6/7/2011 1:46 PM ET|
How to pay off your mortgage early
There are many ways to retire a home loan in advance, but not all of them may work for you. Here’s how to find the one that best suits your needs.
Paying off the mortgage early is in. Refinancing to take money out of our homes is out. In this foreclosure crisis, more people are seeking the security and psychological benefits that come with owning a home free and clear.
If you want to pay off your mortgage early, you'll find plenty of experts recommending ways to do it. All strategies work, but you'll find some methods of paying off your mortgage are safer, faster and less painful than others. (Check today's lowest mortgage rates at MSN Money.)
Compare these ways to pay off your mortgage early, from the simplest to the most complex:
Just pay more
If you want to see magic, start playing with a mortgage calculator and see how paying a little more on your principal here and there can shorten the length of your loan. If you pay a little more principal, you get a bonus. The lower your principal gets, the more every payment from then on is applied to the principal, as less goes to cover interest expense.
If nothing else, round your payments up, recommends Tracy Piercy, a certified financial planner and the CEO of MoneyMinding.com. She says when people have a payment for $644, they think of it as $650. Why not just pay $650, then? An extra $6 a month on a $200,000, 30-year loan can save you four payments at the end of the mortgage.
When you pay extra, make sure the extra is applied to the principal balance, not just set aside for the next payment. And before you make extra payments, read your contract and make sure you won't have to pay prepayment penalties.
Refinance with a shorter-term mortgage
You can refinance into a mortgage for 10, 15 or 20 years, but 15-year mortgages are the most common. Your payments will be higher on a 15-year loan, but perhaps not as high as you think.
One advantage of a 15-year loan is that you're committed to the higher payment. There's no dithering about whether you can afford to pay extra month.
With a 30-year, $100,000 loan at 5%, your principal and interest payments are $537. At the same rate, but on a 15-year payoff schedule, your principal and interest payments are $791. That's $254 more a month.
To get the effect of a shorter-term mortgage without the risk, take out a 30-year loan but make payments as if you had a 10- or 15-year loan. "You just make increased payments. You're in control, not the bank," Piercy says.
Switch to biweekly payments
Biweekly payments take advantage of the fact that most months are longer than four weeks. If you pay half your regular mortgage payment every other week instead of making one full payment a month, you'll have made 26 half-payments, or the equivalent of 13 monthly payments, at year's end.
Check if your bank will set up a biweekly payment plan. Some banks do it free; others charge. Ask the bank to credit extra payments toward the principal so you save more on interest expense. Some banks set aside extra payments until the end of the year.
You shouldn't have to pay an outside company to set it up for you. "I hate the idea of having to pay a third party for something the consumer(s) can do on their own," says Cathy Pareto, a certified financial planner in Coral Gables, Fla. "Why pay the extra fees if you can avoid them and still accomplish the same goal?"
Use money merge accounts (the Australian method)
In Australia, mortgages are generally set up like home equity lines of credit, or HELOCs. They double as checking accounts, thus the term "money merge." When you get paid, you deposit your check into the account, and as you spend money you take it back out again. You hope to put more money in every month than you take out.
With a mortgage using the Australian method, interest is calculated daily instead of monthly, and because the money spends as much time as possible in the account before you take it back out to pay bills, you save on interest expense.
But Dr. Don, a Bankrate.com columnist, writes, "I just don't think the typical homeowner benefits from this type of mortgage loan." Typical homeowners don't see enough reduction of their interest expense to make this method worth it for them, he warns.
Some money merge programs require you to buy software that costs thousands of dollars. However, there's no magic formula for shifting your money around. "You don't need software to do that," Piercy says.
The biggest downside to the money merge plan is that it requires discipline. "You wouldn't do it unless you understood cash management," Piercy says.
This article was reported by Sally Herigstad for Bankrate.com.
VIDEO ON MSN MONEY
Friends let me tell you I have read herein a lot of good advice and a load of wise, traditional conservative money management plans that work.
I too have never bought cars on time it was either cash or do without. I owned my own home that I sold last July to a person with me being the mortgagee. They have paid down over 27% of the loan already.
