How to Pay Off the Mortgage Early

March 9, 2011 No Comments »

early

Mortgage Q&A: “How to pay off the mortgage early?”

If you’re looking to pay off your mortgage early, now is an easy time to do so.

With mortgage rates still quite low historically, it’s possible for homeowners to make the same mortgage payments they’ve always been making, while paying off their mortgages early.

Let’s look at an example:

Loan amount: $300,000
Loan program: 30-year fixed
Current mortgage rate: 6.25%
Current mortgage payment: $1847.15 <===== keep making this payment
Refinance mortgage rate: 4.75%
New mortgage payment: $1564.94

If you were able to refinance your mortgage as specified above, your new mortgage payment would be roughly $282 cheaper per month, assuming you stayed with the same loan program.

While such a move clearly provides monthly payment relief, it could also shorten the term of your mortgage tremendously, assuming you made your old mortgage payment on the newly refinanced mortgage.  This is the trick to paying off your mortgage early.

If you continued to make the old monthly payment of $1847.15 per month, the $282 or so a month in overpayment would go toward the principal balance, shortening the amortization period from 30 years to about 22 years.

The total amount of interest paid over the life of the loan would also decrease from over $263,000 to less than $182,000, for total savings of nearly $82,000, not factoring in tax deductions and the interest you paid on the original loan.  Not bad for continuing to make the same monthly payment you were making before, right?

You could also refinance into a shorter term fixed mortgage, such as a 15-year fixed. The 15-year fixed mortgage payment in our example from above would be $2,219.06 (assuming a new refinance rate of 4%), which is a more significant jump that not all homeowners would be comfortable with.

But if there’s a wider spread on your current mortgage rate and the refinance rate, it could make a lot of sense to shorten the term with little or no monthly payment pressure.

Finally, you could leave your mortgage intact and just make larger monthly payments (toward principal), or look into biweekly mortgage payments.

Just keep in mind that if you make larger payments each month on your original mortgage, it WILL NOT lower your payment the next month.  The way mortgages are paid off, extra payments simply reduce your interest expense and shorten your term, they do not affect the amount of future monthly payments.

In other words, if you paid an extra $100 each month, you would still owe the same amount the following month, despite having a smaller outstanding balance.

Tip: Making extra payments earlier in the loan term will amount to greater savings, so if you plan to pay your mortgage off early, do it sooner rather than later!

Should I Pay Off My Mortgage Early?

Just keep in mind that mortgages are very cheap at the moment, and you might be able to get a better return for your money by investing it or contributing to a 401k or similar retirement account.

You also get a tax break for paying mortgage interest. And if you factor in inflation, which will probably surge in the coming years, you’ll essentially be paying off your mortgage with cheaper money of the future.

Additionally, a home is an illiquid asset, so if you pay off your mortgage and experience some kind of financial emergency, having all your cash tied up in your home and none on hand could put you in a tough spot.

Also note that if you have credit cards and other more expensive debt, you’ll want to attack those first as well. There’s no sense in paying down your mortgage quicker than you have to if there are other debts hanging over your head.

At the same time, if you don’t want to pay all that extra interest and take any investing risks, it may make sense to pay off the mortgage early.  This can be especially true if you’re close to retirement, and anticipate living on a fixed income.  Peace of mind has quite a bit of value too you know…

Before deciding whether to pay your mortgage down early or not, do the math and look at all possible scenarios to see what will work best for you and your unique financial position.

Every situation is different, so don’t assume what works for someone else will work for you.

Ways to Pay Off Your Mortgage Early

  • Make extra payments to principal
  • Make an extra payment each quarter, semi-annually, or annually
  • Make biweekly mortgage payments
  • Round up your mortgage payments
  • Apply your tax refund (or any other windfall) to your principal balance
  • Refinance your mortgage to a lower rate and make the old higher payment
  • Refinance to a shorter-term mortgage such as a 15-year or 10-year fixed loan
  • Sell another property and use the proceeds to pay off a different mortgage
  • Sell stock or other investments and use the proceeds to pay down the mortgage
  • Find a roommate and use their rent to pay down the mortgage early
  • Cash in your credit card rewards/points and apply them to your mortgage balance
  • Put loose change in a collection jar and periodically deposit it and use it to pay down the mortgage
  • Get a side job and use the earnings to pay down the mortgage
  • Host a garage sale and apply proceeds to the mortgage balance
  • Ask for a no-interest loan from a family member and apply it to the mortgage balance
  • Ditch your car if you can get by without one, use extra cash on hand to pay off your mortgage early
  • Know which mortgage to pay first to save the most money!

Tip: Watch out for “mortgage accelerators” and “money merge accounts” that promise to shed years off your mortgage. These programs are often riddled with fees and could wind up doing more harm than good.

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