3 free ways to pay your mortgage faster

Blue toy house in grass

Paying extra on your mortgage can be a good idea.

It can shave years off your home loan and save tens of thousands of dollars in interest charges.

The one thing you should not do, however, is sign up for an accelerated payment plan from a mortgage service company that costs hundreds of dollars.

There are better ways to cut that home loan down to size. Here are three free and easy options, and one that isn't free but can still save you tons of money.

 

1. Increase your monthly checks by one-twelfth.

 

The additional money you're sending reduces the balance of your principal, which is the actual amount you own on the house without interest.

The biggest share of your early mortgage payments goes to paying interest, so paying a little extra on principal now makes a huge difference in the years ahead.

 

2. Make one extra payment a year.

 

This works especially well if you get an annual bonus or always receive a sizable income tax refund. Just add the money to your next monthly payment.

Once again, you're chopping away at that principal ahead of schedule.

 

3. Pay half of your regular monthly payment every two weeks.

 

Although a few lenders allow customers to switch to biweekly payments at no charge, most won't do that, nor will they accept partial payments.

But you can have the money automatically transferred from your checking account to a savings account every two weeks and then transferred to your lender at the end of every month. Ask your bank or credit union for help setting up online transactions, if necessary.

By the end of the year, you'll have made 26 half payments, which adds up to 13 full payments — or, again, one full extra payment.

Caution: Paying down the principal on your home loan more quickly will never reduce the minimum monthly payment or allow you to skip a payment.

It simply shortens the length of the loan and reduces the total amount of interest you have to pay.

 

How much could you save?

 

Extra payments add up

Additional monthly payment Total savings
$100 $37,070
$200 $61,161
$300 $78,259

A $200,000 30-year home loan with an interest rate of 5% would cost $186,512 in interest with the traditional 12 payments a year. Make the equivalent of 13 monthly payments every year, and the loan will be retired in 26 years and you pay only $153,813 in interest — a savings of $32,699.

Of course, you don't have to keep your home loan for decades to benefit from extra payments.

You'll immediately begin adding to your equity (the difference between what your home is worth and how much you owe on your loan). That lets you ditch private mortgage insurance sooner, saving you as much as a couple hundred dollars a month.

If you ever have an emergency, you'll have more equity to take out a home equity loan. And, of course, the less you owe on your mortgage, the more money you pocket if you sell your home.

Our accelerated mortgage payoff calculator can figure out how quickly you can pay off your home loan and how much you'll save.

The biggest challenge to following through with a faster payoff plan is maintaining self-discipline. It's easy to start paying extra — until you have extra expenses or you forget an extra payment.

That's where mortgage service companies say they can help. When you buy an accelerated biweekly payment plan from one, you're essentially asking the company to make you pay off your loan early.

They collect your biweekly checks and fine you if you miss one of your voluntary payments.

According to them, the threat of those penalties and the hundreds of dollars they charge in setup and maintenance fees are worth it to save tens of thousands of dollars in the long run.

But they're not.

Start-up fees begin at $300, and many service companies also charge processing fees of anywhere from $2.50 to $10, plus monthly or annual maintenance fees.

Some service companies pay interest on the money they're holding, but that won't come close to covering the fees.

The U.S. Consumer Financial Protection Bureau sued one company, Ohio-based Nationwide Biweekly Administration, in 2015, accusing it of misleading consumers about the potential savings from its plans.

Nationwide was charging a start-up fee of $995, plus yearly administrative costs of up to $101.

The protection bureau noted that someone who signed up for the plan with a 30-year mortgage of $160,000 at 4.5% would have to stay in the program for nine years to recoup their fees. (Nationwide suspended operations after the suit was filed.)

Even if you only pay a $300 initial fee and then $10 a month, you'll spend $420 in the first year and $2,700 over 20 years. If you don't make all 26 payments a year on time, you'll have late fees added to that and wind up paying even more.