My wife found a great job in San Antonio, Texas and I was assured by no less than the Texas Workforce, 6 different employers in the area and 5 years worth of research that we could move here, both find jobs, find affordable housing and be just fine. They didn't tell me that there were 100 people for each job advertised. I also read unemploymen was a paltry 6..5% in San Antonio but after arriving here learned that it was 8.5% and 8.1% for the whole state a 25% uninsured motorist rate and same for uninsured health care and a load of illegal workes, though the governor here named Rick Perry says all is well
I have worked since age 14 I am now 52. Diligently invested in General Electric for more than 15 years and watched that investment go from $90,000.00 down to $39,000.00 today. I have made application to 325 jobs, joined the Texas Workforce Employment site and also have registered with 15 staffing and temp agencies. I have a degree in business management and one in marketing and 30+ years experience in management, military, consumer service, retail/wholesale, landscaping, Numismatics, purchasing, clerical, administration and construction and I cannot even get a call back or an initial interview for a job. I was offered a nice 8 hour a week position at $7.25 at a Uhaul franchise though!
My point and my intent is to let you all be aware that no amount of planning, wisdom or investment idiom is full proof. I researched moving to this area for 5 years and still didn't do the right amount. We purchased a home in February which is a small ranch type of 1200 square feet that is already, according to our most recent fair market value statement from the local taxing authority about 4.6 percent underwater from the paltry sum of $125,000.00 that we paid.
Be a little smarter and a little more diligent than I was and do not take your current good fortune for granted. Just one small slip, one oversight, one error in judgment can take you over the edge so fast it will make your head spin. And to top it all off, this young lady I sold my home to, who has paid it down already by 23 percent called me yesterday and informed me she was going to have to walk away as she lost her job.
You know an 80 ounce Coors Lite would go good right now! I see a lot of good people daily and I meet many on the web. I certainly do not want folks harmed as I now find myself. We never bought cars on time, always cash, pay our credit cards off each month, well until last month anyway and my wife just lost her job that we moved here for as the business (private school) failed.
Please don't error like we did...Best to all.
We paid off our mortgage in January 2011. We decided to do this when there were some job cuts and we didn't want to get caught in a bind. So now if one of us loses our job it won't be the end of the world.
Pay extra principal on your mortgage each month and kill that beast! You will sleep so much better in a paid for home.
My husband and I paid off our home in 7 years flat.
Now, ask me how many of my co-workers can say they own their home free and clear by the age of 36.
No mortgage is the only way to go.
Hello, I want to change the subject a little hear. My wife and I who are not rich and both do not have a BS, but have decent jobs and work our **** off. My wife wanted to move into a huge house right away, but also we had the offer to buy her grandmother's house at a steal. I told her this was an investment and talked her into it. We got the house for 109,000 which was easily 150,000 at the time. It was a corner twin. We fixed that house up where it could have been on a magazine Cover. I actually cashed a 401k in which was around 42,000 but got hit 10% off the top and than another 18% end of year. I actually lucked out bc it was b4 the 2008 crash and I would have lost it all. The house we fixed up, we made 165,000 profit and put it all down on the place we always wanted to live. The house we bought was a foreclosure, But it was the biggest house in the area which the other houses in the area were going for 500 to 600,00. We got it for 370,000 at 5% fixed. We live around Dr's, Lawyers and professional people who we have became friends with. We have found out, that most of them are in so much debt, they will never get out of it. They bought 550,000 dollar houses with barely nothing down bc the banks were giving it to them and now they can't afford furniture. I learned alot talking to these people. They are still paying off 200,000 dollar school loans. My wife and I also have a savings account with about 30,000 and I have a seperate one from work with about 17,000 besides great healthcare and a pension. I am no scholar by all means, but these people are in so much trouble, I feel like the one with the PHD. A friend of ours is a Dr and is in so much debt. I thought she was a millionaire with this huge house and pool, etc, but they are on the verge of losing it. I also have 3 young sons. I will never ever allow myself to get to that point. Our house we bought will be one of the nicest ones in the area when finished, no doubt and knowing if we ever got it trouble, we can make a profit. Save any money you can, just for a piece of mine. Getting laid off from a job, you need atleast a years worth of pay if not more with this economy. It use to be 3 months of saving and who really has that. Peace !@
The bank said we could afford an 800k home...so i went and bought a very nice 1906 Home in beautiful shape on a quiet street in a small rural town for 280k. Got a 15 yr loan at 4.5% fixed.
We also make a double principle payment (a little more than double, actually).
We hope to have it paid off in about 6 1/2 yrs instead of 15
Glad we did it that way instead of the 30 yr on a 700K home that we would never live to see paid off.
