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Don’t like the thought of paying your mortgage back over 30 years? Us either! While it may not be the easiest to accomplish, paying off your mortgage early has a lot of benefits like saving you tens of thousands in interest. Here are a few ideas to help you pay off your mortgage quicker without breaking the bank.
Note: Calculations throughout this article are based off of a $200,000, 30 year fixed rate mortgage with an interest rate of 4.250%.
1. Make Biweekly Payments
Setting up biweekly payments can shave years off of your mortgage. Instead of a full payment every month, you’ll pay half of your mortgage payment every other week. Since there are 52 weeks in a year, biweekly payments will help you make 13 full payments each year. To set up biweekly mortgage payments call your current mortgage servicer and talk to them about changing your payment schedule. If your mortgage was $200,000, you’d pay off your mortgage 4 years and 3 months early while saving $25,196.01 in interest with biweekly payments.
2. Use Credit Card Rewards
This is a creative way to help you lower the balance on your mortgage without using any of your income. Get a credit card that offers cash back rewards and use it for your everyday purchases, like groceries and gas. Then at the end of each year, after your rewards have built up, apply the cash you’ve earned towards your principal. The amount you’ll save on your mortgage depends on how often you use your cash back credit card, but this tip will reduce your principal amount and the time it takes to pay back your mortgage.
Note: The key is to find the credit card with the highest cash back reward that you feel comfortable using. We’d recommend you shoot for at least 2% cash back to help you get the most savings.
3. Refinance to a Shorter Mortgage Term (or pretend you did)
Refinancing your home loan to a shorter term drastically reduces the time it will take you to pay off your mortgage. It also rewards you with a much lower rate and less interest. It’s important to note that your monthly payment will increase by refinancing into a shorter termed mortgage. If you’re concerned about the higher monthly payments, you can pretend that you refinanced to a shorter mortgage. Challenge yourself to make the payments required for a 15 year loan. If it gets difficult to make the payments, or you have unexpected bills show up, you can slow down since you didn’t actually refinance.
4. Make One Extra Payment per Year
You can slash roughly 4 years off of your mortgage by making one extra principal payment per year. An extra payment can be made a couple of ways. You can pay it all at once, or you can add a portion to your monthly payments. If you choose to pay it all at once, find a time of the year that’s best for your budget.
To add a portion on top of your current monthly mortgage payments do the following. Divide your monthly mortgage by 12 and add that amount to your mortgage payment each month. On a $200,000 loan with a monthly payment of $984 (principal and interest), you’d add $82 to each payment. An extra payment per year eliminates 4 years and 3 months of your mortgage, saving you $24,885.34 in interest.
5. Increase Your Payment by $1 Each Month
How many times do you pay a dollar for something like a soda or candy bar? Did you know that that dollar could make a big impact on your mortgage? Some calculations show that you could pay your mortgage off as much as 8 years earlier by increasing your payment one dollar each month. So if you’re monthly payment is $984, pay $984 this month, $985 next month, and so on.
6. Refinance to a Lower Rate and Keep Making the Higher Payment
When you refinance to a lower interest rate you can pay your mortgage off a few years quicker while making the same payment you are today. A lower rate decreases the interest you own and drops your monthly payment. The key to an early payoff is to continue making your current payment and apply the difference towards your principal. If you dropped the interest rate on a $200,000 loan from 4.250% to 3.750% your payments would be $57.65 lower each month. Putting that amount towards your principal balance would speed up your payoff date by 3 years.
7. Keep Paying Your Bills
Are you currently paying on a car loan? How about a credit card? After you’ve made the final payment on these smaller loans, just keep paying the bill. Put it towards the principal on your mortgage. You’ll see your principal balance plummet without even noticing a difference in your expenses. If you were paying $45 a month on a credit card and continued to pay the bill, you’d pay off your mortgage 2 years earlier as well as saving $13,645 in interest.
8. Get Rid of Mortgage Insurance
Your lender charges mortgage insurance when you get a conventional home loan with less than 20% equity in the home. The cost of mortgage insurance is roughly 1% of your loan amount on an annual basis. For a $200,000 mortgage it would be around $2,000 each year or $166.67 added to your monthly payments. You can request to have mortgage insurance removed from your loan once you reach 20% equity. Removing mortgage insurance would free up that $166.67 which you could put towards your principal. For a $200,000 mortgage, that would help you pay off your home loan 4 years and 2 months earlier without paying anything additional.
Heads Up: If you don’t request to have your mortgage insurance removed, you’ll continue to pay for it until you’ve got 22% equity in your home, which can take a few additional years.