10 Strategies for Paying Off Your Mortgage Early

by on October 11, 2010

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If you are interested in getting completely out of debt, paying off your mortgage may be the largest hurdle. Here is a list of the strategies for paying off your mortgage early. All of these strategies can be evaluated using the free Home Mortgage Calculator spreadsheet. Instead of talking about how much you might save by paying off your mortgage early, I’m going to talk about how many years each method can knock off.

Extra Payments, Extra Payments, Extra Payments

Before I start talking about the strategies, you should know that paying off a loan early means that you have to make extra payments on the principal. We’re going to assume for these examples that you have a fixed-rate mortgage, because if you have a HEL (home equity loan), HELOC (home equity line of credit), or ARM (adjustable-rate mortgage), things can be a little different. However, paying off a loan always comes down to having to pay the principal, no matter what type of debt you have. (We’re going to assume for this article that foreclosure and bankruptcy are not options you want to consider).

The following strategies are not necessarily exclusive. You may be able to mix and match some of them.

1. Downsizing

Selling your home to either rent or purchase a smaller home with the equity that you’ve built up is the fastest way that I know of to get out from under a heavy mortgage. Unfortunately, if you currently owe more than your home is worth, this might not be an option (or at least not as simple or pleasant).

2. Accelerated Bi-Weekly Payments

I’ve had more questions about this over the years than any other option. This is a common term used for Canadian mortgages, but people often confuse “accelerated” plans with normal “bi-weekly” payment plans. Paying bi-weekly vs. monthly does almost nothing to help you. It is the “accelerated” part that does the trick.

In short, the “Accelerated Bi-Weekly” payment is 1/2 of a normal Monthly payment, but you end up making 26 payments per year (instead of 24 if you were paying a true semi-monthly payment). This is a convenient way to make extra payments on the principal automatically every time you get your bi-weekly paycheck. The effect is that by the end of a year, you will have made roughly the equivalent of 1 extra monthly payment towards the principal.

The amount of time you can shave off your mortgage using the accelerated bi-weekly approach does not depend on the size of the loan, but it does depend on the interest rate. Here is a table that shows how many years you can shave off a 30-year mortgage based on the interest rate.

Interest Rate Years Shaved Off
2.90% 3.5
3.78% 4
4.57% 4.5
5.30% 5
6.00% 5.5
6.59% 6
7.74% 7
8.84% 8

3. Treat a 30 like a 15

A smart home buyer will purchase a home only if they can afford the 15-year mortgage payment. Contrary to popular belief, getting a 30-year mortgage and paying as if it is a 15-year mortgage is NOT the same as getting a 15-year mortgage from the get-go. Why? Because a 15-year mortgage will almost always have a lower interest rate!

With that said, let’s assume now that you don’t have the option of going back in time and getting the 15-year mortgage …

You can still make the effort to schedule your extra payments based on whatever end-goal you want to achieve. Perhaps you can’t afford to pay off your home in 15 years, but maybe you could try for 20 years.

The limit to how fast you can pay off your mortgage will depend on how much extra you can afford to pay each month. That is why the Home Mortgage Calculator is set up to let you enter the extra payment amount rather than how many years you want to knock off. However, you can just iterate (change the inputs to check the results) to figure out how you could reach your 15-year or 20-year payoff goal. Hint: If you are using Excel, you might want to try out the built-in Goal Seek tool.

4. Pay As Much as You Can Whenever You Can

Home Mortgage Calculator thumbnail

Home Mortgage Calculator (screenshot)

Making unscheduled extra principal payments is great. In recent years, this method has received a fancy name: “debt snowflaking.” Some people (myself included) like to look at these types of extra mortgage payments as an alternative to investing. If you have a 6% mortgage, and the alternative is to put the money into a 4% CD, the mathematically superior choice is to put the money towards paying off the mortgage.

How much time you can knock of your mortgage depends of course on how much and how frequently you can make extra payments. The Home Mortgage Calculator was designed to let you add these types of unscheduled extra payments and see what effect they’ll have.

5. Don’t Squander Your Tax Deduction!

If you qualify for the home mortgage interest tax deduction, the tax deduction is NOT income. It is tempting to think of it is as income or a nice windfall if you get the money back in the form of a tax refund, but it is NOT a tax CREDIT. It is simply a “discount” on what you have to pay to the government or a little “money back”. Think of it this way … if I made you pay me $100 each month and at the end of the year I gave you back $200, is that a deal you should be excited to jump into? Let’s hope you said no.

So, what I propose is this … figure out how much of your tax return is due to your mortgage interest deduction and then make an extra yearly payment on your mortgage equivalent to that amount. As you pay down your mortgage, the amount will decrease (because you will be paying less interest and therefore your tax deduction will decrease).

