The Beauty of Financial Freedom
If you had your mortgage paid off, what freedom would it bring? What would you do differently? Would you travel more often, or save more for retirement or your children’s education? Would you stay at your job or change careers? Financial freedom is a priceless gift for those that can achieve it.
Paying off your mortgage is a huge and seemingly unreachable goal for many families. Who wants to pay thousands of dollars in interest, but most of us have to take out a loan and pay it down over time. In our modern society, many young families have the mindset that it will be 20 or 30 years before they can be debt free, but what if you challenged yourself to be different? What if you actually set a goal combined with specific strategic actions meant to help you pay off your mortgage sooner?
Count the Cost
According to Experion, a global leader in consumer and business credit reporting, in the United States, the national average mortgage debt is $201,811 and ranges from $406k to $126k depending on the state where you live.
Depending on the type of mortgage, term, fixed vs variable, the interest rate can range from on average 3.5% to 4.5%. For illustration purposes, we’ll use 4.0%
If your mortgage is $202k at 4.0% interest rate, the following chart shows how much you’ll end up paying in interest for terms of 30, 25, 20, and 15 years (depending on the term of your loan).
Imagine what you could do with an extra $67 to 145 thousand dollars?!?
Consider the Savings
Ok, so now that we’re in STRONG AGREEMENT that we don’t want to be throwing away money, let’s see how much we could save if we aimed to pay off some of the mortgage above and beyond the monthly payment.
Let’s say you had a 25-year loan on $202k at 4%. Here’s what you would save if you paid additional money every month.
So, regardless of whether you put down an extra $50 a month or a whopping $750 each month, you can see that it saves literally thousands of dollars in interest and cuts years off of your mortgage! C’mon…we can do this! It’s not out of reach!
Check The Terms & Conditions
First of all, if it’s your goal to pay off your mortgage early, you’ll need to check into the terms and conditions of your mortgage. Some companies have parameters around how much / how soon you can pay off your debt. They spell out when you can pay down your mortgage and in some cases, may have a penalty charge. (but don’t be afraid of that, the penalty fee may be less than the interest you would have paid!)
Pay Down Strategies
Here are 5 strategies for paying down your mortgage. We’ll continue to use our original scenario of a loan of $202k, 4% interest rate, and 25-year term.
- Pay Extra on your Mortgage every month…consider our original example of paying an additional $50 – $750 per month and the amount you’d save.
- Bi-weekly payment – Instead of paying your mortgage once a month, you pay half the original monthly cost every two weeks. In our example above, the mortgage would cost $1066.23. The bi-weekly cost would be $533.12. By paying every two weeks, you end up with 26 payments, essentially paying an additional month each year. It saves $16,599 in interest and cuts off and reduces the term by about 2 years.
- Dave Ramsey, best-selling author, and radio-host, recommends making an extra payment every quarter. In our scenario, this strategy would save you $46,029 and shaves off 9 years.
- Make Lump Sum Payments – Use your Tax Return to Pay down your mortgage, or bonus, or pay an extra month at the end of the year. As an example, by paying $5k annually, you save $52,057 and reduce your term by 10 years.
- Refinance to lower your mortgage rate or to shorten your term, but keep paying the higher amount
So, you’re probably thinking, “Melissa, of course, I want to pay off my mortgage asap…and, of course, I want to pay as little as possible to interest, but I’m just not sure we have room in our budget to find extra money that we can put towards our loan.” Below are 11 really practical ideas of ways you can find extra money in your budget. You can also check out this post for additional ideas.
Pay Down Your Mortgage like a Ninja
You got this! You can do it! Yes, it will take work, potentially some planning, and possibly some sacrifice. Even with low-interest rates, the amount paid to interests is high. What is financial freedom worth to you? You could buy a car, go on a nice vacation, finance an investment property, or fulfill countless other life dreams by paying off your mortgage. This is your time to make a seemingly intangible goal tangible. Even an additional $50 a month can result in thousands of dollars of savings! Make a commitment today to one thing you’ll do to pay down your mortgage sooner.
