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3 ways to pay off your mortgage faster

Sometimes it makes financial sense to put extra effort into retiring this large debt. Some methods are better than others.

By Stacy Johnson Jan 30, 2012 11:38AM

This post comes from Brandon Ballenger at partner site Money Talks News.


Money Talks News on MSN MoneyWe've already provided tips for destroying debt in 2012, but we didn't specifically cover the biggest debt many people have: their mortgage.


According to CNN, the average mortgage debt in the U.S. is $173,876. Is there any way to pay off that debt faster on your way to financial freedom? In the video below, Stacy Johnson offers three ways to reach that goal. Check it out, then read on for details about what not to do. (Also see "Don't rush to pay off that morgage.")

Refinance to a shorter loan

Replacing a 30-year mortgage with a 15-year loan can save big bucks. For example, if you have a $200,000 mortgage at 5%, paying it over 30 years will result in a total interest tab of $186,511. But shortening the term to 15 years means total interest of just $84,685, for a savings of more than $100,000. An added benefit: The rates on 15-year mortgages are typically lower than those on 30-year loans.

 

Of course, that shorter mortgage also comes with higher monthly payments. The 15-year loan payment in our example above is nearly $1,600 a month, while the 30-year is less than $1,100.


Whether this strategy is sound for you comes down to what you can pay per month, and how much the switch will cost.


As a rule, housing expenses shouldn't be more than a third of your take-home pay. And  because the fees for refinancing a mortgage can add up to thousands of dollars, recouping those costs can take months or even years. So be sure to explore all closing costs and fees. And it always pays to shop around for the best rates.


Make extra payments
Maybe you've gotten an offer to skip a loan payment (on the mortgage, car, whatever) and wondered why the lender was being so nice. The answer, of course, is that it wasn't. You still owe that money, probably with extra fees and interest on top. The best thing you can do with any loan is the exact opposite: Pay extra.

A program often offered by mortgage lenders would have you make your payments biweekly rather than monthly. Because there are 26 two-week periods in a year, paying every two weeks equals making 13 monthly payments. That alone would shorten a typical 30-year mortgage to 22 years and potentially save tens of thousands of dollars in interest. 


The problem with mortgage company biweekly plans, however, is that they often come with an upfront fee attached. You can avoid it. Provided there's no prepayment penalty, you can always pay extra on your mortgage without a fee.


If you want to mimic the results of a biweekly payment plan, simply add one-twelfth of a payment to your monthly checks. Just make sure the extra money is applied to principal only, rather than prepayment of future payments.


Round up

If money is too tight to accelerate your payment schedule or squeeze out an extra payment every year, that's OK. You can still get ahead by doing something you learned in grade school: rounding to the nearest whole figure. Say your payment is $954 a month. When you're thinking of your monthly obligation, do you think of it as "about a grand'? Commit that mental fudge to paper and you'll thank yourself later.

Not to be repetitive, but make sure that extra money reduces the principal. Your bank might not automatically do it.


What not to do

Another option you may have heard of is a money merge account, or MMA. The basics: You get a home equity line of credit, or HELOC, by borrowing against the value of your house. This line of credit then essentially becomes the bank account you use to pay your bills (including your mortgage) and it's where you deposit your income. Because interest is calculated differently on a HELOC than a standard mortgage -- daily, instead of monthly -- the people who pitch this product make it sound like it will aid in paying off your mortgage in record time.

 

Of course, using this technique often requires expensive software to watch your MMA transactions and tell you how to time payments.


If using your home as collateral to pay for your home sounds convoluted and risky, that's because it is. You could just as easily come out behind as ahead through bad timing or spending more than you bring in. Without discipline and careful planning, you could ultimately lose your home by failing to repay or refinance the loan in time. And it's not clear that this method will save you much money. For more on MMAs, see "Should I buy a mortgage acceleration program?"