Here is how you would estimate the tax return due to a mortgage interest deduction …

  1. Calculate the total interest you will have paid during the year (e.g. $8000)
  2. Multiply that total by your marginal tax rate (e.g. for the 25% bracket, 0.25*$8000=$2000)
  3. The result ($2000) is approximately the tax returned for that year.

When I ran a simulation using the Home Mortgage Calculator, I was pleasantly surprised at what I found out. For a 5% rate and a 25% tax bracket, putting the tax return towards the principal each year should reduce a 30-year mortgage by 6.5 years! On the lower extreme, a 4% interest rate for someone in the 15% tax bracket would knock off about 3.5 years. If you are in a high tax bracket and/or have a high interest rate, you would do well to not squander your tax return.

6. Demolish a Year of Your Mortgage

The Thinking Mans Mortgage

The Thinking Mans Mortgage

Alan Atack, author of The Thinking Man’s Mortgage talks about quite a few different mortgage-payoff strategies (for the New Zealand audience). I worked with him on the creation of a New Zealand version of the home mortgage calculator, which he uses in the book to demonstrate some of the strategies. When I read the final draft I was pleasantly surprised to learn a very interesting new strategy. Mentioning this strategy was actually the motivation for writing this entire article.

Alan has a chapter in his book titled “Demolish a Year off Your Mortgage” where he shows how to plan extra payments that will let you reduce your mortgage by one year. I really like this approach, because it helps you set a series of smaller goals instead of just one very long-term goal. Like most debt reduction strategies, it’s more about willpower than about the math. The more often you can feel that sense of accomplishment, the more likely you are to keep up the motivation to reach your final goal.

“…take some time to celebrate this achievement with a bottle of bubbly and a special dinner, or perhaps a barbeque for friends and family. Do this every time that you manage to write off a year; it is indeed cause for celebration.” – Alan Atack

7. Cut Back On Expenses

This should be obvious, but to make larger extra payments may require you to cut back on your other expenses. Do you really use that gym membership? Are there other “luxury” expenses that you could easily do without for a while?

8. The Last Step In Your Debt Snowball

If paying off your mortgage is just the last hurdle in your quest to become debt-free, you may have already made significant budget cuts to help you pay off credit cards or other loans. Take advantage of the willpower and motivation that it has taken to get to this point and apply your entire snowball towards your mortgage.

If you have a more than one mortgage on your home, pay off the one with the lower balance first, simply for the psychological effect that will have.

9. Refinance (maybe)

If refinancing could lead to a significantly reduced interest rate, it might be worth looking into. With a lower interest rate, your monthly payment would likely go down and therefore you could afford to make a larger extra payment.

The problem is that people usually try to refinance to reduce their monthly payment. If you have already been aggressively paying down a mortgage, you may find that refinancing is not necessarily going to help much.

There are a lot of variables associated with refinancing, so make sure to run plenty of simulations if you decide to go this route.

10. Converting to a HELOC

This method is often promoted by companies that use high-powered sales speak like “pay off your mortgage in lightning speed.” The idea is to direct-deposit your entire paycheck into your special revolving credit account and then pay all your bills from there. A company may try to get you to purchase some expensive software that can help you keep track of your special HELOC account. I suspect this is the reason that I’ve received so many requests for creating a spreadsheet to manage this type of plan (which I refuse to do, by the way).

In theory, the idea is okay: Instead of your checking account balance just sitting around doing nothing, the extra money you are not spending can help reduce the interest owed on your mortgage.

However, I don’t like this approach because the main reason for paying off your mortgage is to REDUCE risk and REDUCE stress. This approach actually INCREASES risk because if you don’t watch your spending very carefully, you could end up getting deeper into debt. It also encourages the use of credit accounts, which may be exactly the habit you are trying to break.

The alternative would be to simply look for a high-yield checking account so that you can be earning interest on your checking balance.

In general, you should be suspicious of anything heavily advertised.

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{ 23 comments… read them below or add one }

D Hill November 6, 2010 at 12:46 pm

I found this to be a very interesting article.

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Mortgage Broker March 30, 2011 at 10:00 am

” Treat a 30 like a 15″ is great information. Many people think that a 30 yr mortgage is great because it enables them to have a smaller monthly payment. They seem to have a plan that if they have extra money that they will put this towards their home whenever they wish. This usually never happens. It seems that those extra funds get used up for that new item that they have been wanting or that vacation they have been wanting to go on.
Great informative article.

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Michael T April 2, 2011 at 1:16 am

I am on Dave Ramsey’s Total Money Makeover plan and am on the step where we are trying to pay off the mortgage! We are debt free except for the mortgage! It’s just so huge and daunting. Listening to Dave’s show people pay off their mortgage in like 3-5 years, how do they do that!

