Paying your mortgage off early could save you tens of thousands of dollars in interest, and put you much closer to achieving your financial goals. And it’s not even as difficult to achieve as you might think.
1) Pay Biweekly Instead of Monthly
Most mortgages are set up so that you make a monthly payment. However, that doesn’t mean you have to make a single payment each month. Check with your mortgage company to see if you can pay half as much money every two weeks instead. As long as they don’t charge you any extra fees for the privilege, you could use a biweekly payment schedule to pay your loan off early.
Here’s how it works. There are 12 months in a year, so if you pay monthly, you make 12 payments in a year, correct? But there are 52 weeks in a year, so if you pay half your monthly amount every two weeks instead, you’ll be making 26 payments a year — divided in half, that’s 13 full monthly payments each year. That extra yearly payment could knock years off your loan, and you won’t even have to scrounge around for extra money to make it.
2) Pay Extra Towards Your Principal Whenever You Can
Your mortgage loan has two components: principal and interest. Principal is the amount you actually borrowed, and interest is charged on top of that. The more that you pay towards the principal, the less there is to charge interest on, so you’ll save money in the long run and make a huge impact on your loan term by paying a little extra money toward your principal each month, especially if you do so at the beginning of your loan term when more of your payment goes toward the interest than the principal.
You don’t need to come up with hundreds of extra dollars each month to make this work. You don’t even need a hundred. Sending an extra $25 or $50 to be applied to your principal each month can make a difference, especially at the beginning of your loan term — you can use a mortgage calculator to determine just how much of a difference a small, extra, monthly principal payment can make. Just make sure you specify that additional funds are to be put towards your loan principal.
Refinancing your mortgage can get you a lower interest rate and a shorter loan term. Switching from a 30-year to a 15-year term can mean paying off your house more than a decade early, and payments on a shorter loan term may be more reasonable than you would think. It’s definitely worth looking into.
4) Recast Your Mortgage
If you do happen to have a large lump sum that you want to put towards the principal on your home loan, you should consider recasting your mortgage. When you recast your mortgage, your lender will re-amortize the loan, which will give you a lower monthly payment, reduce your principal, and reduce your total interest paid.
5) Hack Your House
House hacking involves renting out part of your house while you’re living in it, so you can pay some or all of your mortgage costs using a tenant’s rent. Traditionally, house hacking involved buying a multi-family property or a home with an accessory dwelling unit or a mother-in-law apartment, but that’s not the only way to go. You can also rent out an extra bedroom in your home as a short-term rental, or even get a roommate to help split mortgage and utilities costs. If you have some land, you could rent out space as storage for boats, cars, or RVs. You could even put a tiny home or an RV on your property and rent it out as a dwelling unit, HOA rules and local zoning laws permitting.
You don’t need to be wealthy to pay your mortgage off early – and doing so can go a long way towards helping you achieve your financial goals. By putting just a little extra toward your loan principal each month, you can shave years off your loan term, and save yourself thousands in interest. It’s well worth stretching your budget a little.