A 15 or 30 year mortgage is a long time to be paying on the same bill. Even with interest rates at historic lows, a 30 year mortgage will charge you almost 100% of the home’s cost in interest over the life of the loan. For example, a $175,000 mortgage at 4% for 30 years will cost $125,772 in interest. The total interest comes to 41% of your total payments to the mortgage company and almost 72% of the cost of the home itself!. It’s like buying your house for a 41% premium to the cash price.
Photo by woodleywonderworks via Flickr
But you don’t have to stick to the 30-year term exactly. There are several ways you can pay off your home mortgage faster, and as a result save thousands of dollars.
Note: You might want to consider carefully whether you want to use your mortgage as a hedge against inflation, or pay it off early.
Pay Off Your House Faster with These 4 Tactics
Here are four different ways you can save on mortgage interest and pay off your home loan faster than the original term.
Add Additional Principal to Each Payment
The easiest way is simply add extra principal to each payment you send in to your mortgage company. Every little bit counts as you reduce the amount of principal, the interest charged on the remaining principal will be lower.
You can add extra principal in two different ways:
- Manually whenever you send in a payment. You add whatever money you can on a month to month basis.
- A set amount automatically. You set aside additional money in your budget — or just know you can afford to pay that amount extra each month — and your mortgage company automatically deducts it with your payment.
Refinance to a Shorter-Term Mortgage
Refinancing your mortgage from a longer term like 30 years to a shorter term like 15 years can save you significant amounts of money. Your monthly payment will increase as well; it’s like you’re adding a bunch of extra principal to each payment.
One bonus of refinancing to a shorter-term mortgage is you will almost always get a lower interest rate as well. A 30-year mortgage might cost 4% and a 15-year mortgage only 3% or 3.25%.
Pay More with Bi-Weekly Payments
One relatively painless way to pay extra on your mortgage is to pay every 50% of your mortgage payment every two weeks rather than 100% of your mortgage payment every month. In most months this won’t be any different than paying your mortgage off with normal payments, but there is a subtle difference. If you pay once per month you’ll pay 12 individual payments. If you paid twice per month that would be doubling the number of payments from 12 to 24. But if you pay 50% every two weeks (rather than twice per month), you will end up with 26 payments throughout the year rather than 24 payments. This is because there are 52 weeks in a year, not 48 (12 months x 4 weeks in a month). Those two extra 50% payments will result in you adding 1 additional payment each year.
Refinance to a Lower Rate But Pay the Original Payment
Another twist of refinancing your home to a lower rate is that if you can afford to, you can just keep paying your original mortgage payment. This works only if the mortgage terms are the same length (or if you were paying significant amounts of extra principal to a longer term mortgage and refinance to a shorter term).
For example, let’s say you’re paying $1,200 per month on your mortgage. You are able to refinance your home and drop your interest rate so much that your mortgage payment drops to $1,066. That alone would save you a ton of interest, but if you keep paying your original $1,200 payment in your budget then you’ll save even more.
Kevin Mulligan is a debt reduction champion with a passion for teaching people how to budget and stay out of debt. He’s building a personal finance freelance writing career and has written for RothIRA.com, Discover Bank, and many others.
I would rather extend my mortgage as long as possible because I rather have more money now then later
What a timely post. I just bought my first house and after this first year I’m planning on jump starting my pay the house off faster plan. Including a larger amount with each automatic payment. Thanks for the other suggestions as well.
These are great ideas for paying off a mortgage quicker. My favorite is refinancing to a shorter term. So many years can be knocked off the loan by doing this, but for many it can be too expensive. The updated Harp program is encouraging 15 year mortgage terms in order to the loss of equity faster.
APPRECIATED EQUITY Another, even more efficient way, to pay off your mortgage is to use appreciated equity. What I suggest is to buy an extra house, rent it out for several years, and finally refinance or sell it. Then use the equity from your second house to pay off the mortgage on the first house. For example, if you put an extra $200 a month into the principal of your house, how long will it take to pay off the loan? Answer: A lot longer than selling an appreciated property and using the cash to retire debt. With housing prices… Read more »
Hey Terry – You’ll be happy to know that I just bought a rental house. I’ll be closing this Friday. However, I didn’t buy a fixer upper. It’s a new renovation and I already have a tenant lined up.
That’s great news!
I hope that you can incorporate your experiences into an article from time to time, to keep us posted on how that is working out.
I’m in the process of shopping for another rental property myself right now. I’ve been “out bid” on two properties just recently. A lot of investors are out there beating the bushes for good deals.
I think the first advise would be that NEVER buy a house more than you can afford since it is a long term commitment and your financial situation could change could change rather quickly (job loss, relocation, new baby, etc.)
If you really want to payoff your mortgage quickly, nothing is better than sending in regular extra payments along with your regular mortgage amount.
By the way, I am not just writing to write. We just paid off our 30 years mortgage within 5+ years!