8 ways to pay off your mortgage early

There's more than one way to pay off your mortgage early. We show you eight.

By Smart Spending Editor May 1, 2013 4:29PM

This post comes from Jeffrey Trull of partner site Doughroller.

www.doughroller.netThe decision to pay off your mortgage early is a controversial one. But for some who have tackled many of their big financial goals and erased other debt, putting their home mortgage in their cross-hairs can make sense.

Toy house sitting on money © Vstock, Tetra Images, CorbisIf you’ve decided to pay off your mortgage early, here are eight strategies for saving money and paying the balance quickly.


1. Refinance to a 15-year mortgage
An easy way to guarantee that you’ll pay off your mortgage twice as fast is to refinance your mortgage from a standard 30-year term to a 15-year mortgage.

If you refinance to a 15-year mortgage, you’ll typically pay a lower interest rate while making larger payments each month.

By refinancing a $250,000 30-year mortgage at 5 percent to a 15-year mortgage at 2.63 percent, you’ll save about $178,000 on interest.

The downside: higher monthly payments and probably less flexibility. By sticking with a 30-year mortgage, you would have lower payments but could always add to them to pay off the mortgage sooner. With a 15-year loan, you’re stuck with the higher payment. While you may be able to afford this now, focusing on other financial goals or a decrease in income can throw a wrench into your plans.

Mortgage rates are near an all-time low, so you’re still getting a good deal and increased tax benefits even if you choose the 30-year mortgage.

2. Refinance but keep the same payments
Many who refinance do so to reduce their monthly payments. But if you refinance, you can double up by reducing your interest rate and continuing to make the same monthly payment.


This yields the same results as adding extra to each monthly payment. Check mortgage refinancing rates to find out how much you can save compared with your current rate.

3. Use pay raises on your mortgage
One way to find extra cash to put toward your mortgage: apply raises from your job.

The goal is to put the same percentage of your income toward your mortgage even when your pay goes up. If you can avoid any lifestyle inflation, you can put all of your raises toward your mortgage balance.

This strategy works best for those who get regular raises. If you aren’t expecting to see your income increase anytime soon, this strategy might not be the best option to start with.

4. Pay extra each month

Fifty bucks might not be much in your budget but consistently adding this much to your mortgage payment can make a big difference.

Using the same example above, but adding an extra $50 to your monthly payments cuts payoff time by about 2.5 years. Double your extra payment to $100, and you’ll chop off about 4.5 years.

The biggest challenge with this plan: your willpower to keep making extra payments. Because it’s voluntary, it’s up to you to stay on track.


5. Use cash windfalls to pay lump sums
Instead of paying a little extra each month, you could pay a large lump sum here and there. This can be done with a cash windfall, such as from a yearly tax refund, work bonus or inheritance.

Paying an extra $3,000 every tax season will reduce your mortgage term by nearly nine years.

6. Make biweekly payments
If you opt to make biweekly payments on your mortgage, you’ll make an extra mortgage payment every year.

Making 26 payments a year with our example cuts almost five years off a 30-year mortgage.


If you opt to have your bank set this up, you may have to pay a large yearly fee. If you don’t want to pay this fee, you can get the same benefits by adding extra to your monthly payments. Just tack on 1/12th of a monthly payment, and you’ll replicate the results.

7. Set a target payoff date

Setting a target payoff date allows you to know exactly how much extra to pay each month to be mortgage-free by a certain date. You’ll have the added motivation of marking your calendar to plan the celebration.

If you’re looking to be mortgage-free in 20 years, in the example above it will cost you $308 above your standard $1,342 payment each month.

If you’re really aggressive and want to pay off your 30-year mortgage in 10 years, you’ll need to add another $1,310 to your $1,342 monthly payment.

8. Combine methods
There’s no need to select only one method from this list. Many mortgage-holders can choose a few options on this list and combine them to pay off their loan even earlier.

Let’s say you apply an extra $200 each month as well as your $3,000 tax refund every April. Your 30-year mortgage is paid off early in about 18 years.

To calculate your own scenarios to pay off your mortgage early, check out Financial Mentor’s mortgage calculators and play with your numbers.

Are you paying off your mortgage early? Let us know in the comments what your strategy is.


More from Doughroller:

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31Comments
May 2, 2013 1:33PM
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"Paying an extra $3,000 every tax season will reduce your mortgage term by nearly nine years."