That's the kind of help you don't need.

This brings us to the option that isn't free, but can potentially save the most money. If you really want to discipline yourself to pay off your home loan sooner, consider refinancing for a shorter time period.

Most fixed-rate mortgages are 30 years, but you can get loans that last 20, 15 or even just 10 years.

Loans that run for shorter periods generally come with lower interest rates. The combination of a lower rate and less time can really add up.

Let's look at that $200,000 mortgage again, this time for only 15 years. A 15-year loan runs about one percentage point cheaper than a 30-year loan. With a 15-year mortgage at 4%, you'd pay about $66,288 in interest over the life of the loan.

That's a savings of more than $120,000 in interest over a 30-year loan at 5%.

Of course, your monthly principal and interest payments would go up significantly, from around $1,074 to $1,479, so you would need to make absolutely sure you could handle that increase.

You'd also have to pay some loan closing costs, although most usually can be wrapped into your loan.

But if you're positive you can swing it, shortening the time of your mortgage can be the shortcut to huge savings — even the day you own your home free and clear.

  • Matunos

    I may be missing something here, but this idea as stated doesn't add up.

    First of all, regarding tax benefits, you're getting back a percentage (based on your marginal tax rate) of the money you spend on interest, but you're still spending that money on interest. For example, paying an extra $100 in interest in order to increase your deduction by $35 doesn't make a lot of sense (you're still down $65). It only makes sense if cashflow is your main problem (that is, you're strapped for cash and really need that tax return money)- and in that case you shouldn't be considering making extra payments to your mortgage anyway and when you do have extra cash you probably have other debts that are better to pay down sooner.

    Now, if you have a low mortgage rate, extra cash on hand, and no other expensive debts to pay off, it's true that it may make sense for you to invest that extra cash rather than apply it to your mortgage. The question is can you invest it with a higher expected return than your mortgage rate? If your rate is 4% and you think you can get say 8% in the stock market over the next 10-30 years, it may make sense to put the extra money there. On the other hand, the stock market is risky, you might not get that return, whereas you know you'll owe 4% of principal (compounding) for the life of your loan.

    Under no circumstances are you going to find a savings account that pays interest that exceeds your mortgage rate, though. For example, the best savings rates currently max out at about 0.75% APY. While your money is compounding at that rate, the interest on the principal of your loan is compounding at a higher rate. If you're not going to do anything else with that savings (e.g. it's not emergency savings, you're just going to one day use it to pay off your loan early), you're much better off paying down the principal sooner rather than later, reducing the amount of interest you accrue for future payments.

    • Mandy L

      Exactly what I was thinking regarding taxes. About the savings rate, though, I have to disagree. Navy Federal Credit Union has rates over twice .75%. Regular savings even at their rates though isn't really the best way to build for the future because long-term investing makes more money.

  • Cesar Delgadillo

    Get Pre-qualified, rates are at all time lows.

  • Cesar Delgadillo

    History of Rates

  • Cesar Delgadillo

    Get Pre-Qualified rates are at all time lows.

  • jonathan mccubbin

    Just so we are clear you pay alot more in interest if you make one large payment at the end than if every month you make a payment toward the principle. Even if they equal the same amount of 100k due to compounding interest??

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  • Invest_It

    Best payoff calculator I have used

  • Tarugo King

    Assuming your interest rate is 5%, at the end of 5 years with no additional payment, your total interest is $46,872 and you still have a balance of $11K against the principal if you make a lump sum payment of your savings (2000+800 x 5 years x 12 months)= $168,000.

    If you add the 2800 as an additional monthly payment, you pay off your loan in 4 years and 9 months AND your total interest payment amount to approx $24,400.

    Clearly, you don't know what you are doing.

  • RonJohn

    You *must* pay a *minimum* of $400/month until the balance is paid. So, no you can't do what you suggested. (Note that you *can* do it on car loans, but doesn't save you any.)