How to Pay Off Mortgage Debt Early

A little bit of knowledge and some proper planning is all you need to pay off mortgage debt early. Whether your mortgage term is 15, 20 or 30 years, it is possible to shorten the length of your loan by almost 50 percent without taking too big of a bite out of your finances.

Mortgage repayment differs from other loans, like credit cards or car loans, in a few key ways:

  • You always pay your mortgage in arrears. A payment made in February, for instance, satisfies the principal and interest accrued during January.
  • Lenders calculate accrued interest only once per month based on the principal owed at the end of the previous month. This makes when you pay your mortgage during the month less important than how much you pay -- assuming you pay by the due date to avoid any late-payment penalties and dings on your credit score.

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Understanding Amortization

Mortgage lenders use a method called amortization to determine the total amount of your monthly payments and how much of it to allocate between principal and interest. Although your monthly payment does not change (except in the case of an interest rate change on an adjustable rate mortgage), the amount applied towards the original loan balance and interest changes with each payment.

The concept is simple -- every penny that you pay towards your principal balance reduces the total amount that the lender uses to calculate accrued interest. If you have a $100 loan at 10 percent interest, your first payment would include $10 in interest charges. If you pay $25 towards the original loan amount, your next payment would include only $7.50 in interest charges, or ($100 - $25) * 10% = $7.50.

In the early years of a mortgage, accrued interest takes the lion's share of each payment. With each payment that you make, the amount applied towards the original loan balance increases and the accrued interest decreases accordingly. In the last few years of a mortgage, the bulk of your payments apply toward the original loan balance.

How To Calculate Your Interest Payment

To calculate your current interest payment multiply your principal balance by the interest rate divided by the number of payments you make per year.

For a mortgage with a monthly payment, use the calculation:

  • Principal Balance * (Interest Rate / 12)

For a mortgage with biweekly payments, use the calculation:

  • Principal Balance * (Interest Rate / 26)

For a complete mortgage amortization schedule, use an online mortgage calculator or the mortgage amortization template for Microsoft Excel

Strategies to Pay Off Mortgage Debt Early

Using a strategy to pay off your mortgage early has the additional benefit of saving you money in accrued interest payments. You need to take several factors into consideration, however, before you implement any of these early pay-off strategies, including the loss of income tax deductions on interest payments, the length of time you plan to spend in the home, the current interest rate of your mortgage and any other debt you may have that carries a higher interest rate.

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Double Your Principal Payments

Many think that doubling the principal payment each month is an old wive's tale, but the fact is that it works. Not only will it cut the length of your mortgage roughly in half, but it drastically reduces the amount of interest you accrue over the life of the loan. This is a good plan for young couples who plan to stay in their home long-term, as the amount of principal payments starts out relatively small, and increases over time, hopefully in line with increases in income.

A $200,000 fixed-rate mortgage over 30 years at six percent interest would require only an additional $200 in extra principal at the beginning of the loan. If you continued to double the principal payments each month, you would reduce the length of your loan to 15 years and would save over $115,000 in interest payments.

You don't have to double the principal to see some reduction in mortgage length and interest payments. If you paid an additional $100 per month on that same $200,000 mortgage, you would shave 5-1/2 years off the length of the loan and save yourself almost $50,000 in interest.

Make At Least One Extra Payment Per Year

Committing to even one extra payment per year towards the mortgage principal can have a tremendous effect on the length of your mortgage. This type of early pay-off strategy is particularly beneficial to those who rely heavily on annual bonuses or commission payments.

If you made one additional payment of $1,199.10 per year on a $200,000 30-year fixed-rate mortgage at six percent interest, you would cut a little over five years off of the length of your loan and save over $47,000 in interest. Up that additional annual amount to $5,000, and you would save over $115,000 and pay off your loan in a little over 16 years.

Switch To a Bi-Weekly Payment Schedule

Switching to a bi-weekly payment schedule is only beneficial if you make formal arrangements with the bank for this type of repayment plan. Since lenders only apply payments and recalculate your loan once per month, sending in payments every two weeks would have no benefit to you without the lender's engagement and approval.

With a bi-weekly mortgage, the lender sets up a repayment schedule with payments due every two weeks that are roughly half of what a traditional monthly payment would be. Since there are 52 weeks in a year, you make 26 payments per year which effectively nets out to the equivalent of 13 monthly payments.

Following the strategy of making one additional mortgage payment per year would have almost the same benefit of a formalized bi-weekly mortgage, except that you would not be committed to that extra payment amount if your finances took a turn for the worse.

