If you have a mortgage, consider paying it off early. These pay off early mortgage strategies may help you live debt-free before you retire.
Easy Ways to Pay off Mortgage Early and Live Debt-Free
Pay off Mortgage Early Benefits
Traditional advice has always been to invest money in a retirement fund rather than pay off a loan sooner. The reason for this is twofold. First, you can potentially earn more interest by investing, and you get money back at tax time.
While this may seem like sound advice, the truth is, stocks are risky, and paying off a mortgage gives guaranteed returns.
Paying off your mortgage as early as possible has many benefits, but mainly it saves money in the long run.
Most first time home buyers opt for a 30-year mortgage because it’s the most affordable option. If you put down a 20% deposit on a $150 000 mortgage, the monthly installments are roughly $650.
In five years, you might earn a higher income or rent out a spare bedroom. Using the extra money to reduce the loan period to 15 years can save you up to $40 000 in interest.
You also don’t have to worry about keeping a roof over your head in an economic downturn.
How to Pay Off Mortgage Early With Biweekly Payments
A biweekly payment schedule means you pay half the amount every two weeks. In other words, you pay 26 half-payment, which translates to 13 full payments a year. Depending on the interest rate, you can reduce the mortgage term by eight years.
- Method 1 – If your mortgage company accepts biweekly payments
Divide the monthly installment (principal and interest) on your statement by two. For example, if it’s $ 2000, the biweekly total is $ 1000. Remember to include insurance and tax in the calculations.
The mortgage company must credit partial payment to your account immediately to build equity in your home faster. Some loan companies hold biweekly payments until they have the monthly repayment amount. If this is the case, you won’t see the full benefit from half payments.
Some companies may charge a fee to convert the payment schedule to biweekly. Additionally, they may only transfer the payments to the lender monthly, which means the additional installment only applies at the end of the year. Meanwhile, the company earns interest on your money, while charging a fee.
- Method 2 – If the mortgage company doesn’t accept biweekly payments
Open a separate bank account specifically for mortgage payments. Use the same calculation as above and deposit partial payments every other week. Make the full monthly payment from this account after every second deposit.
This method has two benefits. First, you still make an additional payment yearly while sticking to your budget. And you don’t miss out on earning interests on the biweekly deposits.
Alternative Ways to Pay Off Mortgage Early
- Pay the principal first
The principal mortgage amount determines the amount of interest you pay, and almost half the interest on a 30-year mortgage accumulates in the first ten years. In other words, at the start of the loan, a large part of the monthly repayment amount pays the interest rates and not the principal amount.
Reducing the principal amount as soon as possible makes a huge difference. Additional payments can cut years off the payment term.
One popular strategy is to pay 1/12 extra every month.
Mark any additional payments as “apply to principal” and not towards your next installment.
- Save where you can
Look for areas where you’re spending unnecessary money, even small amounts. For example, buying a coffee every day adds up to roughly $90 a month. Taking lunch to work instead of going out can save $100 each month.
If you pay $20 extra towards your mortgage monthly, you can pay it off a year early, and $100 extra saves $28 000 on interest in the long run.
- Refinance if it makes sense
As mentioned earlier, refinancing a 30-year loan can save you close to $40 000 over the lifetime of the loan. However, make sure it’s worth it.
In general, the interest rate needs to be 2% lower for refinancing to be worthwhile.
On the other hand, if you can afford the monthly installments on a 15-year mortgage, but your interest rate is already low, pay your 30-year mortgage as if you’ve refinanced.
- Maximize your down payment
Pay as much as you can on the down payment. Postpone the down payment until you’ve saved at least 10% of the purchase price. The bigger your down payment, the smaller your monthly payments are.
Before You Get a Mortgage
While it might be exciting to buy your first home, ensure that you can afford the repayments. Remember to include costs, such as closing costs, moving costs, and ongoing maintenance, in your calculations.
Besides repayments, you should have at least three months of expenses saved in an emergency fund but aim to have six months savings for emergencies as soon as possible.
Next, make sure you have enough capital saved to make a sizable down payment. Ideally, this is 20% of the purchase price but can be as little as 3.5%. The
Finally, the monthly payment amount should be 25% of your income or less. Overall, ask yourself if you can afford a 15-year mortgage. If the answer is no, then hold off on purchasing a house and reevaluate your financial situation in a couple of months.
Pay off your mortgage early so debt won’t weigh you down till retirement. Consider the various options available and choose one that suits your current situation. Reevaluate your finances often to see where you can save money. Lastly, ask yourself if buying a house is a safe investment and make sure you can afford repayments for the foreseeable future.
Do you plan on paying off your mortgage early? Let us know what strategies you’re using in the comment section!