How to Pay Off Your Home Early!

With a little know-how, it is possible to save thousands of dollars in interest and pay your home off early. Want to save money and time? Consider these five tried and true strategies!

STRATEGY #1 – Switch to a Biweekly Payment

Instead of making one monthly payment you can make a half-sized payment every two weeks. This usually works within people’s budgets, but the end result is you make one full extra payment per year (because there are 52 weeks in the year so you make 26 half sized payments rather than 12 monthly resulting in 1 full extra payment in the year).
For instance: a $350,000 loan at 3.5% interest for a 30 year loan if paid monthly will result in $215,796 in interest paid. If you instead paid ½ of your monthly payment every two weeks your total interest paid would be $184,614, a savings of $31,181, taking 5 years off the loan.

For help calculating the specific impacts of this strategy on your personal loan, use this calculator!

STRATEGY #2 – Make Extra Principal Payments

If you are able to put an extra $100 a month towards your principal balance (using the same loan scenario as shown in Strategy 1) here is the result:
New total interest $191,448 vs $215,796 = savings of $23,346 and takes 3 years off the loan.

Or maybe you could put an additional $200 a month towards the principal:
New total interest $172,234 vs $215,796 = savings of $43,561 and takes 5 yrs/5m off the loan.
The most important part of this strategy is to make sure to designate the extra payment as a principal payment, otherwise your lender will just apply the extra payment to the next payment. It must be designated towards principal. For a fun and easy to use site for seeing what will happen if you make extra payments, click here!

Also, to see even faster results, combine strategies #1 and #2 together!

STRATEGY #3 – Refinancing

I suggest on the anniversary of the purchase of your home each year that you check on current interest rates. Does it make sense to refinance? There are of course costs associated with refinancing (closing costs, appraisal, etc.) but often it will still result in significant savings depending on the rate you received when you borrowed.

It also might make sense to refinance to a 15 year or 20 year loan. Switching from a 3.5% 30 year loan to a 15 year 3% loan saves $130,729 but does cost $845 more a month (on a $350k house). To compare a 15 year vs 30 year loan, use this calculator.
It is worth taking a few minutes to review rates and maybe talk with your lender.

STRATEGY #4 – Take a look at your PMI

If you did not originally put 20% down it is worth checking to see if your home has appreciated enough to remove private mortgage insurance. Here is a great article explaining the ways to remove PMI – this can happen pretty quickly if you are using some of the strategies from above. Once you remove the PMI take the amount you were paying and instead divert it directly toward the principal (as in Strategy #2).
One additional note – at times lenders have allowed me to submit a CMA (comparative market analysis) in order to remove PMI rather than having an appraisal.

STRATEGY #5 – Put windfalls directly towards principal

If you receive a tax refund put it all towards principal. Using our scenario from above, a tax refund of $1500 per
year paid directly towards principal will result in the following over the life of the loan:

Original interest $215,796, new interest $185,191 = $30,604 savings & 3yrs/9 mos off the loan

When you get a raise or bonus at work, consider continuing to live on your previous salary and put the raise money straight towards principal.

Should you pay off your mortgage early? That depends! Most financial advisors recommend you first pay off high interest credit card debt, then work on having a 6-month emergency fund. Then start to tackle your mortgage debt. With as low as rates are right now you may be able to make more money diverting money towards investments. Regardless, it is worth considering the impact of strategies to pay off a mortgage early!

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