Good article, I got some good ideas on ways to shave a few payments here and there. On my way to financial freedom!

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thehomewizard April 26, 2011 at 11:02 am

gotta watch the tricks!
item# 2. Accelerated Bi-Weekly Payments
factually true.
However, one trick the banks use is is to NOT amortize your loan BUT once / month.
countrywide had a program (before they got eaten up by bank of america) where they would let you pay weekly, biweekly and other options!
trick was they would hold my $ in “escrow” till the end of the month then finally apply the whole payment once. effectively diffusing the benefit of paying down the principle weekly or even biweekly.
end result, instead of making any difference in my loan paydown, they got the interest on 1/4 of my payment for 3 weeks, and the interest of 1/4 of my payment for 2 weeks and the interest of my 1/4 payment for one week before they finally “applied” my last 1/4 payment as the full monthly mortgage payment to my monthly bill. (they didn’t apply the payments to the loan more than once per month).

looked good to begin with, but more than one way to fleece the consumer eh?

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Jon Wittwer April 26, 2011 at 11:22 am

@thehomewizard … It’s true that little details like that can mean you aren’t saving as much in interest as you would have thought. But, keep in mind that the bigger effect is to pay extra on the principle. I’m not trying to defend any banks here … just making a point about the mathematics … If you are using an accelerated bi-weekly plan, the amount that you are saving by making extra payments on the principle has a much larger effect than what you’d be saving by just changing the payment frequency alone. These scenarios can be investigated using the Home Mortgage Calculator. Compare the difference between selecting the “Bi-Weekly” option vs. the “Acc Bi-Weekly” option. Compare the bi-weekly payment amount as well as the interest savings.

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Mike May 1, 2011 at 4:21 pm

What a great article. Good tips. I’m applying #4 a lot! I’m trying to pay my mortgage off in less than 5 years– before the age of 30! I’m throwing everything at the mortgage– because I already have an emergency fund and invest in the stock market. It’s kind of like the Dave Ramsey method, but super-charged. You can follow my progress on my blog, if you’d like. mortgagefreeby30.blogspot.com

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Mike May 21, 2011 at 9:33 am

I found this to be an extremely interesting article because I have been trying to balance my extra income between paying down my house to eliminate debt and investing towards my future with IRA, Roths, etc…

What are your thoughts? Would it be beneficial for someone that wants to pay off a mortgage loan faster to refinance their existing mortgages by keeping their existing 15 year or 30 year mortgages or would it be quicker to refinance your entire mortgage loan into a HELOC and using it to payoff your home? This is a little different from your point # 10 because I agree that the Austrailian mortgage idea of using a HELOC as a checking account is scary. I was just wondering is using a HELOC strictly as a home loan device might be easier given the different interest paydown structures. It seems like you might be able to save a lot of money in interest if one used a HELOC as opposed to a fixed rate loan.

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Jon Wittwer May 21, 2011 at 2:16 pm

@Mike … I think you mean an adjustable rate mortage (ARM) as opposed to a HELOC (home equity line of credit). Refinancing can be a good thing, if it means getting a significantly lower interest rate. But, there are many more issues to consider than just the interest rate, like the refinance costs/fees, whether you can afford the potential rise in interest rates, whether or not you may need to sell the house in the next few years (it takes a few years to make up for paying points and refinance costs), whether you can pay it off completely in the next 5 years, who your lender is and what options they provide, and of course what you mentioned – whether paying down the debt aggressively is even the best option right now.

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michael divine July 7, 2011 at 8:26 pm

Hi everyone.
@thehomewiz and john wittwer – I agree with you both and have found a way to try to win both ways – Ive opened a seperate checking account dedicated to my mortgage payment. Ive calculated the amount i need (paid weekly) and transfer that amount automatically to the second checking account. this account earns interest (not as much as the loan but at least its something) and i still end up making one and one half a months payment at the end of the year. the small interest earned i use for xmas but this year will go into a small principle payment…every bit helps

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John September 29, 2011 at 8:26 pm

Is there a spreadsheet that takes inflation and the time value of money into account? An $1000 payment today is surely less in today’s dollars in 10, 20, 30 years.

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Jon Wittwer September 29, 2011 at 8:29 pm

Check out this inflation calculator and the formulas for Excel that are listed on the page.

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Mary May 10, 2012 at 7:40 am

Been there, been cheated. The bank’s estimate of the payoff seldom will match my own.
Yes, if the bank would actually credit your payment when made, it would be ok. Realistically, most accounting systems just don’t refresh fast enough for you to mine dollars from early deposits. Mine requires automatic deduction from a checking account. If you make an extra payment electronically, they reserve (and they do) the right to not take your next payment from your account!
The best current strategy is to take a sizable check into the bank on the day before the monthly payment is due, and give it to a teller, getting a receipt that says it is applied toward principle. Keep the receipt forever. ASK for a mortgage payoff statement once a year to ensure that your records of principal match the banks.

