Whether you are buying a house or saving for your children’s college education, chances are any additional payments you make on a mortgage or student loan can have a sizable impact. How likely is it that adding extra payments monthly will help? By answering this question, we’ll be able to determine if this tactic is really worth the effort.
How long will it take me to pay off my mortgage? That’s the question many prospective home buyers ask themselves. This calculator can help. Estimate how much you can save on mortgage interest by making bi-weekly payments. It may help you realize that a buy now, pay later mortgage strategy could make sense for your financial situation.
You can pay off your mortgage by making extra payments every month.
The number of extra payments you need to make depends on how much you have left on your mortgage and whether you have a 30-year or 15-year mortgage. If our mortgage calculator says you owe $1,000,000 and your monthly payment is $3,000, your monthly payments will be $5,000 per month.
If the amount you owe on your mortgage is less than $1 million, you will need to make more than one extra payment per month to cover the difference between what you are paying and what it would cost to pay off the mortgage in full. For example, if your monthly payment is $2,000 and our mortgage calculator says it would take 10 years to pay off the loan in full, then every month after that until it’s paid off will require an additional $1,000 payment from you.
Is it worth making extra mortgage payments?
Throughout the life of your mortgage, there may be times when you’re looking to pay extra on your mortgage. Maybe you received a bonus that month or you finished paying off other debt. Making extra mortgage payments may help reduce the term of your loan, in addition to the amount of interest paid over the term of the loan. However, while making extra mortgage payments typically comes with benefits, there are other things you may want to consider before doing so.
Potential benefits of paying extra on a mortgage
Paying extra on a mortgage may help reduce the amount of interest paid over time, in addition to the total amount of time it takes to pay back your mortgage. You may be able to reduce the amount of interest paid and the time it takes to pay back your mortgage by applying extra payments directly to the principal balance. Making payments directly to the principal normally reduces the amount of interest paid because interest is calculated as a percentage of the principal. Typically, the lower the principal, the less interest owed.
Things to consider before paying extra on a mortgage
Before making extra payments on your mortgage, you may want to consider the impact this might have on other areas of your finances. For example:
- Savings: By making extra mortgage payments,you may not be able to save as much as you normally would.
- Monthly payments: Paying extra on a mortgage doesn’t normally lower your monthly payment, so you’ll still need to keep that regular monthly payment in mind.
- Cash flow: With extra payments going toward your mortgage, you may have less cash to spend on other necessities. If you find yourself able to make extra monthly payments, it may be worth exploring refinancing or shorter-term loan options.
When to make extra mortgage payments
If you feel comfortable about your finances and don’t believe there’s a place where the payments would be better suited, then it may be time to consider making extra mortgage payments. Even a small amount extra each month may help you get ahead.
An extra mortgage payment calculator can help you visualize how making extra payments may reduce the amount of interest paid over the lifetime of the loan. A word of caution, though: You may want to check for any prepayment penalties in your mortgage agreement if you’re looking to pay down a significant portion of your principal ahead of schedule.
In summary
Making extra mortgage payments can help reduce interest as well as the term of your loan. Evaluating what works for your financial health while using a mortgage payment calculator can help you decide if making extra mortgage payments may be worth it in the end.
Tips to Pay Down Your Mortgage in 10 Years or Less
1. Purchase a home you can afford
“If you want to finance a home, you’ll need to get prequalified first,” writes Mike Timmerman, who paid off his mortgage in just two years. “The bank will look at your overall financial picture and spit out an amount that you’re likely to get a loan for. Some people use this number to set a housing budget, but not me.”
“The bank is just guessing. I examined my monthly budget and determined what I wanted to spend on housing,” Timmerman adds. “ It ended up being much less than what the bank told me I could afford.”
2. Understand and utilize mortgage points
Whenever people are curious about how much their mortgages cost are going to cost them, lenders will provide them with quotes that include loan rates and points. Stephanie McElheny, the Assistant Director of Financial Planning at Hefren-Tillotson in Pittsburgh, says that “one point is equal to 1 percent of the loan amount (ex. 1 point on a $200,000 mortgage would be $2,000).”
McElheny adds, “there are two kinds of points, discount and origination fees:
- Discount: prepaid interest on the mortgage; the more you pay, the lower the interest rate.
- Origination fee: charged by the lender to cover the costs of making the loan.”
If you plan on staying in your home for the foreseeable future, it may be worth paying for these points since you’ll end-up saving money on the interest rate of your mortgage. You could save that extra cash each month and put it towards your overall mortgage payment.
3. Crunch the numbers
“Call your mortgage holder or look at the latest statement. You’ll need the current outstanding balance. Once you have that number, you’ll need to calculate what the payments will be to pay off the mortgage in five years,” says Neal Frankle on the Wealth Pilgrim.
