Have you ever wondered how to pay off your mortgage faster than the 30 years that most people sign up for? For me personally, I dream of my mortgage being paid off and not having that expense every month. Now I can already predict that you will say, “what about the write off”? But we will save that conversation for another day.
Let’s just say that the average amount financed is around $180,000 and your interest rate is 4.5% with a 30 year mortgage. The following math applies to all loans and your exact scenario won’t change it much.
Add money every month
I know this sounds obvious, but you might be amazed at how just a little money every month added to your principle payment will reduce the number of payments you are actually making. Here are two examples:
Add as little as $100 a month to your payment. And you can take up to 6 years off of your loan. Now the math isn’t quite as simple as saying that you are saving 6 years of payments.
In the above loan scenario, your payment would be around $912 a month, and you are adding $100 a month so you are changing the payment to $1,012.
So you are saving 6 years of payments. We can do the math to see how much money this will save you over the life of your loan.
6 years (or 72 months) times $912 equal $65,664 dollars.
But that is not the end of the equation. We have to identify how much more it costs you because of the $100 a month. So:
$100 a month times 24 years (or 288 months) equals $28,800 in additional payments.
Now we subtract the two numbers to get your actual savings.
$65,664 minus $28,800 = $36,864 saved.
If you are thinking that you cannot afford $100 a month, just send in a little bit. Start by rounding up your payment to nearest even hundred dollar number. As time goes on, you may think about adding a few more dollars and you will be that much further ahead.
Bi weekly payments
Bi weekly payments can take years off your loan. This means that you are making a one half of your payment every 2 weeks – instead of a full payment once a month.
The reason this works is because there are 52 weeks in any year. But there are only 12 months. So paying monthly will make twelve payments of $912 equaling $10,944. But paying every two weeks will make 26 payments of $456 equaling $11,856. You have essentially made one extra payment in the course of a year.
There are services that will solicit you to say sign up for biweekly payments. If you can do it, then it is recommended. But check to make sure they are not charging a fee to do it. Otherwise you can just send in the extra little bit every month and have the same impact on the number of years it takes to pay off your loan.
Just to be clear, I know there are times when it makes sense to refinance. But if you keep on refinancing, and re-extending your loan to a new 30 year period, then how will you ever pay it off. If there is a right time to refinance, how do you know when it is?
Sometimes the interest rates are so low that you would almost be foolish to not refinance. But do you really want to add the extra years on to your mortgage? You may not know this, but there are more loan terms available than the standard 15 and 30 year options. Most lenders will offer a loan for 10, 15, 20, or 30 years. So just match the best length of time to the number of years you have left. Then you can take advantage of low interest rates without extending your loan out for extra years.
If you are going to refinance, take the lowest number of years that you can comfortably afford. This makes your monthly payment more, but can get your home paid off faster.
So if you like the idea of paying off your mortgage faster than the actual loan term, then try one of the methods above. You might be surprised at how much fun it is once you start seeing the balance of your loan going down.