How To Pay Off Your Mortgage Early

by Jon Dulin

How to Pay Off Your Mortgage EarlyYour house is for most people is your largest expense. Not only in terms of the size of the monthly payment, but also in terms of time. The majority of homeowners will be making monthly payments on their homes for close to 30 years, if not longer. If we look at a house that costs $200,000 and we put 20% down (meaning we take out a mortgage for $160,000) for 30 years at 5%, our monthly payments are roughly $860 per month. Over the course of the 30 years, we will pay close to $149,250 in interest. That is in addition to the $160,000 that we are repaying for the purchase price of the home. When  you make a point to pay off your mortgage early, you save thousands in interest charges.

How to Pay Off Your Mortgage Early

The question I get most from homeowners is about how to pay off your mortgage early. There are plenty of great guides out there that will help take you through the home buying and financing process, but many people forget that it is just as important to have a post-purchase strategy. The quickest way is to strike it rich and win the lottery. Of course, the odds of that happening are against you.

The next quickest way to pay off you house early is to rob a bank. With this option, there is the high likelihood of you getting caught and spending many, many years in prison.

So how do you, the average person, pay off your mortgage early and quickly? There are a few options.

Bi-Monthly Mortgage Payment

The first way to pay off your mortgage early is to create a bi-monthly mortgage payment system. A bi-weekly system takes your monthly payment and cuts it in half, so that you pay every other week, or twice a month. The idea behind this is that there are 26 weeks in a year, so instead of making the normal 12 monthly payments, you are actually making 13 (26 payments of half your monthly mortgage amount equals 13 full mortgage payments.) You end up making one extra payment each year.

Some banks now offer this but they charge you a set up fee and some even charge ongoing fees. You can skip the fees and do this yourself. But, don’t simply mail in half of your payment every other week. The bank won’t process it that way. Instead, you will make your normal monthly payment of $860 (from the example above).

In addition to that, you make an additional principal payment of $72 each month. This $72 represents 1/12th of you monthly payment. So by the end of the year, you will have made 13 payments. By following this technique, you will reduce the time you pay back your loan from 30 years to 25 years and 3 months, and will save $27,275 in interest. You can play around with the effects of paying extra with my extra payment calculator.

Tax Refund

A second option to pay off your mortgage early is to use your tax refund to pay down your mortgage. According to the IRS, the average refund is $2,900. If we take that amount and apply it each year to your mortgage, you will end up paying off the loan in 18 ½ years, and saving $63,775 in interest, based on the example above.

Bi-Monthly and Tax Refund

Both of these options are great, but here is the greatest one of all: combine options 1 and 2. Simply pay the $72 more each month and use your entire tax refund to pay off the mortgage early. If you combine both options, you will get rid of your mortgage in less than 17 years and save around $73,000 in interest.

Other Options

There are other options to pay off your mortgage early, such as working a second job, but I don’t see someone wanting to work a second job for close to 20 years to pay their mortgage off early. You could also take out a shorter term loan, such as a 15 year loan. If you go this route, be sure to include the options above. If you do, you could own your house in just over 10 years.

Another option is to use any “found” money to pay off your mortgage early. When I say “found” money, I mean any money you aren’t expecting or are counting in your budget. Did you get a check from a cash back credit card? Use that money and pay down your mortgage. (Here are some of the best credit cards on the market today.)

In my eBook, Spare Change, I list over 100 ways to save money that can help you pay down your mortgage by an additional $2,000 each year.

A third and final option is review your insurance policies and get a free quote every year or two. It takes five minutes and can save you hundreds of dollars each year. I did this a few years ago and saved $150/year on my home and car insurance and then switched again last year and saved another $100/year.

Final Thoughts

Anything extra you pay will help reduce the time you have the loan and the amount of interest you pay. Of course, before you even buy a house, make sure you buy one that you can easily afford. Read my article on the reasons why you should buy less of a house. If you begin to use just a few of these tips, you will be able to take years off your mortgage and free up more of your hard earned money.

Do you have any other ways to help you pay off your house quickly?

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{ 5 comments… read them below or add one }

Tyler John February 13, 2012 at 2:54 pm

thx for the post. interesting read on paying off your mortgage. another way to help with the mortgage payment would be (for some) to refinance their home. since i am not an expert in real estate finance, i can't speak too much in depth on the subject. however, there is an article from the federal reserve on this subject http://www.federalreserve.gov/pubs/refinancings/default.htm. Basically, they compare two mortgages, the first with a 30yr term and 6% APR, the second with a 15yr term and 5.5% APR. in their eyes, it would be better to go with the second option because of the significant savings in interest. in the end, you are paying more per month but actually save more over the long-term. so i guess it comes down to the homeowners goals. also, i wouldn't recommend refinancing a mortgage if there was a prepayment penalty or if the homeowner had already been paying down the loan for a long time (>15yrs if 30yr term).

what do you think? any other ideas?

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moneysma February 13, 2012 at 3:38 pm

Refinancing is a great option to help pay off your mortgage early. There are a handful of things to look at, aside from a shorter term and lower monthly payment. You'll want to make sure you don't pay more interest by refinancing. This is typically done when you are close to paying off your current mortgage. The reason is because you pay mainly interest in the first years of a mortgage and mainly principal in the end. By refinancing you are "restarting the clock" and can easily pay more in interest.

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Jennifer March 5, 2012 at 11:25 am

Adding extra to your payments each month will help pay it off early. Snowball any extra money received towards the mortgage and you can likely knock it out a lot quicker the loan term. Most of the time though, people get small amounts of money each month and just spend it without thinking twice. A $10 rebate, $50 birthday money, $25 back from returning something you paid for previously and $15 in coupon savings at the grocery store quickly add up to $100 extra towards the mortgage.

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MyMoneyDesign March 5, 2012 at 5:03 pm

Nice options! For a long time I considered if the bi-monthly option was for me, but I ultimately decided against it (I wanted to spend the money in other ways). I just completed my refinance and will be posting an article on it on this upcoming Wednesday. One of the things I’m going to look at is how much quicker I’d pay off the mortgage if I just continued to pay the same amount and add the extra on top of the principal.

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Clear Rock Homes May 17, 2012 at 2:55 pm

I think, if your goal is to be debt free quicker, you really need to sacrifice and work harder to reach this goal. Accepting this as a fact will make your journey to a debt free state easier.

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