Adding one, two or all of the below things to do to pay your mortgage off early will help you to shave years off of your mortgage!
There are tons of posts and articles that I have read that debate whether or not it is a smart financial move to pay your mortgage off early. This is not one of those posts.
This post is for those of you who have made the decision that you want to pay your mortgage off early and you want all of the help that you can get to do it.
(On a side note, I personally want to pay our mortgage off early for two reasons. The amount of interest that you pay on a traditional 30-year mortgage can sometimes be as much as your house is worth! This is insane to me! Secondly, paying off your mortgage early means more financial freedom. If I ever want to stay at home with our future children, I don’t see how that is possible if we are paying that mortgage for the next 30 years.)
Now, before continuing on, I do have one question to ask you. How long do you plan on staying in your current home?
Is the answer 3-4 years or less?
If you plan on staying in your home for less than 4 years then trying to pay your mortgage off early might not be the best plan for you. If you plan to move to a new house then you would be selling your current house and getting a mortgage on the new one.
Trying to pay your mortgage off early in this case might be pointless as the debt would get restructured in a few years anyways. If this is your situation, skip down to where I talk about what to do if you are getting a new mortgage or a mortgage for the first time.
6 Things to Do to Pay Your Mortgage Off Early
1.Set a goal
This seems silly and unnecessary. The goal is to pay my mortgage off early. Duh.
I hear you. What I mean though is for you to create a specific goal of when exactly you want your mortgage to be paid off. Pick an exact date!
If you have a significant other or anyone else on the mortgage with you, you need to include them in this goal setting.
It will be really hard to reach your goal if the other person has a different goal entirely or they don’t even know that you want to pay it off early!
When having this discussion with that person, review the next 5 things that you can do to pay your mortgage off early. You will have to decide how much you are both willing to sacrifice in order to find extra money.
Can’t agree on an exact date together? Pick a date in the middle.
The good news is that you can always change this goal date! Maybe the first four months of saving and applying extra money towards your mortgage goes really well. The other person is now more motivated to paying it off sooner. Change the goal date to an earlier date!
2.Make bi-weekly payments
This means instead of making 1 payment per month (or a half payment twice a month) you will actually be making a half-payment every two weeks. Doing this step alone can help shave 5-7 years off of your mortgage.
If you get paid from your workplace on a bi-weekly schedule then this should be familiar to you. You get a third paycheck in two months out of one year. (Those two months will vary from year to year and will also depend on how you company’s payroll systems are setup.)
The same goes for your bi-weekly mortgage payments. Each year you will end up making an extra two-half (or one full month’s) mortgage payments. You will want to make sure that these extra payments get applied as additional principal and NOT towards interest.
Depending on your mortgage institution, this can be setup though them. They can setup an auto-deduction from a checking or savings account of your choice.
Make sure to ask them about any fees associated with this payment plan as some of them will charge you extra fees to set up your payments this way!
Your company does charge a fee? Forget the fee! You can set this up on your own. If you physically mail checks then setup calendar reminders to send checks every two weeks.
If you your mortgage company has free online payments then try to set them up on auto-payment or set yourself calendar reminders as well.
*Special note about bi-weekly payments* – Bi-weekly payments confused me for a couple of months until I just called our mortgage lender and she explained this to me.
I thought that bi-weekly payments would save you money by reducing your interest because they would take your half payment and apply it immediately to your mortgage. Therefore reducing the principal more often and then reducing the total interest paid.
This is not how bi-weekly payments work. Most mortgage institutions will not apply a half payment. They will wait until they receive both halves of the payment and then apply it towards your mortgage. So no interest saving there.
The key to bi-weekly payments is the fact that you will make one full extra payment each year. This saves you interest money when those extra payments are applied towards principal. So instead of 12 monthly payments per year on traditional monthly payments you will make 13 fully payments per year on the bi-weekly payment plan.
3.Apply any extra money in your budget towards additional principal payments on your mortgage
Let’s say that you had an excellent month budgeting and you have $75 leftover after paying all of your expenses and adding to your savings. Send that $75 to your mortgage and have it applied as additional principal only. (My pay stubs have a check box to mark this option.)
