Strategies for paying your mortgage off early
If you've evaluated all of your options and you still want to pay your mortgage off early, there are a few different ways you can go about this.
First, you can refinance your 30-year mortgage for a 15-year mortgage. Say you have a $200,000 mortgage with a 4.25 percent interest rate. Over 30 years, you'll pay $354,197. But let's say after five years, you switch to a 15-year mortgage at a 4 percent interest rate. You'll save $52,372, and you'll pay off the mortgage 10 years ahead of schedule. You will have to pay closing costs, so this is only a smart option if you can score a lower interest rate than the one on your existing mortgage.
If this isn't the case, then rather than refinancing, you can pay your 30-year mortgage off in 15 years by simply doubling the payments you make each month. If you can't afford to do that, you may feel more comfortable paying just 1/12 extra each month. In our example above, your monthly payment would be $984. Add 1/12 to that, and you get $1,066 per month. That extra cost would be pretty easy for most people to absorb, and over the course of each year it'll add up to one extra mortgage payment. You'll save $24,885 over the lifetime of your loan, and you'll pay it off four years and three months early.
You can achieve the same effect by making a single extra payment each year or by setting up biweekly payments, if your lender allows this. You'll pay half of your monthly mortgage payment every other week, so it won't feel like you're paying that much more. But because there are 52 weeks in a year, and you're paying every other one, that adds up to 26 half-payments, or 13 full payments, each year. Whichever method you choose, be sure to note on the check or elsewhere that the money is to be applied to the loan principal rather than your next month's payment.
Another way to pay your mortgage off early is to put all of your unexpected or extra income toward your mortgage. This includes tax returns, bonuses, and any financial gifts you receive from friends or family. The advantage of this strategy is that you don't have to set aside any money in your monthly budget for an extra mortgage payment. The disadvantage is that this makes it much harder to predict when you'll pay the loan off. Still, every little bit counts, and if you're contributing extra money whenever you can, you'll probably be able to knock a few thousand dollars off your mortgage.
Paying your mortgage off early is pretty simple once you have a strategy in place. By following one of the methods listed above, you can save yourself a lot of money without putting a huge strain on your monthly budget.