While bi-weekly payments on a 30-year mortgage can shave off 6-8 years, for a 15-year mortgage, the time saved is less dramatic but still significant, effectively adding an extra payment per year (26 half-payments = 13 full) that reduces principal faster, shortening the 15-year term by potentially 2-4 years and saving substantial interest, though specific results depend on your interest rate and loan amount.
Standard loan terms are 15 or 30 years. Making bi-weekly payments rather than monthly payments allows you to pay one extra monthly payment ($954) toward the principal each year. Bi-weekly payments will save you 19,834 in interest, and will reduce the term of your loan from 30 years to 26.1 years.
The Short Answer. Making just one extra payment per year on your mortgage can significantly reduce your loan term and save you thousands in interest over time. Making 2 extra mortgage payments a year can lead to substantial savings on interest and help you pay off your mortgage years earlier.
Pay less interest.
For a 15-year mortgage, it would be lower, say 5.25%. You'll pay $367,112 in interest over 30 years. The same loan at a 15-year term will cost you only $122,919 in interest—a savings of $244,193.
Dave Ramsey strongly advocates for 15-year, fixed-rate mortgages as the quickest path to wealth, emphasizing lower total interest, faster equity building, and less debt, asserting that if you can't afford the higher payments, you can't afford the house; he recommends buying with cash if possible, but a 15-year loan is the preferred borrowing option, keeping your payment under 25% of your take-home pay.
When you make an extra payment or a payment that's larger than the required payment, you can designate that the extra funds be applied to principal. Because interest is calculated against the principal balance, paying down the principal in less time on your mortgage reduces the interest you'll pay.
The 3-7-3 Rule in mortgages isn't a loan type but a federal timeline from the TILA-RESPA Integrated Disclosure (TRID) rule, ensuring borrower protection by mandating disclosures within 3 business days of application, a 7-business-day wait between the initial Loan Estimate and closing, and another 3-day wait if significant changes (like APR) occur, giving borrowers time to review costs before committing to a loan.
Paying an extra $500 a month on your 15-year mortgage drastically shortens your loan term, saves you tens of thousands in interest, builds equity faster, and helps you become mortgage-free years sooner, effectively turning your 15-year loan into a much shorter one, potentially paying it off in less than 10 years depending on your loan details.
The biggest drawback to a 15-year mortgage is the higher monthly payments that come with it. Although these mortgages come with lower interest rates, they also come with heftier monthly expenses that you'll have to budget for because you're basically paying your house off in half the time of a 30-year loan.
To pay off a 25-year mortgage in 10 years, you need to make significant extra principal payments through strategies like increasing monthly payments, making bi-weekly payments (effectively one extra payment a year), applying windfalls (bonuses, refunds) as lump sums, or refinancing to a shorter term, focusing on early payments to maximize interest savings.
The main downsides of prepaying are tying up cash that could earn more elsewhere (like investments), potential prepayment penalties from lenders, reduced liquidity for emergencies, and missing out on the time value of money, especially if your loan interest rate is low; it also means losing potential tax deductions and can complicate financial aid.
Make extra house payments.
Let's crunch the numbers. We'll say you have a $240,000, 30-year mortgage with a 7% interest rate and a monthly payment of $1,597 for your principal and interest. If you made an extra payment just once every quarter, you'd pay off your house nearly 15 years early!
Despite the benefits, biweekly payments may have some drawbacks. Some mortgage lenders charge prepayment penalties or fees, which can diminish the financial benefit of paying extra toward your principal. Other lenders simply may not offer a biweekly payment option, which would require you to manually make payments.
Making an extra payment on your mortgage can help you pay off your mortgage early. It also helps reduce the principal balance quicker which means there is less principal to gain interest. In the long run, your extra payments could help you save money as well as reducing the length of your loan term.
Cutting expenses, increasing income, and using windfalls to make lump sum payments can help pay off the mortgage faster. Refinancing to a shorter loan term or a lower interest rate can also help expedite mortgage payoff.
Overpaying your mortgage can have big benefits, including clearing your repayments sooner and paying less interest.
Three points on a mortgage cost 3% of your total loan amount, acting as prepaid interest to lower your interest rate; so on a $200,000 loan, 3 points would cost $6,000, potentially reducing your rate by about 0.75% and saving you money over the life of the loan if you stay in the home long enough to break even.
Not Putting Extra Payments Toward the Loan Principal
Otherwise, you may not see much progress in your early mortgage payoff efforts because your extra payments will be absorbed by interest.
You want to save on interest: By making extra principal payments, you'll shorten the time it takes to repay the loan, saving money on interest. You plan to sell your home soon: Paying off your mortgage early builds equity in your home more quickly. That means you'll pocket more of the proceeds when you sell.
Once you get approved for a HELOC, you could pay off your mortgage and then make payments to your HELOC rather than your mortgage. Note that HELOC rates are variable, which means the rate can fluctuate up or down and is tied to a known index, usually the prime rate.