 

If you're getting a tax refund of $3,000, you're doing your withholdings all wrong.

May 2, 2013 11:06PM
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nice article.... if you decide to pay early upfront and go with a 15 year mortgage then  you are saving in the interest rate as well as on how the interest is very heavy upfront compared to a 30 year mortgage.

 

I got a 15 year and then paid more but kept a safe cushion in the bank. When my cushion reached high enough and in the meantime mortgage amount reduced and they became same, I paid it out completely...in 7 years, reduced to zero and then started saving again.. 6 months into saving i lost my job. But no worries as my monthly committments are very less now and my investments are doing fine to keep me going till i find a new job, We are a double income family as my wife works too,  I could sustain for over 2 years just on savings, but with one person working we are okay and living fine and better than sustaining. Thanks always to God. 

May 2, 2013 4:05PM
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My wife and I decided to buy more house then we needed so we could rent out the extra bedrooms. It has worked out great! We paid our house off in under 10 years. Now it actually cash flows.

 

Buy a house with a walkout basement and then furnish and rent out the two bedrooms downstairs. You can basically make double payments on your house without any of it coming out of your pocket.

 

Now we are putting the extra income into a target retirement account.

May 2, 2013 9:56AM
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net answer:  pay off the mortgage early by "simply" making more payments than you are required by the bank loan. 

 

"simply" meaning extra cash of any sort. 

 

ALL extra cash = faster

SOME extra cash = slower but still faster than your 30 year loan

May 2, 2013 12:48PM
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My mortgage on my house was 68k. I'm starting to pay 2400 a month on my mortgage now. which means i pay my house in 2.5 years instead of the 27 years i had left. i,m pride to pay a house off in 6 years. and i wish everyone could too. my house started out at 103k 5.25% payments at 529 a month. for 30 years. I'll retire in 8 years,i might need the money to live later. if you can pay extra on your house without hurting yourself do it i say. A house is a big investment and needs to be watched very carefully.
May 3, 2013 11:43AM
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the  only ones who think paying off your morgage is contraversal is the bankers and morgage companies..too much interest to lose.....my morgage is paid off and its the best thing  i ever did...

being completelty debt free gives you piece of mind and room to enjoy life..

May 2, 2013 10:07AM
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I am paying mine off early combining methods. Re-financed to a ten year and am also paying extra. We've always paid some extra, but now are really trying to knock it out. I was adding $ 90.00 a month but have recently upped it to $ 290.00. There is an inheritance looming and if that happens then we'll probably just pay it off in full and be done with it. Even without the inheritance we should have it knocked out in 6 more years.

There is another method which can be used for those just starting out and not a lot of extra dough. Double up on your principal payments each month. If you just starting a 30 year loan then the extra won't be much.

 Each month as you pay off the balance the amount going to principle goes up so your extra principle payment will go up a little as well. It's easy to just keeping upping the amount by a little and it teaches you discipline.

Each extra principle payment knocks one month off your loan, so if you stick with it your 30 year becomes a 15 year......and if you can't stick with it at least you knocked something off.......stay motivated...... I can't wait to have a good old fashioned mortgage burning party in the backyard.....

May 3, 2013 8:38AM
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Let's not forget that the best way to pay off your mortgage early is to not buy a house beyond your means.  Buying a lower priced home frees up a lot of cash that can be applied to the mortgage or used elsewhere.

Better yet, avoid the mortgage altogether.  I paid cash for my current home in 1997.  Imagine what it's like to not have a mortgage payment at all . . . .
May 2, 2013 10:14AM
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Steve G is right, more money of any sort means it gets paid off faster, and that is what you want.

I think another key thought is focusing on the amount of the debt and not the monthly payment.

Lowering your payments should not be the focus, paying off the debt in full should be the focus......do whatever you can to knock it out, refinancing over and over costs you thousands in fees and starts your payments over again, great for the banks, but not for you......

I made a scorecard of sorts, with $ 1000.00 increments on it, each time I get my balance bellow one I cross it off, at the start it takes a while to get to the next one, but where I am now I'm knocking off one a month, it's really motivating.....