Frankle continues, “You can either ask the mortgage company to do the math, or you can do it yourself. If you do it yourself, you can use the following formula in Excel:
Let’s say your outstanding balance is $200,000, your interest rate is 5 percent and you want to pay off the balance in 60 payments – five years. In Excel, the formula is PMT (interest rate/number of payments per year, total number of payments, outstanding balance). So, for this example you would type =PMT (.05/12,60,200000). The formula will return $3,774. That’s the monthly payment you need to make if you want to pay off your home mortgage of $200,000 at 5 percent over five years.”
Frankle says that, “The same mortgage paid off over 30 years is only $1,073 a month, so be prepared when you do this calculation. It will be much higher than your current payments. Now you have your number. You might find that the payment is twice or three times your current mortgage. Remain calm.”
4. Pay down your other debts
“A crucial rule of debt repayments is: clear the most expensive debts first,” suggests Martin Lewis, founder of MoneySavingExpert.com. “Do so and the interest doesn’t build up as quickly, saving you cash and giving you more chance of clearing debts earlier.”
As a rule of thumb, “Clear high-interest credit cards and loans before overpaying your mortgage, as they’re usually more expensive.”
5. Pay extra
“Each time you pay extra on your mortgage, more of each payment after that is applied to your principal balance,” says best-selling author and radio host Dave Ramsey.
“Here are some options for paying extra and examples of how extra payments will affect the average $220,000, 30-year mortgage with a 4% interest rate:
- Make an extra house payment each quarter, and you’ll save $65,000 in interest and pay off your loan 11 years early.
- Divide your payment by 12 and add that amount to each monthly payment or pay half of your payment every two weeks, also known as bi-weekly payments. You’ll make one extra payment each year, saving you $24,000 and shaving four years off your mortgage.
- Round up your payments so you’re paying at least a few extra dollars a month.
- Increase your payment when you get a raise or bonus.”
Dave recommends that you “check with your mortgage company before you make additional principal payments. Some companies will only accept extra payments at specific times, or they may charge prepayment penalties. And always make sure the additional money is applied to the principal and not next month’s payment.”
6. Make biweekly payments
“A biweekly mortgage is one on which the borrower makes a payment equal to half the fully amortizing monthly payment every two weeks,” explains Jack Guttenberg, aka: The Mortgage Professor. “Because there are 26 biweekly periods in a year, the biweekly produces the equivalent of one extra monthly payment every year. This results in a significant shortening of the period to payoff. For example, a 4 percent 30-year loan converted to a biweekly pays off in 310 months — or 25 years, 10 months.”
Dr. Guttenberg adds that this “makes sense for borrowers who have the capacity to pay more than required but need the discipline of a well-defined routine.” And, since some banks for this, you can create your own by opening a new bank account where “you deposit half the payment every two weeks, and withdraw the full monthly payment every month for submission to the lender. At the end of a year, there will be enough in the account for a double payment.”
7. Be frugal
Andrea Stewart and Honer were able to pay off their mortgage in just 7 years. They began by planting a garden in their backyard. “It’s actually easier to go into your backyard and pick things than go to the grocery store,” Honer said. “We like the organic element as well as it’s a huge bill cut.” This not only saved on their grocery bills, but also on their gas since they didn’t have to drive the store as much.
The couple also crunched the numbers and found that they could live from only one income. That second income went towards their mortgage. “I think we were always frugal to begin with — we’re both savers,” Stewart said. “One of the things we asked ourselves when we made a purchase was, ‘Is this really going to make us happy?’ … We try to have experiences like traveling and things like that, yeah, but I don’t think [we like] a lot of stuff.”
8. Hit the principal early
“Over the first few years of your mortgage, it may seem that you are only paying interest and the principal isn’t reducing at all,” says Nila Sweeney, managing editor or Property Market Insider. “Unfortunately, you’re probably right, as this is one of the unfortunate effects of compound interest. So you need to try everything you can to get some of the principal repaid early and you’ll notice the difference.”
“Every dollar you put into your mortgage above your repayment amount attacks the capital, which means down the track you’ll be paying interest on a smaller amount. Extra lump sums or regular additional repayments will help you cut many years off the term of your loan.”
9. Use your tax refund
As noted earlier, the way to quickly pay off your mortgage is to make extra payments as long as your mortgage allows you to,” says investor and writer Dan Dzombak. “For many people, that’s easier said than done.”
“One strategy that can make this a reality for you is to use your tax refund to make one large extra mortgage payment a year.” Back in 2015 it was “estimated 75% of taxpayers will get a refund this year, and so far for the 2015 tax season the average tax refund is $3,586, a 10.5% increase over last year’s tax season.”