Comparison of Early Pay-Off Strategies

 
Length Until Payoff
Amount of Interest Saved
Double the Principal
15 years
$115,000
Add'l $100 Per Payment
24.5 years
$50,000
Add'l $500 Per Payment
15 years
$130,000
One Add'l Payment Per Year
25 years
$47,000
Add'l $2,500 Pmt Per Year
22 years
$80,000
Add'l $5,000 Payment Per Year
16 years
$115,000
One Add'l $10,000 Pmt In Year 15
28 years
$15,000
Reduction in length of time and interest saved on a $200,000 30-year fixed-rate mortgage at a six percent interest rate.

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Comments 17 comments

mortgage-news profile image

mortgage-news 5 years ago from Los Angeles, CA

Now is a great time to refinance from 30 years to 15 years. Lock yourself into historic low interest rates and reducing the term will minimize any increases in your monthly payment.


speedbird profile image

speedbird 5 years ago from Nairobi, Kenya

Nice hub,very informative in matters dealing with mortgage payments, keep it up!


lrohner profile image

lrohner 5 years ago from USA Author

@thebabyshop - You can always contact your lender and see if they will switch you to a formalized bi-weekly payment schedule. Then you will see the benefit of it. And good luck in your future house hunting endeavors!


thebabyshop profile image

thebabyshop 5 years ago from Massachusetts

This is really helpful! We're planning on moving within the next few years, so we weren't going to put any extra money in into our current mortgage payments and instead save for a down payment on a future home.

I had heard a tip before to make biweekly payments, but obviously that isn't to anyone's benefit but the bank since they don't apply it immediately. Thanks for all of these tips!


lrohner profile image

lrohner 5 years ago from USA Author

Thanks, MBM! Great insight!


MortgagesByMark 5 years ago

Good tips, just don't let the bank charge you for the privilege of making bi-weekly payments. That is a huge ripoff. You can achieve the same thing by adding an extra 10% to your payment or making an additional payment each year, perhaps with your tax refund.


lrohner profile image

lrohner 5 years ago from USA Author

@LakeErie - In these economic times, I'm really happy you were able to work everything out.

@Mike - Thanks! Even doubling the principal for the first 10 or 15 years will have a tremendous effect. My advice to you is to pay as much extra as you can early on in the mortgage -- unless you have other debt, like credit cards, that are at a higher interest rate than your mortgage. Concentrate on those first.


Mike's Corner profile image

Mike's Corner 5 years ago from Maryland

Great hub, Irohner, I never realized that doubling the principle payment would have such a dramatic effect . . . I'm in year 4 now of a 30-year so doubling the principle at this point doesn't amount to a huge increase in the payment, definitely worth it!


lakeerieartists profile image

lakeerieartists 5 years ago from Cleveland, OH

This is a great hub, with solid information. In our situation, we started out with a loan that was low in the beginning then started to go up every year, since we planned to move in about 10 years, but low and behold we are still in the same house after 20 years, and had to refinance to a new loan. Worked out for us, but just goes to show, you never know what will happen in your life.


lrohner profile image

lrohner 5 years ago from USA Author

@Hello Hello - Thank you so much for taking the time to read my hub.

@ DzyMsLizzy - OMG! There's no way to modify the loan? My daughter and SIL just got theirs modified to a very affordable payment. If there's anything I can do to help, please let me know.


DzyMsLizzy profile image

DzyMsLizzy 5 years ago from Oakley, CA

Interesting, but won't work for us. Sadly, we are in a deep hole created by a predatory loan, and our income is no match for it.

We were caught in a bad spot to start with (for reasons I won't go into here)when we had to re-fi, and ended up with the current situation.

No way out, and if I can't up my income by at least $2K/month by Sept., we stand to become homeless.


Hello, hello, profile image

Hello, hello, 5 years ago from London, UK

Very helpful and informative.


lrohner profile image

lrohner 5 years ago from USA Author

@Simone - Why thank you so much for your kind words! I do hope people realize that a 30-year mortgage doesn't have to mean you pay on it for 30 years. :)

@Rismayanti - Keep working hard and you'll get there soon enough.


Rismayanti profile image

Rismayanti 5 years ago from Tropical Island

Wish i can vuy a house soon with online work


Simone Smith profile image

Simone Smith 5 years ago from San Francisco

I LOVE paying off debt early! It's so extremely satisfying - plus, as you have demonstrated exceedingly well here, it pays off! Thanks for creating the helpful guide, including this wonderfully useful table, and providing helpful examples. Fabulous Hub!


lrohner profile image

lrohner 5 years ago from USA Author

Glad you learned something, OUAT. It's a good time to buy, so start saving your pennies!


onceuponatime66 profile image

onceuponatime66 5 years ago from USA IL

Thanks for letting me know all of the things to do to pay off a mortgage early. I rent apartments so I learned so much from you. In IL the foreclosure rate is at a high rate. It's a good time to by cheap but not to sell.

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