Of all the homeowners in the United States, only about 20 million of them own their homes free and clear without a mortgage. The remaining 66 million of us write checks for mortgage payments every month, looking longingly to the day when we’ll be financially unburdened. For the vast majority of people, that day will come 30 years after their first mortgage payment (unless they refinance) since most conventional loans are scheduled for 360 payments. But with approximately half of the total bill of your mortgage going to pay off interest (on a 30-year fixed loan at 5.3 percent), paying your home off may seem like running a marathon where the finish line keeps moving back.
But there are ways to get to that finish line faster while significantly reduce the total cost of interest and the loan you pay at the same time. That day when you own your home free and clear and don’t have to make a mortgage payment doesn’t need to be a far-off dream – it can happen within a couple decades or much sooner. So today, we’ll touch on fifteen strategies that will allow you to pay off your home loan faster than 30 years and for less interest.
First, a little background on the incredibly important mortgage payment schedule:
Your payoff of principal and interest follows a set schedule called amortization. If you look at your amortization schedule, in the first years of any loan, you’re paying off almost all interest and very little principal. So the sooner you contribute extra money toward your mortgage, the more benefit you’ll receive. Conversely, starting to add extra payments after fifteen or twenty years of payments won’t have nearly the same effect.
Therefore, the BEST thing any homeowner can do is to start paying extra from the very beginning. If you plan on staying in the home (and the loan) for a long time, then paying extra is a great tactic. However, if you plan on selling or refinancing in a few years, it may not be prudent to try and pay it off.
1. Add extra to each mortgage payment:
Every month, you have the option of adding an extra sum to your mortgage payment, which your lender will automatically apply toward principal, paying down your loan more quickly. How much will it save you?
In one scenario, we have a $200,000 mortgage at 5% due over 30 years with a total payout of $386,514. Add only $200 a month extra to your payment and your loan amount will reach 8 years and 8 months faster, saving you more than $61,000 in interest
If you could manage $400 a month extra, your loan would be paid off in only 16 years and 9 months, saving you more than $91,000 dollars!
But we think you can do even better than that. Using some of these strategies and tactics in this blog, what if you could sacrifice an extra $500 a month? That would mean your loan is paid off completely in 14 years and 2 months (less than half of the scheduled 30 years!) and save you well over $100,000!
No matter how you choose to “attack” your mortgage balance, keep those numbers in mind as realistic goals as you read the rest of this blog.
2. Make one extra payment a year:
Instead of making extra payments monthly, some people prefer to write one big check to their lender once a year. How much will it save you?
A $200,000 30-year home loan with an interest rate of 5% will cost you $186,512 in interest if you make the standard 12 payments a year. But by adding just one full payment every year, you’ll pay the loan off in only 26 years and you pay only $153,813 in interest, saving $32,699!
3. Double up four times a year:
By essentially making an extra payment every quarter starting when you first get the loan, the interest savings will let you pay off the loan almost twice as fast.
4. Sign up for bi-weekly payments:
Instead of a monthly payment, most lenders offer you the option to make bi-weekly payments. That may sound like the same thing but remember that there are 52 weeks every year, not 48. The result is that bi-weekly payments will allow must borrowers to pay off their loan about six years earlier.
5. Pay all your mortgage fees and charges up front:
We may be able to set up your loan so you pay your mortgage fees, costs, closing costs, etc. out of pocket instead of built into the mortgage amount. That may be a small sting of a sacrifice at the time, but the difference of a few thousands dollars in lower loan amounts will mean much less total interest and a faster payout if you manage it correctly
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Stay tuned for part two of this blog, with the remaining ten strategies to help you achieve freedom from your home loan!