Pay off your mortgage early and faster

Home ownership

The american dream, minus the debt?
The american dream, minus the debt? | Source

Mortgages...love your home but not the payment?

Everyone wants to live debt free, time is money, money is time and buying a home is one of the biggest purchases you will make in your life, wouldn't you love to pay it off 10, or even 20 years faster?

Other huge purchases are cars, education expenses, and weddings. But unlike the other big ticket items, a home is an asset, which means over time, the value of your home should increase.

Imagine all the wonderful things you could do every month with money that wasn't being spent paying for your mortgage all while the value of your home gets better and better (the ideal scenario). Pay off other bills, save for retirement, travel, buy other things you want! Or even quit the 9-5 grind and get a job you love!

Housing expenses account for a huge chunk of your income every month, if you paid your home off early, you'd have money for other things you desire, plus have a huge sense of satisfaction when it's paid off. If you've ever even paid off a car, you know how rewarding that feeling is!

So…how can you painlessly (relatively anyways) start paying of your mortgage faster?

Financial puzzle

First…get a big over-view of your current debt, bills and income

First, it's wise to take a look at all your bills vs. your income to determine if you're in a position to make extra payments on your mortgage, or modify the loan. It's hard to make consistent extra payments if you are in between jobs, or don't have stable work, or a steady flow of income.

Sometimes the extra cash you could apply to the loan would be better off socked aside in a savings account for emergencies or other expenses.

On average, a first time home buyer will move within the first 5-7 years of owning that first home. If this is the position you are in, don't bother paying off the loan faster. It will strap you for having extra cash each month and you won't see a huge significance when selling the property. However, if you know the home you are currently mortgaged on is "the one" or where you'll spend 15+ years or longer, it will benefit you to pay down principal faster. Ideally, it would be great to have that 30 fixed term reduced by 10-15 years.

Before you start making additional payments against the principal on your mortgage, ask yourself these questions.

  1. Are there bills or expenses you could cut out or eliminate so that that money could go to pay off your mortgage faster?
  2. Do you have a decent savings account, a good rule of thumb is the equivalent of 3-6 months of your monthly income.
  3. Do you regularly pay your monthly bills, do you pay on-time, and are they current? If not, try to make this happen before hammering off the principal on your mortgage loan.
  4. What other loans do you have? Do you have loans with really high interest rates, if so, you should pay these off first! I'm mostly referring to credit cards and student loans, but if you're paying 7% on 20k of student loans, vs 3% on a mortgage, you need to negotiate that down and knock out the student loan debt first.

Loan terms

Check your loan terms!

Before you start paying extra on your mortgage principal, make sure you know your loan terms.

Sometimes loans will have a "prepayment" penalty, in which you will be charged for early pay-off. It is best to negotiate this out of a loan before signing and agreeing to the terms for the next 15-30 years!

Once you determine you do not have prepayment penalties, proceed.

Make sure you have access to regular mortgage statements each month and that all extra payments you make are getting applied to the PRINCIPAL only. You do NOT want your hard earned extra payments getting applied to the principal and the interest. They need to be applied to the principal only or it will do nothing to shorten the life of your loan.

Two popular terms used to describe payments to principal only are;

  • Principal only payment
  • Curtailment

This is what you want that extra payment being applied to.

Property taxes

Make sure your home value is in line with your property taxes

If you just purchased a home (within the last 6 months) good for you and congratulations. Now take the copy of the over-priced appraisal you paid for and make sure the value on it is comparable to the value the county has given you for your property taxes. If it's way off, file an appeal and get it lowered.

If your house value is higher than what is on the county records, promptly file the appraisal in a "do not disturb" folder.

If the value of your home is over-valued by your counties standards you will pay a lot more in annual property taxes. It may be worth it to file an appeal even if you don't have a current appraisal. Although most counties will require one if specific conditions are not met, which may mean you will need to pay for one. They range anywhere from $300-$800, you will need to determine if this is a justified cost.

If you get your taxes decreased, enact your self discipline and pretend your payment is the same each month (as it was before the decrease) and apply that tax overage to the principal only payments on your mortgage.

Presto-chango! A big way to dent the principal in your loan without even feeling it.

Mortgage payments

Pay your mortgage bi-weekly, instead of monthly

This is another great strategy to pay off the principal of your mortgage without feeling any pain.

Most banks won't offer you this information freely, because it's not in their best interest. But what you will want to do is make your mortgage payment bi-weekly instead of monthly. Essentially, you will end up making 26 1/2 payments in the year which equates to 13 annual payments, since there are 52 weeks in a year. That 13th payment can then be applied directly to principal only.

If you make just one extra payment a year on a 30-year, fixed-rate loan, you could easily repay that home loan in as few as 25 years and save thousands of dollars in interest charges. Imagine doing this for years! You can easily see the benefit.

If you opt to try this method, it's very important to get ALL the details from your bank. You will want to make sure your bank does not charge a fee to enroll in a program like this, although most do.