“Making one extra mortgage payment of $3,600 every year has roughly the same effect as making a $300 extra monthly payment: You can pay off your loan roughly 12 years early.”
10. Pour every bit of extra cash into your mortgage
Dedicate every windfall — a bonus, raise, or holiday or graduation gift — you receive toward paying down debt,” recommends Marilyn Lewis in Money Talks News.
“Obviously, the highest-interest debt takes priority. But if you have an adequate emergency savings fund and your mortgage is your only debt, don’t even ask yourself what you’ll do with extra money when it falls into your hands: Add it to your mortgage payment, designating it as additional principal.”
11. Refinance your mortgage
“Refinancing your mortgage loan can help you in a few different ways,” writes Morgan Quinn for GoBanking Rates:
- You can shorten the loan and brave through higher payments until it’s paid off.
- You can get a lower interest rate.
Quinn adds that, “These refinancing options could allow you to pay off your mortgage early — years early, even — and save you thousands in interest, as refinancing a mortgage gives you the opportunity to draft up a brand new loan.”
“If you don’t have much — or any — equity in your home, you might qualify for the Home Affordable Refinance Program.
To qualify for HARP, you must meet the following requirements:
- You must be up to date on your mortgage.
- Your home must be your primary residence.
- Your loan must be owned by Freddie Mac of Fannie Mae.
- The loan must have been originated on or before May 31, 2009.
- Your current loan-to-value ratio must be greater than 80 percent.”
12. Rent out space
With the sharing economy in full-swing, it’s easier than ever to rent out an extra bedroom, garage, or parking space. If you go on vacation for two weeks, consider listing your home on Airbnb so that you can make a little extra money while you’re away. That extra money could all be added to your mortgage payment.
You could also go all-out and rent your entire room, like personal finance writer Sean Cooper.
He explains in LearnVest that in 2012 he found “a newly renovated, one-story bungalow with a basement apartment, in a great location near Lake Ontario.” He would live in the basement and would rent the main floor in order to pay off his mortgage. He says, that his “real estate agent was nice enough to help show my property to prospective tenants in July 2012, before I even moved in, and soon I had rented out the house.”
Cooper was also frugal and had a second job on the weekends, but he was able to knock-off $100,000 on his mortgage in just two years by renting out his home.
How to Pay Off a 30-Year Mortgage Faster
There are a few ways to pay off a mortgage sooner than the 30-year term.
Options to pay off your mortgage faster include:
- Pay extra each month
- Bi-weekly payments instead of monthly payments
- Making one additional monthly payment each year
- Refinance with a shorter-term mortgage
- Recast your mortgage
- Loan modification
- Pay off other debts
- Downsize
There are advantages to each approach. The choice comes down to careful study and a decision based on your financial position and ability to repay what will be higher monthly payments.
Pay Extra Each Month
Take any leftover funds at the end of the month and make an additional principal payment. Attacking the principal with extra monthly payments lowers the amount of interest you pay over the life of the loan. A common strategy is to divide your monthly payment by 12 and make a separate “principal-only” payment at the end of every month. Be sure to label the additional payment “apply to principal.” Simply rounding up each payment can go a long way in paying off your mortgage. For example, instead of $763, pay $800.
Pay Bi-Weekly
Around 36% of American workers are paid bi-weekly, which aligns with this payment method. Paying bi-weekly means paying half the monthly amount every two weeks. That means 26 half-payments, or 13 full payments, which is one extra payment per year. Check with your bank or lender to ensure that it will accept bi-weekly payments instead of monthly.
Make an Extra Mortgage Payment Every Year
Throw all or a portion of new-found money like a year-end bonus or inheritance at the mortgage. The earlier into the loan you do this, the more of an impact it will have. In a typical 30-year mortgage, about half the total interest you pay will accumulate in the first 10 years of your loan. That is because your interest rate is calculated against the very high principal amount you owe in the early years.
Refinance with a Shorter-Term Mortgage
Refinancing a mortgage refers to getting a new loan to replace your current mortgage. The new loan can help cut monthly costs or pay off the loan quicker with a new loan term. A shorter term on the mortgage means it goes away sooner but at the cost of a much higher monthly payment – and perhaps some out-of-pocket closing costs. Ask yourself: Can you afford the higher monthly payment of a 15-year loan? Or, are you better off contributing extra each month to a 30-year payment?
Recast Your Mortgage
Recasting your mortgage is an excellent way to lower your monthly payment while keeping your interest rate and avoiding the fees that come with refinancing. Recasting usually charges fees around $200-$300. It involves paying a lump sum toward the principal amount. The lender then modifies your amortization schedule to reflect your new balance. This is a good idea to lower your payment without changing your interest rate.
