If you can afford to pay extra on a loan principal, you'll come out ahead.
While conditions certainly haven't been ideal for buyers over the last couple of years, with competition and elevated home prices (and rising mortgage rates over the course of 2022), some people have managed to buy a home recently. If the stars aligned for you and you're now staring at 30 long years of mortgage payments, you might be wondering how to get out from under it sooner. While you could refinance into a 15-year mortgage, your payments will be a lot more expensive if you go this route, perhaps unaffordably so.
You may also have bought with a down payment under 20%, meaning you're now paying for mortgage insurance. Once you've got more than 20% equity in the home, you can have your lender cancel your PMI, so it's worth it to pay extra to get there faster if you can. With a little math and some extra funds, here's how you can accomplish it.
The 10/15 rule
Sean Pan on TikTok (@seanlovesrealestate) recently outlined his 10/15 rule in one of his videos. If you can manage to pay 10% of your mortgage payment every week (in addition to your usual monthly payment) and apply it to the principal of your loan, you can pay off your 30-year mortgage in just 15 years.
The first several mortgage payments you'll make on a home cover just the interest charged by your lender. Paying extra money (in any amount) toward your principal means that you will end up paying less interest, as you'll pay off that principal sooner. This process can be applied to any type of loan; finance expert Tori Dunlap advocates for it too.
The example Pan uses is a $3,000 mortgage payment, so an extra $300 per week. This is a lot of money, and it's likely more than many people could comfortably afford to pay in addition to their regular mortgage payment and other bills. However, any extra money that you can send to your mortgage lender to be applied to the principal (and make sure your lender isn't just tacking it onto your next payment, as this will not save you money on interest) will help you pay off your mortgage faster.
Could it work for you?
There are a few circ*mstances where the 10/15 rule might work for you. If you live below your means and can comfortably afford your monthly mortgage payments, you could try it out. And if you live in a part of the country that hasn't seen such elevated home prices thanks to the wild market of the last few years, you might be able to afford those extra payments. Ditto if you've recently increased your income thanks to a raise at work or a side hustle.
Unfortunately, many people did have to stretch financially in order to afford to buy a home recently, and may be sitting with very large monthly payments, both as a result of higher home prices and higher mortgage rates. So while they may have the option to pay extra, they may lack the ability. Run the numbers and see if you can swing any extra amount of money to send to your loan principal. You could also earmark future windfalls (like a tax refund or a work bonus) to go to your mortgage.
Don't feel bad if you can't manage to pay off a 30-year mortgage loan in just 15 years. The nice thing about the 30-year mortgage loan is that it gives us the ability to stretch those payments out, and it has made homeownership possible for many people who otherwise wouldn't have been able to buy.
FAQs
Here are some ways you can pay off your mortgage faster:
- Refinance your mortgage. ...
- Make extra mortgage payments. ...
- Make one extra mortgage payment each year. ...
- Round up your mortgage payments. ...
- Try the dollar-a-month plan. ...
- Use unexpected income. ...
- Benefits of paying mortgage off early.
By applying the 10/15 rule, your average payment each month would amount to $2,290 — an extra $690 — but your mortgage would be paid off in just over 13-and-a-half years and you'd save over $200,000 in interest.
What is the 7 day rule in mortgage? ›
Lenders must allow applicants to have a 7 business day waiting period after mailing or delivering the TIL prior to consummation (closing of the loan). This timing is not based on receipt date (or assumed receipt date) by the consumer— the timing begins with the mailing or delivery by the lender.
What happens if I pay an extra $1000 a month on my mortgage? ›
Throwing in an extra $500 or $1,000 every month won't necessarily help you pay off your mortgage more quickly. Unless you specify that the additional money you're paying is meant to be applied to your principal balance, the lender may use it to pay down interest for the next scheduled payment.
What happens if I pay 3 extra mortgage payments a year? ›
Making additional principal payments will shorten the length of your mortgage term and allow you to build equity faster. Because your balance is being paid down faster, you'll have fewer total payments to make, in-turn leading to more savings.
What happens if I pay $500 extra a month on my mortgage? ›
Making extra payments of $500/month could save you $60,798 in interest over the life of the loan. You could own your house 13 years sooner than under your current payment.
What is the 2 2 2 rule for mortgage? ›
One Spouse's Income Doesn't Meet Requirements
Many lenders use the 2/2/2 rule to evaluate loan eligibility, which typically requires: 2 years of W-2s. 2 years of tax returns. 2 months of bank statements.
What is the golden rule of mortgage? ›
The 28% / 36% rule is based on two calculations: a front-end and back-end ratio. As we've discussed, this rule states that no more than 28% of the borrower's gross monthly income should be spent on housing costs – but it also states that no more than 36% should be spent on total debt costs.
What happens if I pay an extra $200 a month on my 30 year mortgage? ›
If you pay $200 extra a month towards principal, you can cut your loan term by more than 8 years and reduce the interest paid by more than $44,000. Another way to pay down your mortgage in less time is to make half-monthly payments every 2 weeks, instead of 1 full monthly payment.
Is $2,000 a month mortgage high? ›
$2,000 Mortgages Are More Common Than You Might Think
After factoring in property taxes, the data reveals that it's still possible to buy a house in a little more than half the country — 28 states — with a monthly budget of $2,000.
Faster Loan Payoff
By making 2 additional principal payments each year, you'll pay off your loan significantly faster: Without extra payments: 30 years. With 2 extra payments per year: About 24 years and 7 months.
Is there a downside to paying off a mortgage early? ›
Paying off your mortgage early is a good way to free up monthly cashflow and pay less in interest. But you'll lose your mortgage interest tax deduction, and you'd probably earn more by investing instead. Before making your decision, consider how you would use the extra money each month.
What happens if I pay half my mortgage every two weeks? ›
Your lender or servicer allows biweekly mortgage payments. Your extra payments are applied to the loan principal. You won't be charged a prepayment penalty or fees for setting up or maintaining the payment plan. Your interest rate won't change (unless you have an adjustable-rate loan).
Does Dave Ramsey recommend paying off a mortgage? ›
Paying off your mortgage early will rev up your wealth building.” However, one of his more controversial pieces of advice revolves around not paying off your mortgage early, even if you can do so. This advice counters the traditional wisdom of becoming debt-free ASAP.
Is there a penalty for paying off a mortgage early? ›
Prepayment penalties can be charged in a variety of ways. They may be calculated as a percentage of the remaining loan amount — typically 1 to 2 percent. The penalty could be equal to a certain number of months' interest. Or some lenders may charge a flat fee.