More on Money Talks News and MSN Money:

20Comments
Feb 2, 2012 4:08PM
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I got a letter from the mortgage company saying I could save $16,000 using the biweekly program. I knew there had to be a trick. So I read the fine print and they want to add a fee on top of the normal payment for this "service". Not a chance. I can pay extra for free. I always tack on about 10% of the payment to principal. Whenever a company says it can save you a ton of money, watch out because there's something going on.
Jan 30, 2012 1:15PM
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Best way to insure a "priciple only" payment is to pay with a separate check and put "principle only" in the memo space
Jan 30, 2012 12:39PM
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How do you "make sure the extra money goes on the principal"?  Especially if you have a lender that is not local, or that you do not even know??
Feb 2, 2012 5:02PM
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So the "secret" is to pay more money, more often?  Can anyone who can read not figure that out on his or her own?  Does MSN pay people to write this sh!t??

Feb 2, 2012 1:55PM
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How to make sure the extra money goes to the principle? -- There's usually a place on the payment stub/website where you are paying that asks where you want the extra money to go -- principle or escrow.  If not, contact the lender.
Feb 2, 2012 12:51PM
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Paying an extra payment does not help your bottom line. It will give the lender their interest paid ahead of time. Pay as much as you can on the principal. Reduce your unpaid balance.
Feb 2, 2012 6:39PM
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The "trick" to the biweekly payments is that you are making an extra house payment because most mortgages have monthly payments.  Bi-monthly would be the same.  Bi-weekly will squeeze in 2 extra deductions totalling one house payment since there are typically 26 pay periods in a 52 week year.  So, the extra house payment over time will add up towards the principal.
Feb 2, 2012 8:13PM
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Send extra payments to the principal whenever you can. If you focus on doing so you will pay off your debt sooner saving yourself some $$. Just don't go selling your house and buying a more expensive one once you do like most of us do once we finish paying off our cars.
Feb 2, 2012 8:47PM
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Well all you big spenders that put in an extra $10 a month (that's $120 a year) - and put it in a savings account.....let's see, current savings account interest is 0.5% at most banks (that's one half of one per cent), and that means you will earn an extra SIX CENTS PER YEAR.  Go have a beer.......
Feb 2, 2012 1:50PM
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@MCIAHEL

Its no wonder you're poor with how stupid you act.  Property taxes are usually fixed at the beginning of the year so why don't you just take your $10 and put it in a savings account so you can collect a little interest on it and have the money ready if your payment is raised next year.  But you are probably not disciplined enough to not touch that extra $10 a month and will spend it on a 12 pack of Busch.

Feb 2, 2012 8:51PM
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The statement made about being able to pay a 30 year mortgage off in 22 years with one extra payment per year is incorrect - If you make one extra payment per year on a 30 year mortgage you would pay it off in 25.4 years.

 

To pay off a 30 year mortgage in 22 years you would have to make two extra mortgage payments each year.

Feb 2, 2012 5:55PM
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dominic my hart is with you. I do not have a answer. This is why I hate the bankers.
Aug 8, 2012 1:01PM
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To the people who live in a box and "Can't understand why you would pay your mortgage off early, because <insert republican, conspiracy theory,scare tactic remark here>"...Consider that everyone is in a different circumstance, including income, where they live in the country, etc.  For me, if I pay off a portion of my loan sooner, I can save a few hundred a month in PMI payments once I reach the 20% equity threshold, then stop making those extra payments.  That is a HUGE savings over simply the benefit of the prepayment.  Yes, it is contingent on the market as well, but things are generally getting better (at least in my area).

 

And to dominic...next time look at what you are signing.  I have never held a note with any sort of pre-payment penalties.  That's nobody's fault but your own.