Now $75 doesn’t seem like very much when you have a $100,000 mortgage or more, but you have to remember that you aren’t just saving $75 in interest. When I plugged a one-time extra payment of $75 into my self-created amortization schedule in Excel for my mortgage, I ended up reducing the total amount of interest paid by $142.42.
That’s almost double what I actually paid!
You can use this online calculator to see how making additional payments each month can reduce your mortgage interest. It also shows you how many years you can shave off of your mortgage!
Keep in mind that these calculators aren’t exact science and they can’t account for your escrow account but they help give you a better picture of how $75 each month can make a huge difference!
Do you need help finding extra money in your budget? Check out this post on how to make a grocery budget AND stick to it! Or this post to find out what month of the year you should be buying certain items to save the most money.
In this post, I talk about the 10 things that I stopped buying in order to save thousands of dollars every year.
4.Ignore what your neighbors, friends or family are doing
It is so easy to fall into the trap of having to keep up with those around you.
Your neighbors just got a brand new vehicle and it seems to taunt you as it sits there in their driveway. You turn around and look at your perfectly find vehicle that is 6 years old and it suddenly seems like a clunker.
Resist! You have no clue what your neighbors’ financial situation is and you shouldn’t try to compare yours to theirs.
YOU WILL NEVER BE HAPPY IF YOU ARE CONSTANTLY COMPARING YOURSELF TO OTHERS.
This is applicable to more than just budgeting. You will literally never have enough money if you feel the need to keep up with the purchases of those around you.
Just imagine the looks on your neighbor’s faces when you can proudly state that your mortgage is paid off!
5.Evaluate your budget at least monthly
This is something that you should be doing even if you aren’t trying to pay your mortgage off early. You should be looking to see if your spending habits are in line with your budget and make adjustments accordingly.
Have you underspent in your clothing category for the last three months by a significant amount? Take that difference and start having it applied to your mortgage as an extra principal payment.
You won’t necessarily find something to change or adjust every month but if you are reviewing your budget on a monthly basis then your budget should be on your mind. This way you are thinking about your spending habits more often and are more likely to make better financial decisions.
6.Consider refinancing your mortgage
This would be best to do with a mortgage institution. You might not be able to get a lower interest rate, but if you can reduce the term of your mortgage and increase your monthly payment amounts then you could be saving more money that way. Have them create payment options for 5, 10 or 15 year mortgages.
Also consider asking a different financial institution than the one that you currently use. A new place might be willing to offer you better incentives to get you to leave than your current place.
Keep in mind that there would be closing fees associated with refinancing your mortgage so make sure to consider those in your decision.
A few notes…
Before you decide that you want to pay your mortgage off early, take a look at your mortgage institution’s fees. Are they going to charge you a fee if you pay your mortgage off early?
If yes, find out how much the fee is. You will need to decide if the money you save in interest will offset the fee amount.
Start now! This might be the simplest but most effective thing that you can do to pay your mortgage off early. If you wait until 6 months, 2 year or even 10 years from now you will always wish that you had started sooner!
Even if it is $10 extra a month that you can apply towards your mortgage principal, do it!
What if I Don’t Have a Mortgage Yet?
Often times when you are working with a bank or financial institution for a mortgage, they will often only show you the 30-year mortgage option. They make more money the longer the loan term is.
That doesn’t mean they don’t offer shorter terms. You just need to ask!
Have them show you what your payments would look like on a 15-year mortgage. Can you make it work? You would be a step ahead AND you could still implement the time/money saving tips above to reduce it even more!
Things NOT to do to Pay Your Mortgage Off Early
Do NOT stop paying other bills. Don’t go into more debt just to try and save some interest on your mortgage. This will only set you back further in the long run.
Do NOT stop paying into retirement or savings accounts. If you are still working on getting your emergency fund to your goal amount, DO NOT stop paying into it.
Once you reach your goal amount for your emergency fund you could then consider putting some of that money towards your mortgage going forward.
What other tips or tricks have you use to help you pay your mortgage off faster?