Loan Modification
Loan modification refers to a change lenders make to an existing mortgage. This could mean a lower interest rate or going from an adjustable to a fixed-rate mortgage. These programs are for borrowers falling behind on their payments, often due to unemployment, increased living expenses, disability, or other loss of income.
Pay Off Other Debts
Wise money management means paying down debts with higher interest rates first. You may well be paying 18% interest in credit card debt and 5% in mortgage debt. Payday and title loans usually come with high-interest rates and should be dealt with before focusing on a mortgage loan. Debt consolidation is a smart option if you are carrying several loans. Using a financial adviser or nonprofit counselor to consolidate your loans could save you money. A HELOC is another powerful tool for paying down debts and lets you put your home equity to use.
Downsize Your Home
Buy a house you can afford: Another solution would be to buy a smaller home or move to an area offering more affordable housing.
Here are some questions to consider when shopping for a home.
- What’s my budget?
- How much are closing costs?
- Are there any health hazards?
- Is the roof in good condition? How old is it?
- How old are the appliances?
- Is the home susceptible to flooding or other natural disasters?
Consult a Trusted Real Estate Agent: Talking to a trustworthy real estate agent can provide insights into the world of homebuying. They know how the market works and when and how to capitalize on a buying opportunity. They’re also skilled negotiators that can haggle a home’s price down to its actual value.
Optimize Your Down Payment: Get the most out of your down payment. A larger down payment means less room for interest to grow. The more you can put down, the better.
Do-It-Yourself Method
The easiest option may be to devise your own plan. If it’s affordable, perhaps you add a certain amount each month, then make one extra payment each year. Making frugal living decisions can secure funds for bolstering your payments. Shop at discount stores and boutiques. Consider limiting streaming subscriptions, visiting parks and museums, or anywhere with small or non-existent admission fees. You can add more to the mortgage if your financial position improves via a raise or a new job. In short, the do-it-yourself plan offers flexibility in how you approach the mortgage.
Should You Pay Off Your Mortgage Faster?
This depends on the interest rate for your mortgage. Higher mortgage rates incentivize homeowners to accelerate the payoff process rather than accrue excessive interest. Mortgage rates are climbing, so refinancing may not be a great option for those who’ve already locked in a decent rate.
We’ve broken down some bullets of things to consider when deciding whether to pay off your mortgage early.
In order, the considerations should be:
- Can I eliminate the debt owed on any loan with an interest rate higher than my mortgage? If so, do that first.
- Am I better off funding my retirement? Funding an IRA or 401k is a necessity that cannot be overlooked.
- Do I have an emergency fund? The pandemic proves anything can happen, so having enough money aside in case you lose your job is essential.
- If I have children, am I better off funding a college savings account for them or paying down a low-interest mortgage? The answer is almost always funding college, an investment in your children’s future, and a tax benefit to you.
- What do I lose in a tax writeoff if I eliminate my mortgage? This sounds complicated, but it isn’t hard to figure out. Take your last year’s tax return and see your tax liability without the mortgage writeoff. It may show that keeping the low-interest mortgage is worth the ancillary benefit of a larger tax refund.
- Once I am otherwise debt-free, is my interest rate high enough that applying extra payments to principal or refinancing is worth it? The old rule of thumb was that reducing the interest rate by 2% made a difference. As the loan amount increases, that number may drop to 1%.
- Interest rates are rising, so if you plan to refinance, look into your options now before rates climb any further.
Pros and Cons of Paying Off Your Mortgage Early
Mortgages can be complicated. When deciding whether you should pay off your mortgage early, it helps to assess the pros and cons of doing so. This way, you can visualize the direct impact of this decision on your finances and lifestyle.
Pros of Paying Off Your Mortgage Early
- Free up cash flow: More cash flow can reduce stress and help you meet monthly payment obligations.
- Pay less in Interest: This is a significant factor for most homeowners. Paying less interest on a mortgage lets you store that cash in an emergency fund or pay off other high-interest debt.
- Stop paying PMI: You can eliminate PMI once you’ve reached 20% equity in your home. PMI protects the lender from default, so you should aim to eliminate the extra payment as soon as possible. It offers no other benefit for the homeowner.
Cons of Paying Off Your Mortgage Early
- Lose your mortgage tax deduction: Homeowners can deduct what they pay in mortgage interest from their taxable income. Paying off your mortgage means losing this benefit and could mean a larger tax bill in the future.
- Could earn more by investing: This is especially true if you have a low-interest mortgage. The amount you spend paying it off could have been allocated towards investments, which may yield a greater return in the long run.
- Lose liquidity and hinder cash flow: When you throw all your money into paying off a mortgage, there may not be much leftover in case of an emergency purchase.