Most Americans are living with some sort of debt, be that student loans, credit card debt, or a mortgage. Paying off that debt can significantly boost both your financial well-being and your peace of mind. This article explores several different strategies for paying off your mortgage faster.
If you are considering paying off your mortgage faster, the first thing you should check is whether you will be penalized for doing so. Depending on the type of mortgage and the terms of your loan, you may be charged extra for prepayment, particularly in the first few years of the mortgage term. If you have any questions about this, talk to your mortgage lender.
How to Pay Off Your Mortgage Faster
There are two main approaches to paying off a mortgage in less time:
- Making additional payments
Making Bigger or Additional Payments
One of the quickest ways to pay off your mortgage faster is to put more money toward it, by either making bigger payments or making more payments. In most cases, the extra money you pay goes toward the principal. And the lower your principal is each month, the less you’ll end up paying in interest…and the faster your mortgage will be gone.
Use Bonuses and Tax Refunds
This may be one of the simplest ways to put more money toward your mortgage because it won’t affect your regular budget. While it may be tempting to use the extra money for a vacation or something frivolous, think about how much better you’ll feel instead when your mortgage is paid off.
Round Up Each Payment or Add a Small Fixed Amount to Your Regular Payment
If your monthly payments are $984, try rounding up to $990 or even $1000 if you can manage it. It may not seem like it would make a huge difference, but rounding up can shave a few entire payments off of a 30-year loan.
Similarly, you can add an exact fixed amount to each payment. This could be $20, $200, or anything you know you can afford. You can use this mortgage payoff calculator to see how much faster you can pay off your mortgage by adding just a few extra dollars per month.
Make an Extra Payment Every Three Months
Say you have a 30-year $220,000 mortgage with an interest rate of 4%. If you save enough money each quarter to make an extra full payment every three months, you can knock 11 years off of your mortgage repayment schedule. Breaking the extra payment down by 3-month intervals makes these extra payments both consistent and manageable for your budget.
Pay Half of Each Payment Every Two Weeks
Making bi-weekly payments has a few advantages.
- First, you’re making smaller payments more frequently, so the payments can be a little more manageable. As most companies pay employees bi-weekly, you can coordinate the payments to come out of every paycheck.
- Second, bi-weekly mortgage payments result in a full extra payment every year. In the 30-year mortgage scenario described above, making two half payments every two weeks will allow you to pay off your mortgage four years earlier.
Before you start making extra payments, double-check your contract to ensure that you won’t be penalized. For example, some mortgages have a prepayment penalty or limit extra payments to specific times of the year.
Also make sure that whatever extra amount you are paying is going toward lowering your principal, rather than toward the next payment. Lowering your principal is the key to paying off your mortgage in the quickest way possible.
Another option to help you pay off your mortgage faster is to refinance. You will have to pay closing costs in order to refinance your mortgage, but it can be beneficial to you in the long run.
Refinance to a Shorter Term Mortgage
If you have a 30-year mortgage, you can refinance to reduce it to a 15-year mortgage. This is especially helpful if you have restrictions on making extra payments. Refinancing to a shorter term mortgage basically forces you to make those extra payments anyway, with the payoff being that you will be debt-free in half the time.
If you know you won’t be penalized for extra payments, another alternative is to act as if you’ve refinanced without actually doing so by doubling down on your payments. This way you can avoid the closing costs but still pay off your mortgage that much faster.
Refinance to a Lower Rate Mortgage
A less drastic way of refinancing is to refinance for a lower rate. The exact amount you’ll save depends on your unique situation, but you can crunch the numbers in this mortgage payment calculator to see how much you could save with a lower rate. Often you can manage to cut a few years off of your total payment timeline.
Cutting Expenses and Budgeting
Whatever option you choose will likely need to be accompanied by measures to better control your spending. Here are some strategies for reducing your expenses and sticking to a strict budget.
Reducing Your Expenses
There are many ways to reduce your living expenses, but here are three of the easiest:
- Carpool to work to save gas money and reduce the frequency of car maintenance and repairs. Similarly, if you drive your kids to school, ask some of the other parents in the neighborhood if they would be willing to share the responsibility.
- Don’t go out as often. Going out is one of the biggest expenses people can accrue without realizing it. Eat dinner at home, make your own lunch for work, and cut back on going to happy hour with your coworkers. For entertainment, look for free activities around Chicago.
- Save on your utilities by switching to energy-efficient light bulbs, turning off the lights whenever you leave a room, and knowing the optimal setting for your heater and air conditioner.
Setting a Budget and Sticking To It
Budgeting is always a good idea, but if you want to pay off your mortgage faster, it’s an absolute must. Here are two budgeting strategies:
- Use an envelope system. In this system, you pay for everything in cash. Figure out how much you want or need to spend on things like your mortgage, insurance, gas, groceries, clothing, entertainment, etc. Write each expense category on an envelope and each month put the budgeted amount of money inside. When the money runs out, wait until your next monthly installment — don’t take from other envelopes.
- If paying for everything in cash doesn’t appeal to you, you can use online and mobile budgeting apps. Mint.com connects right to your bank and credit cards, and automatically categorizes each expense. You can set your budget through the app and change the categories as needed.
You can follow any one of these options or combine them to take even bigger steps toward paying off your mortgage. But whatever option you choose, the trick is to be consistent. If you want to get rid of that mortgage, it has to be your first priority.