3 free ways to pay your mortgage faster
Point of Interest
Utilizing free ways to pay your mortgage faster can help you save thousands of dollars in interest while avoiding unnecessary fees or penalties.
If you’ve been wondering, “Should I pay off my mortgage?” — you’re not alone. In today’s uncertain market, homeowners are looking for ways to eliminate debt and reduce monthly expenses. While it may seem like a natural choice to pay off the principal loan on your home, not all early payoff methods are created equal. Prior to starting an early repayment plan, it’s important to understand how it works, how much money can be saved and how much it will cost in the long run.
3 ways to pay off a mortgage faster
Mortgage lenders are eager to wave promises of lower monthly payments through attractive refinancing offers, but refinancing may not necessarily help you pay off your loan sooner. Instead of refinancing, some mortgage lenders offer specialized accelerated repayment plans that can “force” borrowers to make extra payments under the threat of penalties. While you may have trouble finding the motivation to stick to your goals, locking yourself into an expensive program with your lender is likely not in your best interests.
Instead of looking to your mortgage company to help with your repayment options, consider these free alternative plans for paying off your mortgage faster.
Increase your monthly checks by one-twelfth.
Since there are 12 months in a year, increasing your monthly payments by one-twelfth amounts adds a full extra payment towards your principal balance by the end of the year. If, for example, you had a 25-year loan for $250,000 at 3.75% interest, your monthly payments would be $1,285.33. Increasing this by one-twelfth would add $107.11 to each payment for a total of $1392.44 per month. If you started the higher payments from the beginning of the loan term, your loan would be repaid 3 years earlier and you would save $18,131.48 in interest over the life of the loan.
Make one extra payment a year
For some borrowers, the monthly budget is already stretched thin. Instead of increasing each monthly payment, a lump sum payment equivalent to one regular monthly payment per year can have a similarly positive effect. This may be ideal for borrowers who receive a tax refund or annual bonus once per year. For example, the same 25-year loan of $250,000 with interest at 3.75% would keep the lower monthly payment of $1,285.33. By paying one extra payment of $1,285.33 each year, a loan amortization schedule with extra payments shows that you would repay the loan 2 years and 11 months earlier and save $17,381.35 in interest.
Pay half of your regular monthly payment to biweekly payments
If you are paid bi-weekly, you may prefer to align your mortgage payments with your paychecks for easier payoff efforts. Instead of paying one large monthly payment, you would pay half of a total monthly payment every other week. Since there are 26 bi-weekly periods per year, this equates to a full extra payment toward the principal loan each year. For a 25-year loan of $250,000 at 3.75% interest, you would pay $642.66 every other week, resulting in early repayment of 2 years and 11 months and a total savings of $17,789.71 in interest.
How much could you save?
Instead of pulling out your mortgage extra payment calculator, consider the following early pay-off scenarios:
|Total Mortgage Loan Amount||Mortgage Term||APR||Extra Payment Amount||Total Savings|
|$300,000||30 years||4%||$119.35 extra per month||$33,397.06|
|$300,000||30 years||4%||$1432.25 extra per year||$32,210.21|
Let’s assume a borrower took a $300,000 home loan for 30 years at 4.0% interest. Their payment under these terms would be $1,432.25 per month and the total amount repaid after 30 years — with principal and interest — would be $515,607.15. A traditional mortgage would cost this borrower over $215,000 in interest over the life of the loan.
With each of the savings tips, the borrower would save considerable interest over the life of the loan.
- If the monthly payments were increased by one-twelfth, the new payment amount would be $1551.60. The loan would be repaid 4 years and 1 month earlier for a total of principal and interest payments of $482,211.46, resulting in a total savings of $33,397.06.
- If he made one extra payment of $1432.25 per year, the loan would be repaid 4 years earlier and the total payments made over the life of the loan would be $483,398.31, resulting in a total savings of $32,310.21.
- If he repaid in bi-weekly payments of $716.12, the loan would be repaid 4 years earlier and the total payments made over the life of the loan would be $482,751.69, resulting in a total savings of $32,856.83.
Benefits of paying off your mortgage early
While eliminating your monthly mortgage payment is an obvious benefit of repaying your loan early, there are several additional benefits you may gain from sticking to an aggressive repayment plan. Depending on your loan arrangements, you are likely paying more than the calculated principal and interest on your mortgage. Many mortgages have an escrow arrangement that pays for property taxes, homeowners insurance premiums and private mortgage insurance. By repaying your loan, you will eliminate your mortgage insurance completely, and you may also have an opportunity to reduce your homeowner’s insurance premiums.
Utilizing an accelerated repayment plan also increases the equity in your home faster and improves your debt-to-income ratio by paying down the loan principal faster. Taking these steps can put you in a better financial position to help you reach any other financial goals you may have.