Feb 2, 2012 8:49PM
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oh, I'm sorry....that isn't 6 cents per year - that's 60 cents per year.  How foolish of me.  So sure....go ahead and pocket that extra 60 CENTS PER YEAR!
Feb 2, 2012 5:39PM
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Refinance to a shorter loan:
        Who ever wrote this does not have all the information. Banks are not refinancing where my home is no matter how much money you make and no matter how good your credit is. The refuse to touch any home here that is under water. (We owe $219,000 but our home is droping about 13% every 3 months and is currently only valued at $168,000 - 5 years ago it was appraised at $427,000)

Make extra Payments:
      Our mortgage lender will not allow extra payments without a 10% fee on the total amount of payment. If you pay the fee, they will refuse to apply any extra to principle unless you want to pay off the entire loan at once.

Rounding up:
     Will get me a 10% fee on the total payment which is more then the extra paid anyways and they still will not apply it to the principle.

Greed rules everywhere!



Mar 7, 2013 10:20AM
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I add just enough to each months payment to equal one extra payment per year (towards pricipal).

I then make a full extra payment (towards principal only) when I get my tax money.

So in essence I'm making two full payments toward principal only and knocking 8 years of my 30 yr loan.

Eight years off with only one extra payment is incorrect.

Feb 2, 2012 7:52PM
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WHAT IDIOT would PAY HIS MORTGAGE OFF...NOW..ha ha ha ha ...IF OBUMMER gets back in..EVERYTHING will be worth...NOTHING...if you are SMART..you will LIVE in it as LONG as you can..then WALK AWAY..these people are STUPID...pay it OFF..ha ha ha
Feb 2, 2012 6:45PM
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another Suze gaff-hack with horrible advice! where do they find these people?!?! in order to figure out HOW you should pay your mortgage off early, 1st you have to figure out WHY you would pay your mortgage off early!!! for starters, paying off your note early puts more of YOUR money in the BANK's pockets. if you are paying more on the note to "build equity" then you are "earning" on your "investment" just as much as the guy next to you that is making an interest-only payment...the market increase (or decrease) of your home. the money YOU put in doesn't count; it's YOUR money! ok, what if you are paying more to it in case you need it for a "rainy day"...well; most people's "rainy day" is; they lose their job or they get sick or they are coming close to going bankrupt...try getting the $$$ back from the bank in any one of those circumstances! no matter how much you plead and beg the bank to give you back the "extra" $$$ you gave them in good faith, they won't give you a dime of that money back! this leaves you to sell your home in a buyers market when everyone knows why you need the house sold quickly...does the picture of a limping gazelle wandering away from the pack come to mind at all? it should, because you will be selling your family's home for pennies on the dollar! and that's if you sell it at all before the bank (you paid so much more to) comes and takes it from you!! Just for fun, let's take into account that one of the only guaranteed deductions you get from the IRS is mortgage interest. with an average 30 year note at 3.625% right now, and the average american looking to utilize this tactic is in a 25% tax bracket...effectively, you are paying roughly 2.7% after deduction for the money you are borrowing. i know that the market has been pretty poor, but there are still tax-deferred and even potentially tax FREE alternatives, for you to put your $$$ in, that would earn more than 2.7% over 15 years! put all your "extra payment $$" in there and you can pay off your mortgage in full in 15 years AND still have some $$$ in the bank....plus, along the way, should you NEED any of that money, it's yours...take it any time you'd like, you don't have to ask for permission!!!  

Feb 1, 2012 10:07PM
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i always put in a extra 10 bucks to cover tax's when they go up and always do, this time they put it in the principle slot, i called and almost killed the lady on the other end, she told me that i have enough money to pay my tax's and i had ask her, do you know what they will go up already by the end of the year, no sir, but the government said that we can stop you from putting to much in your escrow account as we have to reimburse you at the end of the year, i told her that i would like to have a check at the end of the year because it is a lot better than me trying to scrap up the 300 your going to hit me up for. they just don't want to pay you the few cents in interest is their freak-in problem and the government lets them get away with this crap, always the poor guy that gets"F"
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