FAQs
Increasing your monthly payments, making bi-weekly payments, and making extra principal payments can help accelerate mortgage payoff. Cutting expenses, increasing income, and using windfalls to make lump sum payments can help pay off the mortgage faster.
What is the trick to paying down a mortgage early? ›
Tips to pay off mortgage early
- 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.
If you currently have a 30-year loan, Ramsey suggested refinancing it for a shorter term. This can get you out of debt faster. However, if your current mortgage has a very low interest rate, you might want to stick with what you have and simply make larger monthly payments to pay off your mortgage early.
Is it financially smart to pay off your house? ›
You might want to pay off your mortgage early if …
You want to save on interest payments: Depending on a home loan's size, interest rate, and term, the interest can cost hundreds of thousands of dollars over the long haul. Paying off your mortgage early frees up that future money for other uses.
How to take 10 years off a 30-year mortgage? ›
When you refinance your home, you can pay off your home faster by replacing your 30-year mortgage with one that's a shorter term. With a mortgage refinance, you can shorten your loan term by selecting a 20, 15, or even a 10-year loan.
What happens if I pay an extra $1000 a month on my mortgage? ›
When you pay extra on your principal balance, you reduce the amount of your loan and save money on interest. Keep in mind that you may pay for other costs in your monthly payment, such as homeowners' insurance, property taxes, and private mortgage insurance (PMI).
What happens if I pay 2 extra mortgage payments a year? ›
Just making two extra mortgage payments a year can save you tens of thousands of dollars and cut years off your loan.
What happens if I pay an extra $200 a month on my 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.
What happens if I pay an extra $500 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. These calculations are tools for learning more about the mortgage process and are for educational/estimation purposes only.
What does Suze Orman say about paying off your mortgage? ›
Orman explained that if you have a 30-year mortgage and you've already made payments for 14 years, you should make it a point to get a refinanced mortgage paid off in 16 years. Otherwise, if you refinance for another 30 years, you'll end up paying for your mortgage with interest for 44 years in total.
Not only is there huge freedom in being completely debt-free and living in a paid-for house, but it's also a great way to build wealth—getting rid of your house payment leaves you with a ton of extra money each month to save for retirement. In fact, the average millionaire pays off their house in just 10.2 years.
How to pay off 250k mortgage in 5 years? ›
With these principles in-mind, here's a look at five strategies that can help you pay down your mortgage in just five years:
- Make a substantial down payment. ...
- Boost your monthly payments. ...
- Pay bi-weekly. ...
- Make lump-sum principal payments. ...
- Get help paying the mortgage.
O'Leary's Take on Paying Down Mortgages
According to him, your best chance for long-term financial success lies in getting out from under your mortgage by age 45. This is because by O'Leary's reckoning, most careers are halfway done by age 45.
Why is not good to pay off your mortgage? ›
You may not want to pay off your mortgage early if you have other debts to manage. Credit cards, personal loans and other types of debt usually carry higher interest rates than your mortgage interest rate. Remember, the higher the interest rates, the faster your accounts accrue debt.
At what age should you pay off your mortgage? ›
If you are under 45, it's difficult to argue that your dollars would be better served paying off your mortgage unless you are on Step 9, pre-pay low-interest debt. You should aim to be completely debt-free by retirement, and after age 45 you can begin thinking more seriously about pre-paying your mortgage.
Is it possible to pay off a mortgage in 5 years? ›
Paying off your mortgage in five years or less is possible for many homeowners if they plan appropriately. It may require cutting back on spending or increasing your income, but often it can be done.
What happens if I pay an extra $100 a month on my 15 year mortgage? ›
If you pay $100 extra each month towards principal, you can cut your loan term by more than 4.5 years and reduce the interest paid by more than $26,500. 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.
What happens if I pay an extra $5000 a year on my mortgage? ›
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 an extra $300 a month on my 30-year mortgage? ›
This amortization schedule shows that paying an additional $300 each month will shorten the life of the mortgage from 30 years to about 21 years and 10 months (262 months vs. 360). It will also reduce the total amount of interest paid over the life of the mortgage by $209,948.
