Accelerating Mortgage Payoff
I think we can agree that paying interest sucks muddy pond water. When you buy a $500,000 house with a 30-year 5% mortgage and put 20% down ($100,000)( you will pay $2,147.29 per month, and after 30 years you will have paid an extra $373, 023.14 in interest. That is why we see so many tall bank buildings in the city. The need to save money is becoming a priority. There are only so many ways to make our incomes stretch. One way of saving is often overlooked: that is accelerating mortgage payoff.
It used to be a tradition, with that lst mortgage payment, you had a big party ad burned the mortgage. Maybe that should be a priority one again, Who wants to be a slave to the bank for 30 years.
Paying Interest Sucks
Brian Kline at Realty Business writes, “There are many ways of accelerating mortgage payoff and doing so can save you 20, 30, 40, 50, thousand dollars over the life of your mortgage; or in our example $373,000. For instance, you might make minimum payments for the first 5 years on a 30-year mortgage. Then, at the beginning of the fifth year, you start adding an extra $150 to your monthly payment. Your interest savings over the remainder of the loan is over $25,000. But there are many methods of saving interest and/or paying off your mortgage early. That is one of the more modest ways.”
Ways of Accelerating Mortgage Payoff
- Save $34,449 with regular extra annual payments. Using the same $200,000 30-year mortgage at 4.2 percent, you could begin making an extra $2,500 annual payment as your income climbs. Around year 5 is when many people find their income outpacing their mortgage payment. That extra $2,500 annual payment results in accelerating mortgage payoff by 6 years and 11 months earlier at an interest savings of $34,449. A word of caution, keep an emergency account for unexpected financial needs.
- Save $26,000 by making 13 payments in 12 months. You could put 1/12th of a monthly payment into a special savings account (about $82 per month). Or maybe you are paid every 2 weeks that results in an extra paycheck a month or two out of the year. Making that 13th monthly payment saves you about $26,000 of interest and cuts more than 4 years off the length of the loan.
More Ways of Accelerating Mortgage Payoff
- Save $56,140 by switching to a 15-year mortgage. No extra payments needed. A great time to do this is if you refinance your mortgage when a better interest rate is available. You’ll save even more in interest payments and pay it off much faster. Refinance that same $200,000 ($181,130 remaining balance) mortgage at year 5. Going with a 15-year mortgage automatically shaves a full 10 years of your payments. Shorter term loans often have a lower interest rate. If you refinance into a 3.7 percent loan, your interest savings will amount to about $56,140 (doesn’t include refinancing costs). A word of caution, the shorter mortgage length does lock you into higher payments each month (about $334 higher). Combine that with a few extra annual payments to achieve truly extraordinary savings.
- By accelerating mortgage payoff, you can cut your 30-year loan into a 15-year loan by paying an extra principle each month. Get a copy of your amortization schedule. Each month, write a separate check for the amount due towards your principle next month. You don’t borrow the money that month, so you don’t owe the interest on it. Consistently doing this every month from the beginning changes your 30-year loan into a 15-year loan. No refinancing required.
There are many ways of accelerating mortgage payoff and many online mortgage calculators to show you how much you’ll save. You may want to be debt free, or you may want to pay off the mortgage before retirement.
Reasons Not to Pay Off Your Mortgage Early
There are reasons not to pay off your mortgage early that you need to consider. This can become complicated because you probably write the interest off against your yearly income tax. You should also consider how much you could earn by investing the money elsewhere. This could be a good time to consult with a financial advisor about your specific circumstances. However, never take his or her suggestions at face value. Always be sure you fully understand the numbers shown to you. Including any commissions or fees, he or she makes on alternative investments.
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