Making payments on a mortgage for 30 years can seem like forever, especially when you look at your monthly statement. Not only do you see your huge outstanding balance, but you also see how your $1,000 monthly payment only knocked off $125 of it! Frustrating times for certain. But there are little known ways to pay off your mortgage fast. In fact, I highlight 6 such ways below. You can pick out the one that suits you best, or find a way to combine multiple tips to pay off your mortgage even faster. What are we waiting for? Let’s get started!
6 Little Known Ways To Pay Off Your Mortgage – Fast!
Use Tax Refunds
According to the IRS, the average refund for 2014 is a whopping $3,000! I’m not going to get into the debate about getting such a large refund here, but I am going to show you the power of this refund.
Let’s say you just bought a house and took out a loan for $200,000 at 5% interest for 30 years. You pay the balance due every month except for May, when you make an additional one-time extra payment of $3,000 which is your tax refund. What effect does this have?
If you do this for just 5 years, you will shave off 4 years off your mortgage and save almost $38,000 in interest! Do this for 10 years and you knock off close to 7 years and save $58,000 in interest!
Use Credit Card Rewards
Wouldn’t it be great if you could use credit card rewards to pay down your mortgage faster? You can! We have our mortgage through Wells Fargo and the other day when I was logged into our account, I saw a note about the Home Rebate Card.
For the first six months, you earn 5% cash back on gas, groceries and drugstore purchases and 1% on everything else. After the six months are up, you earn a flat 1% on purchases. The nice thing about the card is that there is no annual fee and that the cash back is automatically transferred to your mortgage principal.
While there are other credit cards out there that earn more than 1% cash back, the benefit of this card is that the cash back gets applied to your mortgage automatically, meaning no work for you.
If you typically spend $1,150 a month on gas, groceries, drugstore and other places, you could save close to $5,000 in interest charges and knock a year off your mortgage. Of course, you don’t want to go into debt when doing this, otherwise the point of paying off your mortgage early is lost.
Pay Extra At The Start
As I mentioned at the beginning of this post, when you first start making payments on your mortgage, you pay mostly interest. As you move towards the end of your mortgage, you pay mainly principal. By being smart and paying extra at the start of your mortgage, you can save yourself thousands of dollars.
Let’s use the same example from earlier ($200,000 loan at 5% for 30 years), only this time we will make an extra $100 payment each month for 5 years. Doing this shaves off close 2 years of our mortgage and saves close to $17,000 in interest. If you do the same thing only at the end of the mortgage term, you knock off 6 months of payments and save about $1,000.
If you can afford to put $200 extra towards your monthly mortgage for the next 5 years, you knock off 2 years of your mortgage and save over $31,000 in interest.
Therefore, the key is to make extra payments at the beginning of your mortgage.
When you refinance, you either get a lower interest rate or you shorten the term of your mortgage. Doing this will help you to pay off your mortgage faster and save you money. In some cases, when interest rates drop by a good amount, you can shorten your term and interest rate, and still have the same monthly payment. If you have more than 10 years left on your mortgage, it might make sense to refinance. You can use the chart below to get an idea of where interest rates are from various banks.
Pretend To Refinance
The main downside to refinancing is the closing costs. Typically they run around $3,000. You could roll them into your new mortgage, but then you are paying interest on that money as well. A better option may be to simply fake a refinance. Figure out how much a monthly payment would be on a refinance and then commit to making that payment every month without actually spending the money to refinance.
For example, let’s use the same numbers, a $200,000 mortgage for 30 years at 5%. You see that a refinance would have monthly payments of $1,400 (right now you are paying $1,074 per month). If you are 5 years into your mortgage and start paying $1,400 each month, you will pay off your mortgage 10 years sooner and save close to $55,000 in interest charges. That is some serious savings!
Round Up Payments
Rounding up your payments is also a great little known way to pay off your mortgage. As I mentioned, your current monthly payment is $1,074. What if you rounded up to $1,100 per month? That is just $26 more each month. While you would only knock 2 years off of your mortgage, you would save over $10,000 in interest charges.
What About Supercharging Your Payoff?
What if we combined two little known ways to pay off your mortgage? Which two tips sound the most reasonable to use? We will pass on the credit card and the refinance as well. The tax refund is good, but many people use that money for vacations instead. Let’s combine rounding up along with paying extra at the start of the mortgage. These allow for the most flexibility and will show us what a little extra payment does in the long run.
For this example, we will use the $26 to round up, plus we will pay an additional $125 each month. So our new monthly payment is $1,225 per month.
With this method, we knocked off about 6 years and saved around $44,000 in interest. Not bad for a small sacrifice. But let’s be honest, you saw the title, little known ways to pay off your mortgage fast, and you want to pay it off fast. So let’s use the tax refund and the fake refinance.
If you do this, you will pay off your mortgage in 14 years (a 16 year savings) and save over $106,000 in interest savings.
So there you have a handful of little known ways to pay off your mortgage. The real key as you can see, is to combine tips to supercharge your payoff. The more money you can throw at your monthly mortgage, the quicker you will pay it off. But even then, it will take time. A mortgage balance is a large amount of money and you can’t pay it off overnight.
But don’t let this deter you – any little bit not only shaves off the time you have to pay, but it also saves you money in interest charges along the way.
Readers, what tips do you have to help others pay off their mortgage quickly?
[Photo Credit: Diana Parkhouse]