Strategies for Paying Off Your Mortgage Early

Nearly 26.9 million homeowners in the U.S. own their house outright according to the Urban Institute. While some of these homeowners paid for their homes with cash, close to two-thirds of all homes owned in the U.S. involve a mortgage.

Individuals with a mortgage on their home can own it outright sooner than its stated term. By employing one or more of several effective strategies for paying off a mortgage early, residents can hold 100 percent equity in what many financial experts profess is the most valuable investment.

However, before you start employing any of these strategies to pay off your mortgage early, there are few things to check. First, find out whether your mortgage has a prepayment penalty, charging you for making extra payments or paying off your mortgage early. Find out if additional payments are applied to either principal or interest automatically, to the subsequent month’s payment or if you are given the choice of how to apply those extra funds paid. Finally, avoid paying for a mortgage accelerator program, as you can achieve the same results without paying extra for the privilege.

Biweekly Payments

Many of the strategies for paying off your mortgage early involve making extra payments to your mortgage, ideally toward the principal on the loan. To achieve the greatest success in these efforts often requires setting up a system for making those extra payments easy. The more you systematize the process of making extra mortgage payments, the more easily you can plan and budget for those payments each month.

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One of the most common ways homeowners systematize making extra payments toward their mortgages is by making payments every two weeks instead of once every month. Instead of making one full mortgage payment every month, pay half the amount every two weeks. In this way, you make 26 half-sized mortgage payments amounting to 13 full payments every year instead of the 12 payments you would normally make paying the full amount monthly. In this way, you can make one full mortgage payment extra per year. In so doing, you can knock as much as eight years off of a mortgage with a 30-year term, depending on the interest rate.

To set up such payments, calculate the sum of the interest and principal portions on each monthly payment and divide the total by two. You can either do the same with the taxes and insurance charged on your mortgage bill or pay the entire amount of taxes and insurance with one of your payments. As long as you make both payments by the due date on the bill, it hardly matters how you divide it up. Check with your lender before starting to employ this strategy to be sure the company accepts partial mortgage payments, as some may not. Other lenders may accept biweekly payments but charge a fee to set up such a plan. Do not pay such a fee to set up a biweekly mortgage payment plan, as it could cancel out any financial benefits you may gain from making those extra payments.

Additional Quarterly Payments

If you can afford a little more, then make an extra mortgage payment every quarter. This way, you make four extra payments per year rather than just one, paying the loan down even faster. Remember, as long as your lender permits paying down principal early, every extra dollar you pay toward the principal on your mortgage is one dollar less charged interest in the future. In this way, not only can you pay off your mortgage earlier, but you can pay less in interest and overall for the home toward the end of the term. You can knock 11 years off repayment on a 30-year mortgage by making an extra payment each quarter.

Refinancing

You can literally change the repayment term on your mortgage by simply refinancing to a mortgage with a shorter term. For example, trade out a 30-year mortgage with a 15-year option and you cut down your repayment period by half.

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Alternatively, if you do not want to lose the low-interest rate you have on your existing mortgage, then simply make your repayments on your longer-term loan as if it were a shorter-term one. For example, double the payments on your 30-year mortgage to pay it off in 15 years. You can find many free mortgage calculators online that can help you figure out what the payments would be on a shorter-term loan, even at the same interest rate. If you already have a 15-year mortgage, then plug the numbers into the mortgage calculator to see what payments would be to pay off the loan in 10 years.

Bigger Down Payment

If you still have yet to close on your home, then you could reduce the overall term of the loan you are taking out by making a bigger down payment up front. If you can put at least 20 percent down on your mortgage, then you can avoid having to pay private mortgage insurance (PMI), thereby lowering the overall cost of the loan.

Pay more than 20 percent and you can decrease the potential repayment term of the loan even more. Even if paying more in a down payment on your mortgage does not shorten the loan repayment term, it decreases the overall amount you owe on the mortgage, including potentially having a smaller monthly payment. This can make it easier to employ other strategies to pay off the smaller mortgage early.

Downscaling and Downsizing

All of the strategies listed so far for paying off your mortgage early can be made easier with two additional strategies. Downscaling your expenses, such as by bringing your lunch into work every day to reduce food expenses of dining out, can help you save money that can then be applied toward additional mortgage payments. Downsizing into a smaller home can reduce the amount you owe overall, thereby making it easier to pay off sooner.

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