Ways to Pay Off Your Mortgage Earlier

Recently a client asked me about trying to pay off their mortgage early. With the market declines that we have seen over recent years, paying off a mortgage early can be a good idea for certain families. So I thought I would offer some guidelines on how to accomplish paying off your mortgage early that are safe, fast and more painless than others.

1.) Adding more to your payment
You can use a site like Bankrate.com's mortgage loan payoff calculator to see how $100 or any other amount added to your payment reduces your interest and shortens the length of your loan. The lower your principal gets, the more every payment from then on is applied to principal, as less goes to cover interest expense. If nothing else, round your payments up. When you pay extra, make sure the extra is applied to the principal balance, not just set aside for the next payment or added to your impound account. And before you make extra payments, read your contract and make sure you won't have to pay prepayment penalties.

2.) Refinance into a shorter mortgage
You can refinance into a mortgage for 10, 15 or 20 years, but 15-year mortgages are the most common. Your payments will be higher on a 15-year loan, but perhaps not as high as you think. One advantage of a 15-year loan is that you're committed to the higher payment. With a 30-year, $100,000 loan at 5 percent, your principal and interest payments are $537 each month. At the same rate a 15-year payoff schedule, your principal and interest payments are $791 per month. The pitfall to refinancing into a short mortgage is that you will be adding the closing costs of a refinance onto the principle balance of the home, so you will need to determine if the cost to refinance is an effective way to pay down the mortgage. You really only want to refinance if it drops the interest. Typically a short term mortgage carries a lower interest rate. To get the effect of a shorter-term mortgage without the risk, take out a 30-year loan, but make payments as if you had a 10 or 15-year loan. You just make increased payments. You're in control, not the bank.

3.) Make biweekly payments
Biweekly payments take advantage of the fact that there are 52 weeks in the year. If you pay half your regular mortgage payment every other week, you'll have made 26 half-payments, or the equivalent of 13 full monthly payments, at year's end. The extra annual payment can reduce up to six years off a 30-year mortgage. Check if your bank will set up a biweekly payment plan. Some banks do it free; others charge. Ask the bank to credit extra payments toward principal so you save more on interest expense.