No matter how much extra you pay each month, that amount can help shorten the life of your loan. Even making one extra mortgage payment each year on a 30-year mortgage could shorten the life of your loan by four to five years.
Making extra mortgage payments may unlock various financial benefits including interest savings, early loan payoff, building equity faster, and increased financial flexibility.
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.
With a 30-year mortgage, making one extra mortgage payment PER YEAR direct to the principal will pay off your mortgage in 24 years resulting in a 6-year reduction. Making one extra payment per quarter (every 3 months) directly to the principal will pay off your mortgage in 19 years - an 11-year reduction!
By making 2 additional principal payments each year, you'll pay off your loan significantly faster: Without extra payments: 30 years. With 2 extra payments per year: About 24 years and 7 months.
You decide to increase your monthly payment by $1,000. With that additional principal payment every month, you could pay off your home nearly 16 years faster and save almost $156,000 in interest.
The 2% rule states that you should aim for a 2% lower interest rate in order to ensure that the savings generated by your new loan will offset the cost refinancing, provided you've lived in your home for two years and plan to stay for at least two more.
Dave Ramsey, the renowned financial guru, has long been a proponent of financial discipline and savvy money management. This can include paying off your mortgage early, but only under specific financial circumstances.
By making a small additional monthly payment toward principal, you can greatly accelerate the term of the loan and, thereby, realize tremendous savings in interest payments.
Ideally, you want your extra payments to go towards the principal amount. However, many lenders will apply the extra payments to any interest accrued since your last payment and then apply anything left over to the principal amount. Other times, lenders may apply extra funds to next month's payment.
Both the principal and your escrow account are important. It is a good idea to pay money into your escrow account each month, but if you want to pay down your mortgage, you will need to pay extra money on your principal. The more you pay on the principal, the faster your loan will be paid off.
A biweekly mortgage means that the borrower is paying every two weeks, or 26 half payments. The result is effectively 13 full payments over a 12-month period, accelerating the payoff of the loan.
Deciding on a set amount you are going to overpay regularly could help you budget. And if things change you can stop at any time. A lump sum could save you money on interest and clear your mortgage faster, but you won't be able to get your hands on the money once you've paid it over.
Orman's Cautions Against Paying Off Your Mortgage Early
Don't Drain Your Savings: Orman emphasizes that homeowners should not deplete their emergency savings or retirement savings to pay off their mortgage. These funds are crucial for financial stability and should not be sacrificed.
In fact, the average millionaire pays off their house in just 10.2 years. But even though you're dead set on ditching your mortgage ahead of schedule, you probably have one major question on your mind: How do I pay off my mortgage faster?
Refinancing can save you money in multiple ways, as it allows you to convert to either a shorter or longer loan term, depending on what's best for you. So if you're 10 years into a 30-year mortgage term, you could potentially refinance to a 10-year term and shave off 10 years.
Paying a little extra towards your mortgage can go a long way. Making your normal monthly payments will pay down, or amortize, your loan. However, if it fits within your budget, paying extra toward your principal can be a great way to lessen the time it takes to repay your loans and the amount of interest you'll pay.
Timing Requirements – The “3/7/3 Rule”
The initial Truth in Lending Statement must be delivered to the consumer within 3 business days of the receipt of the loan application by the lender. The TILA statement is presumed to be delivered to the consumer 3 business days after it is mailed.
The 28% mortgage rule states that you should spend 28% or less of your monthly gross income on your mortgage payment (including principal, interest, taxes and insurance). To gauge how much you can afford using this rule, multiply your monthly gross income by 28%.
Make 2 Extra Mortgage Payments a Year if…
You'll be in your current home for most or all of the life of the loan. The value of extra payments is realized through a reduction in the life of the loan and interest savings over 20+ years; you won't realize nearly the same benefits if you'll only be in the home 5-10 years.
Paying off your mortgage early frees up that future money for other uses. Your mortgage rate is higher than the rate of risk-free returns: Paying off a debt that charges interest can be like earning a risk-free return equivalent to that interest rate.