal and interest you’re actually paying with each payment) is slanted towards paying the interest first and gradually adds more principal as time goes on.

With a 15 year mortgage, the amortization table is more favorable to the principal. That means you’ll pay less interest with each payment and less interest overall during the life of the loan.

Consider a $300,000 mortgage:

  • At 30 years and a 4.0 percent APR, your monthly payment would be $1,432 and the total interest would be $215,609.
  • At 15 years and a 3.5 percent APR, your monthly payment would be $2,145. But the total interest would only be $86,037.

Pay your mortgage off faster and save $129,572 in interest? Yes please!

3. Make a Lump Sum Payments Towards the Principal

One of the great things about most conventional mortgages is that you’re free to make extra payments towards the principal anytime you want. This is a great way to potentially shave off years from your timeline and avoid tens of thousands of dollars in interest.

If you’re expecting a fairly large bonus, profit-sharing check, income tax refund, settlement, or inheritance, then consider using it as a lump sum payment towards your mortgage principal. In essence, you’ll be investing in your home and you should technically be able to recoup this money as equity when you sell your house someday.

For example, let’s consider a $250,000, 30-year mortgage with a 4.0 percent APR:

  • Under normal circumstances, you’d pay this mortgage off in 30 years and spend $179,519 in total interest.
  • If you made one $10,000 lump sum payment towards the principal, you’d now pay it off in 27.8 years and only spend $157,802 in total interest.

You can try this for yourself using this free online calculator here.

4. Make Extra Principal Payments

In addition to making lump sum payments, another way to pay down the principal portion of your mortgage faster is to simply add some additional money on top of your regular monthly payment. This could be $50, $100, or even more depending on what your budget will allow.

For instance, let’s revisit our 30-year fixed-rate mortgage for $300,000 with a 4.0 percent APR. If you sent in just $100 extra per month towards the principal, then you’d shorten your payments by 3.5 years and save $28,746 in interest. You can try this for yourself here using this free online calculator from Bankrate.

The great thing about this arrangement is that you can contribute as much or as little as you’d like whenever you like. For instance, let’s say you’re contributing $200 extra towards the principal when suddenly you need the money for an emergency. Since there’s no commitment, you can stop making these extra contributions without any issue. That can be really helpful for people whose income fluctuates often due to commissions or client-based work.

If you’d like to start finding some extra money that you can put towards your mortgage principal, then one of the first places to start analyzing is your spending habits. There you’ll notice where purchases might start to become excessive and cuts can be made.

A budgeting app like Buxfer can help you to do this. Buxfer’s Insights feature bundles your purchases into specific categories so that you can better understand which areas of your spend the most. Click here to learn more about Buxfer’s Insights feature.

Image credit: Pexels

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