Being able to pay off your mortgage early can provide you with many benefits. It can save you money over the life of the loan in interest payments, it can help attain financial goals and it certainly can provide personal satisfaction knowing your home is paid for in full.
You have gone thru the mortgage pre-approval process and secured the best rate you possibly can. Life is good. Now you may decide you want to get your mortgage paid off early.
Think about living mortgage free!!
4 Ways to Pay Off Your Mortgage Early Without Breaking the Bank
The great part of each of these 4 methods to pay of your mortgage early, is you can do it anytime you want. If there are months or years where you can’t make extra payments, you can decide to stop making the the additional payments without jeopardizing your mortgage.
We are going to use the following assumptions. Take a $350,000 mortgage at 4.5% for 30 years and it will give us a principal and interest payment of $1773.40 a month.
Figure a $350,000 loan at 4.5% for 30 years you will be paying about $288,000 just in interest alone.
Make Bi-Weekly Mortgage Payments
Most banks will allow you to make bi-weekly mortgage payments. Meaning, you will pay $886.70 every two weeks, instead of the $1773.40.
By making bi-weekly payments you will be saving over $49,000 in interest over the life of your home mortgage as well as pay it off in about 25 years 6 months.
The magic in paying bi-weekly mortgage payment is that you will be making 13 mortgage payments instead of of the usual 12 over the course of a year. This is adding the equivalent of one mortgage payment a year toward your principal balance.
A One Time Lump Sum Mortgage Payment
Somewhere along the way you may find yourself running into some extra money. It could be an inheritance, a large tax return refund, a bonus from work, etc…. Anyways you find yourself with some extra cash.
By making a one time lump sum payment of $20,000 at the beginning of year 4 you will save $42,777 over the life of your loan and have your loan payed off in 27 years and 1 month.
Additional Payment Every Month
Adding an additional principal payment to your monthly mortgage payment will also save you interest over the long haul as well as shorten the length of your loan.
An additional $100 a month will save you about $34,825 in interest and have your mortgage payed off in 26 years 9 months.
Change that to $250 a month and you will have saved $72,696 in interest and have your mortgage paid off in 25 years.
The Power of Amortization
Amortization is the repayment of principal over time at regular intervals.
Paying down your principal early not only gets your loan payed off early but it reduces the amount of interest you pay.
In the beginning years of your loan most of your payment is interest payment while very little is principal. As you can see from above the most bang for your buck is the lump sum payment in year four.
Now change that to making the lump sum payment 6 months into the first year and you will save almost an additional $6000 for the same lump sum payment.
Alternately make that same $20,000 payment in year 15 and you will only save about $19,000 in interest for the remainder of the loan.
Notice that even though you are essentially doing the same thing with bi-weekly payments as you are by making one extra payment a year there is a slight difference of the interest you save. By making the payment at the start of each year instead of spreading it out over the year, you save a little more in interest.
It all has to do with how the loan is amortized and how the interest is calculated.
Point being the more you pay down earlier in the loan the more impact it will have overall.
Remember even small payments can have an impact. Just $25 a month extra will save you almost $10,000 in interest and reduce the mortgage to just over 29 years.
Making the Extra Payments To Your Mortgage Company
Don’t just send extra payments to your mortgage company or start paying bi-weekly. Make sure you can make bi-weekly payments. Most banks will let you but not all and it needs to be set up.
You also want to make sure your extra payments are going towards principal and not escrows, interest, etc….
By calling your mortgage lender, you can find out exactly how to do it so there are no mistakes or misunderstandings about where the extra money goes.
Should I Pay Off My Mortgage Early?
Whether you should or should not pay off your mortgage early is certainly a very personal decision. Of course everybody would love to save money and pay off their mortgage early.
First off, if you have credit card debt or other loans you probably should get that paid off first. Mortgage interest rates are usually far lower than other lines of credit. Get all your other debt paid off before making extra payment on your mortgage…. and keep it that way.
Because mortgage rates are cheaper than other debt. Also look at what would you do with that extra money otherwise. Probably nothing.
But if you took that $100 a month and instead of making extra mortgage payments and funded a moderate risk mutual fund every month, at an annual return of 6% for 30 years you would have about $100,000 saved. Almost twice as much made in interest than you would save by paying down your mortgage early.
The caveat is are you disciplined enough to save and not touch your savings? Paying off your mortgage early is a forced savings plan.
Summary of Paying Your Mortgage Off Early
Whether you decide if making extra payments is right for you or not, there is certainly some food for thought for you in this article.
You need to balance your financial goals, your desire to live mortgage free and your level of discipline to determine what is right for your situation. Remember mortgage interest rates are fairly low and there could be better use for your money.
Other Resources:
- Kyle Hiscock The Best Mortgage Blog Articles of 2017
- Luke Skar 7 Tips to Improve Your Credit Score
- Bill Gassett Getting the Best Mortgage for You
- Joe Boylan Everything You Need to Know About Mortgages
- Kevin Vitali Understanding Rate Locks
4 Ways to Pay Off Your Mortgage Early Without Breaking the Bank is provided by Kevin Vitali a Massachusetts REALTOR. If you would like to sell your home or buy a new home give me a call at 978-360-0422 and let’s get the process started.
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