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hiiamamie March 15, 2013 at 5:43 am

We took the 30 yr mortage again this time as a safety net. I’ve always made extra principles payment, lowered this extra payment to $10/mo when my husband was back in school – but I knew I was still working toward the goal to being debt free. This time we are treating our 30 yr as a 20 yr mortage with a goal to pay it off in 18 yrs or less. But if times get though, we have another child (daycare just about $1000/mo), one of us can’t work for a while etc, we know we can make the 30 yr min payment without sweating it. We where talking a .25% difference in interest – I think it’s worth the price. Can’t predict the future, rates will probably only go up, I’d rather plan for the worse when the rates are low.

In addition, the house is almost new and needs landscaping, shed, and hardscaping still. We know in the first couple years – that is where most of our extra money will be going.

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Jessie Smith March 16, 2013 at 7:16 pm

I have had a arm morgage citi financial loan for 5 years now and it is still $15,000!!! So unhappy about this and don’t understand! Please Help!!

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Jon Wittwer March 18, 2013 at 10:29 am

@Jessie … more information would be needed to answer your unasked question.

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Sam April 1, 2013 at 1:22 pm

I’m kind of in the same boat as Jessie above…. I’m 7 yrs into a 20yr ARM with a 30k baloon pymt. Have paid any extra $ I can to it.
For the first 4 or 5 years I was able to pay what I’d been paying in rent ($800) which was usually 200 & some change more then the minimum payment. I hit a rough patch at work and now round the min pymt up to the nearest 50 – so a $425 min pymt is rounded up to $450. I was told in the begining to keep records of my extra pymts & have kept all my statements/payment history. Just not sure how to calculate this & make sure I’m killing the ballon since apparently my extra pymts aren’t going to help cut that balloon down as much as the banker told me it would… my arm adjusts every 3 months so it sounds like the loan recalculates everythign every 3 months :( I’ll have to see if I can find a spreadsheet to calc each pymt & the balloon…

The one good part is my princicple has gone down by almost 20k.

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Jon Wittwer April 1, 2013 at 1:54 pm

@Sam, I have a spreadsheet that might help you, though it is not quite as easy to use as the ones currently on the website. Contact me via email if you want to try it.

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Amanda April 18, 2013 at 12:27 pm

NEED SOME OPINIONS. I wanted to know if I owe 50k on my heloc, and refinancing my first mortgage to lower rate. I am in the 8 year of 30 mortgage. I cannot combine both into one. Value is not there. Should I go for 30yr refi or 20 year refi??

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Jon Wittwer April 19, 2013 at 6:54 pm

@Amanda, There are too many unknowns in your question to provide an answer. There may be forums somewhere for discussing personal financial questions and scenarios in detail. You could download some templates to run some numbers yourself, but you may need to consult with a professional adviser to get a well-informed opinion.

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Monserrate June 4, 2013 at 7:24 am

I am about to spend money on a mortgage to a property.
Does anyone have any tips for me about simple tips to
plan it correctly from the beginning so I repay it at the earliest opportunity.

THANKS MUCH in advance for your answer..

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Stevo July 24, 2014 at 8:42 am

Just wanted to add something you mentioned about a 15-year mortgage almost always having a lower interest rate than a 30-year. In fact, the opposite is true. A 15-year mortgage will almost always have a higher interest rate because the bank has 15 years less to make money off of the loan. Therefore, they usually make 15-year interest rates at least a percentage point higher. I’ve worked in the banking industry a while and I’ve seen it across the board.

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Jon Wittwer July 24, 2014 at 10:05 am

@Stevo, Rates on 15-year mortgages are often lower because they represent lower risk for the lender. According to average rates on bankrate.com, a 15-year mortgage has a lower rate than a 30-year mortgage. True, that is only on average. Perhaps in some parts of the industry that is not the norm. I would recommend that if a person is rate-shopping and wanting a 15-year mortgage, and a lender is charging a higher rate for a 15-year than a 30-year, look for an alternative lender.
See this article on bankrate.com which says “Interest rates are lower than 30-year loans”: http://www.bankrate.com/finance/mortgages/fixed-rate-mortgages-1.aspx

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Ken August 9, 2014 at 12:30 am

These 10 Strategies for Paying off Your Mortgage Early are really good. As you say the only way to reduce your mortgage is to reduce the principal of the mortgage. Another way that is similar to some of the ways you suggest is that you pretend that the interest rate is a couple of percent above what you are paying currently and you then make your payment the amount you would pay at the higher interest rate.. The reason this is a good is that you are making an extra payment, but also has the benefit that if the interest rate increases then you will know that you can pay the higher amount without financial hardship.

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