Chances are your parents had a house, had a mortgage on that house, and paid that mortgage off in the course of 30 years.
But personal finance experts say that it doesn’t have to be that way. You CAN pay your own mortgage faster AND get free and clear years sooner if you play your cards right, unless you have an overly extravagant home.
The tricks of the trade are numerous, but the upshot is always the same — the concept of the 30-year mortgage is based upon paying exactly what the bank says you should.
Let’s look at five ways to carve that mortgage down at a pace closer to your own terms, all of them designed to get you to homeowner’s autonomy faster (and maybe saving a bit of cash by the time you get to the end).
Round Up/Pay Extra
Say you’ve got a $150,000 loan with approximately 176 monthly payments of $851.68 (accounting for principal and interest). Dr. Bennie Waller, professor of finance and real estate at Longwood University, suggests you might pay $900 every month instead, Not only will you save some $22,000 in interest, you’ll cut the number of payments to about 156, knocking off about two years from the life of the loan. While you’re doing this, many experts suggest you apply some or all of any unexpected income — tax returns, bonuses and inheritance, as examples — as principal-only payments.
Make Bi-Weekly Payments
Danny Kofke, author of A Simple Book of Financial Wisdom, suggests you think about payments this way: sign up to make biweekly payments instead of a monthly payment. These biweekly payments will be half of what your monthly payment is but you’ll actually be making an “extra” payment each year. Let’s say your monthly payment is $1,000. You will pay $12,000 each year toward your mortgage: 12 times $1,000 = $12,000. If you use the biweekly approach, you’ll pay $500 every two weeks. There are 52 weeks in a year so you’ll make 26 half payments: $500 times 26 equals $13,000. And so, you will make one extra $1,000 payment each year. Doing this can trim anywhere from five to seven years off your 30-year loan (depending on the terms).
Refinance to 15 Years
When people think about this option, it often scares them, says Rosie Rodriguez, a real estate consultant and mortgage broker. That’s because they think the payment will be double. However, the payment increase is often only about 20% more than the 30-year option. So, for example, a 30-year mortgage may be $2,000 per month, while a 15-year climbs to only $2,400.
Structured Amortization Schedule
This is where a person adds a small amount and knock off a payment or two or more based on their amortization schedule, says Brian Smith, of Individual Advantages. By doing this they accelerate their payments into an area where more of the payment is applied to principal instead of interest and knock off months and years early. If a person were to pay one extra principal payment every three months on a loan of $200,000 and interest rate of 4.5% for only five years, they would reduce their total interest paid by $19,254 and the number of payments by 19 for less than $6,000 over the five years.
Rent Out Rooms
“Here’s the best tip I have for paying off the mortgage early,” says Brandon Turner, senior editor at BiggerPockets. “Rent out rooms to other people and use the extra income to pay the loan down faster. Renting out a room at $400 per month, and applying that to a $100,000 30-year mortgage at 4%, could shave off 18 years … no mortgage in 12 years and no extra money out of your pocket to get there.”
One thing to be careful of, however. Check your loan paperwork to be certain there are no prepayment penalties for early payment of principal. Some lenders include these to ensure that they receive a minimum amount of interest over the life of the loan.
Also, check for similar parameters when it comes to the maturity of the loan and early pay-off. You don’t want to get stuck with a bill for being proactive about paying off your mortgage.