The piece of mind to be 51 yo and the house paid off is worth a fortune to me
I have noticed that a lot of people think that they can afford both a house loan and a car loan.
With this assumption, I did something very simple. I drive a cheap car, but put the 'car payment' that I know I can afford towards the principle on my house instead. I'm 7 years into my mortgage, and should have the house paid off in 2 more years.
I think if people stopped buying fancy cars and put the money into their homes instead, they would be much better off. You can choose between a paid off house or a nice car, but for most of us you can't have both right away.
If you have the discipline and are not sensitive to risk, you are right. If both of those aren't true though, take the guarantee and pay off the mortgage. You can never go wrong by paying off debt!
I pay an extra $100 per month on my mortgage. I also make a payment with every other paycheck, so I make 13 payments per year with an extra $100 paid each time. I am now a couple of months ahead on my mortgage payments. My monthly mortgage statement shows that a payment is not due until October 2011. If we get into a bind, I at least know that, if needed, I can go a few months without having to pay the mortgage.
I get paid every two weeks and I rotate how my paychecks are spent. One paycheck goes towards all the monthly bills (whatever is left over goes into savings) the next paycheck goes to the mortgage. This is the 28 day cycle that works for my family. My husbands paycheck covers weekly expenses; daycare, food, gas.
As an American itinerant contract engineer who has work overseas virtually my entire life, I was fortunate enough to save to be able to pay "all cash" for my next house purchase. Over the life of the typical mortgage, banks get way too much in interest to make it worth my while to purchase. And I suspect that as the Government gets more cash strapped, the Home Mortgage Interest deduction is gong to disappear in some form or another.
To save money, I have had to live in some pretty dumpy locations, but it will be worth it at the end. I do not see my future home as a "piggy bank". but as a place to live and call home. That has been my philosophy, and always will be.
Anyhow, this was a good article, but not applicable in my case. Best of luck for the people who do pursue these options....
The loan rules are simple - ALWAYS have a fixed interest rate. ALWAYS have no prepayment penalty. Don't even consider a loan of any kind (home, auto, electronics, etc) without those two clauses.
Then pay the minimum plus whatever you can. $1 on one payment, $100 on another, it doesn't mater the total interest you pay will always be reduced. You don't need any agreement with the bank, just send the money in. Check your statement the next month to make sure that they have applied the extra payment to the principle. If they haven't, call the number on the statement and ask them to fix it. They are very easy to talk to if you treat them with respect.
The point you're missing is that we are now able to live on one income, in part because we don't have a monthly payment. We also have several months of expenses in reserve for that "rainy day".
No trouble here and no payments!
You make some good points. But to follow your advice I'll take out a $50k loan at 5% and put it in savings earning less than 1%.
Here's why we we're on solid ground to pay off the mortgage:
1) If it gets that bad we can always tap into our retirement funds.
2) You're assuming that we'd be without any income for a long time. We both have part time extra income jobs that can become full time if needed.
3) We have another property that we sold and we are the mortgagee so we have another fixed income stream at 7%. I think you'll agree that this is a better return than any savings account.
4) Finally, I HATE being in debt because the borrower is always slave to the lender.
I agree that people should have their financial house in order and not do one thing to the exclusion of everything else. Had we paid off the house without any savings or other financial underpinning your comments would be spot on! Thanks!
No extra per month: $231,676.32 in interest
Bi-weekly payment (~$100 extra each month): $182,564.29 in interest
$100 extra each month: $182,537.97 in interest
$100 discretionary with money merge: $125,744.38 in interest
Whatever the case...it is nice to see that people are actually savings money again. If you are lucky enough to be motivated to get employed, then you should be able to live within your means.
We could all take a lesson from our grandparents!
If you pay extra to your mortgage be sure to write on your check "apply to principle only"! My husband and I payed a large amount that was to go on the principle and the bank applied to our payments. I called the bank and complained and proved that it was to go on the principle and the bank had to move it to the principle. If I hadn't written "apply to principle only" the bank would not have moved it to the principle!!
Always protect yourself!!
I am trying to post a comment about my recent experience with all my options refinancing which covers most of the options above (except the Australian method) and it blocks the post as spam. Of course I talk about dollars and percents. I'm talking about my mortgage. I am NOT trying to advertise a mortgage package! Their spam filter is way to sensitive considering this is a MONEY BLOG!!!
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