Then I moved on to answering the question: Is it dumb to pay off your mortgage early?
After that, I wrote about everything you need to know before you pay off your mortgage early.
Today I am giving you strategies for doing exactly that. Paying off your mortgage early.
As promised, here are 3 quick strategies to pay off you mortgage faster than you ever thought possible…
1. The Short-Term Strategy
This is a big one.
30 years is a long time to pay for a house. Opt for a 15 year mortgage or even a 10. If you can’t afford to take out a mortgage shorter than 30 years, you can’t afford that house.
If you can’t refinance, that’s ok! You can pay a little extra on a 30 year loan to pay it off quicker. Look at how much extra you would have to pay to pay it off early, it’s not much:
This is the amount you would pay every month (for an 8%, $100,000 loan) to pay off your mortgage early:
- 30 years: $733.76
- 25 years: $771.82
- 20 years: $836.44
- 15 years: $955.65
- 10 years: $1213.28
Did you notice that there is only a $102.68 difference between paying off this loan in 30 years and paying it off in 20 years? That’s 10 years off your mortgage!
Figure out your numbers and how much you can save with Dave Ramsey’s free mortgage calculator.
Not only do you pay off your mortgage earlier with a shorter loan, but the interest rate is usually much lower as well. Why? Simply because the bank is “stuck” or “locked-in” at that interest rate for a shorter period of time.
2. The First Day Payment Strategy
If you take full advantage of this strategy, it is one of the most powerful ways to make a huge impact on shortening the life of your mortgage without paying extra.
You simply make your first payment on the day the loan is activated (the day the lender starts charging interest) instead of waiting until your first payment is due.
This works so well, because this way, your entire first payment goes towards principle. Principle payments have the most impact during the early years, especially this first payment.
It will make you sick to see how much of each payment is going to principle in the early years of a mortgage. There could be as little as $20 or $30 each month going to principle on a $1200 payment. The rest is going towards interest.
If are already the proud owner of a mortgage, you can still apply this strategy by simply making one extra full payment. It won’t have quite the same effect as it will on the first day, but you will still knock some time off your mortgage.
3. The Famous Split-Payment Strategy
You’ve probably heard of it. Some people think it’s magic, but it’s actually a really simple concept.
You simply pay half your payment twice per month, instead of making one full payment.
This works in 2 different ways…
- Paying half-payments every 2 weeks will cause you to automatically make one extra full payment every year. (26 half-payments per year comes out to a total of 13 full payments instead of the usual 12)
- You will lower the principle balance 26 times per year instead of 12.
You can usually set this up with your bank, but if they won’t do it, you can still take advantage of this strategy by adding a little extra to your principle each month.
To figure this out for your mortgage, simply divide the amount of your principle payment (principle only, not escrow or interest) by twelve and add that amount to each month’s payment.
A Little-Known Strategy (The Best One)
Some people think that all of this information is worthless, because they don’t “believe” in paying off your mortgage early. Their idea is that you can earn more in interest by investing than you can save by paying off your mortgage early. This is true most of the time, at least with the current interest rates, but this doesn’t mean you shouldn’t pay off your mortgage early.
They have good reasons for thinking this way, but I disagree. Paying off your mortgage means having total financial freedom. It’s worth it.
There is actually a compromise between both of these views. And it’s almost always the best strategy for paying off your mortgage early.
I call it “Meet in the Middle” and you can read about it here!
Photo Credit: Allan Foster, Kanaka Menehune, Gabriela Ferreira