May 2, 2013 12:53PM
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pay against the principle, not the payments. The loan will go backwards,you stop the interest at the end which helps too.
May 3, 2013 10:23AM
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All good ideas and don't think I wouldn't  (make extra payments) if I could. What is a raise by the way haven't seen one of those in a long time either. Last raise I got after taxes put 20.00 more dollars a month in my paycheck.  Oh well glad to have a job anyway.
May 3, 2013 2:43PM
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We recently refied from a 30 yr at 5.125, to a 15 yr at 2.75.  We had 25 yrs left on the old mortgage so just doing the refi knocked 10 yrs of payments off while our monthly payment went up only $60/month.  We had already been paying that much extra so it was a wash.

 

While paying the mortgage off is a goal, at such a low rate and interest tax deductable, instead of putting the extra money towards the mortgage (in effect guaranteeing a return of 2.75 %), we're takiing the extra we would be putting towards the mortgage and putting it into solid dividend paying stocks.  There are quite a few solid blue chips paying more than 2.75% dividends.  If the time comes when we want to pay it off early, we'll pull the money out of our stocks and pay it off.  While we'll pay capital gains tax if we cash out completely, the good chance of capital gains and dividends returning more than 2.75%, even after taxes, is pretty good.  Just another option that keeps some liquidity on hand, along with the option to pay off the mortgage early.

May 3, 2013 11:49AM
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We have opted for a the 30 year mortgage and paying an extra $100 per year.  I am going to be losing my job soon - the company is moving to another state and we are going. So, if I have to go on unemployment until I find another job, we can easily suspend that extra money until we are back on our feet.  If we had chosen to refinance with a 15 year mortgage, we would be stuck with this larger payment each month.  It takes discipline to keep up those extra payments, but in the end, it gives us more flexibility.  
May 3, 2013 12:50AM
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Several years ago, we refinanced our modest house for 10 years at a rate of 4.35%. Our financial situation was in good order.

The loan servicing company would send the next statement as soon as they received the payment, so I was able to eventually make nearly two payments per month, I got to the point of being 18 months ahead on my payments.

Then my wife got a promotion at work, and we were able to load up those payments with much more money. Eventually the loan company told us that we had enough in escrow to pay off our balance. It took about seven years to eventually pay the ten year note as our finances improved

We lived totally debit free for a year and a half, investing like maniacs. Now we are finishing a huge home renovation and we refinanced the house for $100,000,  five years for huge payments @ 2.75%.

Just a little over 4 years and we'll be mortgage free again, with a house that better suits us, and holds more value,

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I refinanced my 30 year mtg about 8 years ago to a 20 year mtg.

Last year I made 2 lump sum payments of 1000.00 each to be applied to principle only . . . now I have 8 years left on the mtg, but still plan on adding extra when we can to lower that projected payoff year down to 5!

May 3, 2013 1:33PM
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our house will be paid off next year, 10 years early on a 15 year mortgage.  and we will have saved over $20,000 in interest.

 

May 3, 2013 1:08PM
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Bought a house in 2004 30 year loan at 6.5% then in 2009 refinanced at 4.69% for 20 years and paid an extra $100 or so a month. We refinanced again 2 years ago for 10 years at 3.59% and we now pay an extra 300=500 per month we should have the house paid off in the next 3 1/2 years. Its been a lot of hard work and discipline but the end reward is so well worth it.
May 2, 2013 11:05PM
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 TIP #1... CALL AND HAVE YOUR INTEREST RECALCULATED.

We called and they updated our interest without changing anything on the loan.  It cost us 400$ and saved us $17k.  We couldn't believe it.

  We pay Bi-Weekly, but we also opted for the interest to be recalculated every 2 weeks with our payments.   We also have our escrow go into a money market account and we pay our own insurance and taxes from it.  So it very slowly draws interest over the years.  It's not much extra, but will be over the loan.  We financed for 30 years 5 years ago, and will have it paid off in 7 more.

  Not too shabby.

 

May 3, 2013 12:39PM
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Set up auto payments doing  bi-weekly payments with your current monthly mortgage payments (1/2 the normal payment every two weeks). You will see the loan being reduced much faster this way without making extra payments. More of the payment will go to principal, ask your bank about it.
May 3, 2013 12:20PM
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wE ARE NOW AT 4% - What about taking a 30 year so you have flexibility in case of a job loss medical condition or a major  item needs fixing , roof, boiler, etc, & taking equity out to hold in cash at a 3.5% rate I figure at some point maybe even a few years interest rates will spike & you will get over 7% in a plain old CD.

 

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