As an example, my personal bank charges a one time enrollment fee of $295.00 to join their program. However, with this fee you have the option to pay it up front with a credit card, or have it roll over and be deducted from the first extra payment. They also predetermine the dates of which the bi-weekly payments are deducted, so it's best to make sure those deduction dates won't cause you to overdraft an account.

Paid off home

What a great feeling and accomplishment!
What a great feeling and accomplishment!

Make extra payments

If paying your mortgage in bi-weekly payments does not work for you, and you have good self-discipline, the other option is to pay an extra payment or two every year by your own doing.

What I find works best for this is to take your monthly mortgage payment, say 1000 a month and divide that by 12 (your annual payments). This is roughly $84 dollars a month you need to save all year, then apply it to your principal only.

This method is harder if you do not have enough savings discipline but well worth it if you can make it happen. What we've done in the past is set that extra money aside all year, then pay it. This way, if you have an unexpected expense you still have access to that cash if needed. Once you apply a payment directly to principal, it's gone, and you can't get it back.

If finding an extra 80-100 a month to save for making extra payments seems daunting, take a good hard look at your budget and monthly expenses. Most people can easily shave a $100 dollars or more out of their budget if they look hard enough. Are you buying gourmet coffee every day at $5 a cup? Stop doing that. Do you smoke? Quit. Use that extra money to put toward your principal payments.

PMI

PMI is a stupid thing in my opinion.  Another gouging strategy.
PMI is a stupid thing in my opinion. Another gouging strategy.

Get rid of mortgage insurance as soon as possible

private mortgage insurance (PMI) protects the lender in the event that you default on your mortgage payments and your house isn't worth enough to entirely repay the lender through a foreclosure sale. Unfortunately, you pay the bill for the premiums, and lenders almost always require PMI for loans where the down payment is less than 20%. They add the cost to your mortgage payment each month, in an amount based on how much you've borrowed. The good news is that PMI can usually be canceled after your home's value has risen enough to give you 20% to 25% equity in your house.


  • Contact your lender to find out the appropriate PMI cancellation procedures.
  • Get your home appraised by a professional to find out its current market value. Your lender may require an appraisal even if you're asking for a cancellation based on your many payments, since the lender needs reassurance that the home hasn't declined in value.
  • Calculate your "loan to value" (LTV) ratio using the results of the appraisal. This is a simple calculation -- just divide your loan amount by your home's value, to get a figure that should be in decimal points. If, for example, your loan is $200,000 and your home is appraised at $250,000, your LTV ratio is 0.8, or 80%.
  • Compare your "loan to value" (LTV) ratio to that required by the lender

Once you cancel your PMI, Keep paying that amount against the principal of your mortgage on your own schedule.

Take out a shorter loan term or refinance for a lower rate

If you can, take an initial loan term of 15 years. This will greatly increase the amount of your payment each month but may be worth it depending on your life circumstances. Paying off a 15 yr fixed mortgage vs. a 30 yr is a huge difference!

Or, if you have a high interest rate (as many do before the Real Estate market tanked) consider refinancing your home to a lower rate, or a loan modification to a 15 year mortgage. There are fees associated with a refinance, so make sure you do your research and take into account the time you plan on spending in your home.

Equity lines

Use an equity line to pay off an existing 1st mortgage

Using an equity line to pay off a existing mortgage is not for the undisciplined.

Equity lines typically have a very low interest rate, usually in the 2% range.

In order to pay off your existing mortgage with an equity line, you need to have more equity in your home than what you owe on your mortgage.

The bonus to this method is a lower rate while you pay it off, add extra payments and you'll really pay if off faster.

The downside to this is loan modifications and fees as if you refinanced. Also, you do not want to borrow more than needed since equity lines are revolving or you can get yourself into serious hot water.

There you have it!

These are the easiest ways to pay off your mortgage in the most painless ways possible.

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Comments 3 comments

joym7 profile image

joym7 3 years ago from United States

Refinancing with lower rate and for shorter term is a good to go decision. It will help you to pay off your mortgage early and faster.


Grant's World profile image

Grant's World 3 years ago from Canada

Very wise advice.


Itswhatyoukeep profile image

Itswhatyoukeep 2 years ago

Very thorough article in covering both the bi-weekly program and the extra principal payment each month as options to achieve the same goal. The latter of the two is the more advantageous. The main flaws in the bi-weekly payment program are the fact that you have to pay a fee for the "privilege" of sending 2 payments a moth. In addition; the bi-weekly plan now obligates you to making 2 payments (albeit smaller ones) per month. You are now doubly exposed to the potential of a missed or late payment each month in the event you hit a financial rough patch. As we all know, those late payments come with a late fee. Those can add up over time and nullify the benefit of paying bi-weekly.

It is much better to send extra principal each month. If you have some unforeseen expenses in a given month, you can reduce the extra principal payment and make up for it with a subsequent payment without being penalized with a late payment fee and a blemish on your credit. Discipline – as you mentioned – is the key here, but it really is not that difficult especially when you consider the benefits over time

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