The decision to pay off your mortgage early is a controversial one. But for some who have tackled many of their big financial goals and erased other debt, putting their home mortgage in their crosshairs can make sense.
If you’ve decided to pay off your mortgage early, here are several strategies for saving money and paying the balance quickly.
1. Refinance to a 15-year mortgage
An easy way to guarantee that you’ll pay off your mortgage twice as fast is to refinance your mortgage from a standard 30-year term to a 15-year mortgage.
If you refinance to a 15-year mortgage, you’ll typically pay a lower interest rate while making larger payments each month.
By refinancing a $250,000 30-year mortgage at 5 percent to a 15-year mortgage at 2.63 percent, you’ll save about $178,000 on interest.
The downside: higher monthly payments and probably less flexibility. By sticking with a 30-year mortgage, you would have lower payments but could always add to them to pay off the mortgage sooner. With a 15-year loan, you’re stuck with the higher payment. While you may be able to afford this now, focusing on other financial goals or a decrease in income can throw a wrench into your plans.
Mortgage rates are near an all-time low, so you’re still getting a good deal and increased tax benefits even if you choose the 30-year mortgage.
2. Refinance but keep the same payments
Many who refinance do so to reduce their monthly payments. But if you refinance, you can double up by reducing your interest rate and continuing to make the same monthly payment.
This yields the same results as adding extra to each monthly payment. Check mortgage refinancing rates to find out how much you can save compared with your current rate.
3. Use pay raises on your mortgage
One way to find extra cash to put toward your mortgage: apply raises from your job.
The goal is to put the same percentage of your income toward your mortgage even when your pay goes up. If you can avoid any lifestyle inflation, you can put all of your raises toward your mortgage balance.
This strategy works best for those who get regular raises. If you aren’t expecting to see your income increase anytime soon, this strategy might not be the best option to start with.
4. Pay extra each month
Fifty bucks might not be much in your budget but consistently adding this much to your mortgage payment can make a big difference.
Using the same example above, but adding an extra $50 to your monthly payments cuts payoff time by about 2.5 years. Double your extra payment to $100, and you’ll chop off about 4.5 years.
The biggest challenge with this plan: your willpower to keep making extra payments. Because it’s voluntary, it’s up to you to stay on track.
5. Use cash windfalls to pay lump sums
Instead of paying a little extra each month, you could pay a large lump sum here and there. This can be done with a cash windfall, such as from a yearly tax refund, work bonus or inheritance.
Paying an extra $3,000 every tax season will reduce your mortgage term by nearly nine years.
6. Make biweekly payments
If you opt to make biweekly payments on your mortgage, you’ll make an extra mortgage payment every year.
Making 26 payments a year with our example cuts almost five years off a 30-year mortgage.
If you opt to have your bank set this up, you may have to pay a large yearly fee. If you don’t want to pay this fee, you can get the same benefits by adding extra to your monthly payments. Just tack on 1/12th of a monthly payment, and you’ll replicate the results.
7. Set a target payoff date
Setting a target payoff date allows you to know exactly how much extra to pay each month to be mortgage-free by a certain date. You’ll have the added motivation of marking your calendar to plan the celebration.
If you’re looking to be mortgage-free in 20 years, in the example above it will cost you $308 above your standard $1,342 payment each month.
If you’re really aggressive and want to pay off your 30-year mortgage in 10 years, you’ll need to add another $1,310 to your $1,342 monthly payment.
8. Combine methods
There’s no need to select only one method from this list. Many mortgage-holders can choose a few options on this list and combine them to pay off their loan even earlier.
Let’s say you apply an extra $200 each month as well as your $3,000 tax refund every April. Your 30-year mortgage is paid off early in about 18 years.
To calculate your own scenarios to pay off your mortgage early, check out Financial Mentor’s mortgage calculators and play with your numbers.
Are you paying off your mortgage early? Let us know in the comments what your strategy is.