4-ways-to-pay-off-your-mortgage-earlier

Paying extra starting 5 years into the loan You get a $200,000 mortgage at 4.5%. After 5 years of making the minimum payments, you add an extra 1/12th of a month’s principal and interest to each monthly payment. Doing so pays off the mortgage 3 years and 3 months earlier, and saves more than $18,000 interest.
	Monthly P&I, years 1-5	Monthly P&I after year 5	Years and months to pay off loan	Total interest
Minimum monthly payments only	Monthly P&I, years 1-5: $1,013.37	Monthly P&I after year 5: $1,013.37	Years and months to pay off loan: 30 years	Total interest: $164,813.42
Start adding 1/12th to payment after first 5 years	Monthly P&I, years 1-5: $1,013.37	Monthly P&I after year 5: $1,097.82	Years and months to pay off loan: 26 years, 9 months	Total interest: $146,737.89
Savings from adding to monthly payments: $18,075.53

Just pay more

Divide your monthly principal and interest by 12 and add that amount to your monthly payment. End result: 13 payments a year.

Before you make anything beyond the regular payment, phone your mortgage servicer and find out exactly what you need to do so that your extra payments will be correctly applied to your loan, says Joel Doelger, director of community relations and housing counseling for Credit Counseling of Arkansas.

The mortgage payoff calculator lets you see the effect of making an extra payment each month.

Let them know you want to pay “more aggressively,” and ask the best ways to do that, he advises.

Some servicers may require a note with the extra money or directions on the notation line of the check.

In any event, if you’re putting extra money toward your loan, always check the next statement to make sure it’s been properly applied, Doelger says.

RATE SEARCH: Shop today for a mortgage refinance.

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Refinancing to a 15-year fixed You get a 30-year, fixed-rate mortgage for $200,000 at 4.5%. Then, 5 years later, you refinance into a 15-year loan at 4%. Doing so pays off the mortgage 10 years earlier and saves more than $60,000 (if you exclude closing costs on the refi).
	Monthly P&I, years 1-5	Monthly P&I after year 5	Years and months to pay off loan	Total interest
Minimum monthly payments only*	Monthly P&I, years 1-5: $1,013.37	Monthly P&I after year 5: $1,013.37	Years and months to pay off loan: 30 years	Total interest: $164,813.42
Refinance to 15-year fixed after 5 years^	Monthly P&I, years 1-5: $1,013.37	Monthly P&I after year 5: $1,345.45	Years and months to pay off loan: 20 years	Total interest: $103,539.27
Savings from refinancing: $61,274.15

*4.5% interest rate

^4% interest rate

Refinance with a shorter-term mortgage

Want to make sure your mortgage is paid in 15 years? Refinance to a 15-year mortgage.

Fifteen-year mortgages often carry interest rates a quarter of a percentage point to three-quarters of a percentage point lower than their 30-year counterparts, Tyson says.

But this option is not quick or free. You must qualify for a new mortgage — which means paperwork, a credit check, and, likely, a home appraisal. Plus closing costs.

Try the refinance savings calculator now to see if this is a good option for you.

And even with a lower interest rate, that quicker payoff means higher monthly payments. And this method is a lot less flexible. If you decide that you don’t have the extra money one month to put toward the mortgage, you’re locked in anyway.

Unless the new interest rate is lower than the old rate, there’s no point in refinancing, says Doelger.

Without a lower rate, you’ll get all the same benefits (and none of the extra costs) by just increasing your payment a sufficient amount, he says.

RATE SEARCH: Shop today for a 15-year fixed.

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Paying extra from the get-go You get a 30-year mortgage for $200,000 at 4.5%, and you add an extra 1/12th of a month’s principal and interest to each monthly payment, starting the first month. Doing so pays off the mortgage 4 years and 4 months earlier, and saves more than $27,000 interest.
	Monthly payment	Years and months to pay off loan	Total interest
Minimum monthly payments only*	Monthly payment: $1,013.37	Years and months to pay off loan: 30 years	Total interest: $164,813.42
Paying 1/12th extra P&I each month from the beginning	Monthly payment: $1,345.45	Years and months to pay off loan: 25 years, 8 months	Total interest: $137,118.88
Savings: $27,694.54

* 4.5% interest rate

Make an extra mortgage payment every year

Make 13 payments in 12 months. There are a couple of ways to pull off this tactic. You can save up throughout the year and make an extra payment. Or, for those who get paid biweekly, harness part or all of those “extra” or “third” checks.

The equivalent of 13 payments a year will slice years from a new 30-year mortgage, Tyson says.

Bankrate’s mortgage calculator lets you see how much time you can shave off by making an extra payment each year. Click “Show Amortization Schedule.”

RATE SEARCH: Shop today for a mortgage refinance.

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Making a $10,000 lump-sum payment You get a 30-year, fixed-rate mortgage for $200,000 at 4.5%. Then, 5 years later, you make an extra $10,000 lump-sum payment. Doing so pays off the mortgage 2 years and 4 months earlier, and saves more than $19,000 interest.
	Monthly payment	Years and months to pay off loan	Total interest
Minimum monthly payments only*	Monthly payment: $1,013.37	Years and months to pay off loan: 30 years	Total interest: $164,813.42
$10,000 lump-sum payment at 61st month	Monthly payment: $1,013.37	Years and months to pay off loan: 27 years, 8 months	Total interest: $145,751.10
Savings: $19,062.32

*4.5% interest rate

Throwing ‘found’ money at the mortgage

Get a bonus? A tax refund? An unexpected windfall? However it ends up in your hands, you can funnel some or all of your newfound money toward your mortgage.

The upside: You’re paying extra only when you’re flush. And those additional payments toward the principal will cut the total interest on your loan.

The downside: It’s irregular, so it’s hard to predict the mortgage payoff date. If you throw too much at the mortgage, you won’t have money for other needs.

Bankrate’s mortgage calculator lets you see how much time and money you save by making a lump-sum payment. Click “Show Amortization Schedule.”

RATE SEARCH: Shop today for a mortgage refinance.

4-ways-to-pay-off-your-mortgage-earlier