Owning a home is clearly number one on the wish list for many people. However, owning a home outright is a close second. While paying off your mortgage early can come at an opportunity cost, there are several benefits that may sway your opinion.

 

Being mortgage-free decreases your monthly expenses and enables you to finally give your retirement, children’s college fund, and day-to-day savings account the attention they deserve.  Especially for those heading into retirement, eliminating a monthly mortgage payment may also dramatically increase peace of mind.

 

Throughout the first several years of your mortgage, most of your payment will go toward interest. These tips can help you avoid the interest-trap and work toward living the mortgage-free life you deserve:

 

  1. Choose a 15-year fixed rate mortgage. Most homebuyers choose a 30-year fixed rate mortgage because it keeps their monthly payment down compared to a 15-year term each month. While this may be a sensible option, if you’re able to forgo the extra $500 or so in your bank account, choose a 15-year fixed rate. Here is an example:

 

  • If you take out a loan for $500,000 at an interest rate of 6% for 30 years, your monthly mortgage payment will be $2,998 and you’ll pay over $579,000 in interest throughout the course of your mortgage.

 

  • If you take out a loan for $200,000 at an interest rate of 6% for 15 years, your monthly mortgage payment will be $4,219 and you’ll pay just over $259,500 in interest throughout the course of your mortgage.

 

  • Though a 15-year term will force you to pay a higher amount each month, you’ll be free from paying a mortgage in just 180 months and you’ll save $300,000 or more in interest payments.

 

  • 15-year fixed rate mortgages boast lower interest rates because the lender assumes a lesser risk than a 30-year mortgage term.

 

  1. Make regular lump sum payments. It’s possible to make additional lump sum payments toward your principal. Specify that this payment should be applied to “principal only” as most lenders will automatically apply it as an early payment instead.

 

  • Apply your Christmas bonus toward making this extra lump sum payment. If your employer is less generous, simply set aside $25 per week throughout the year and send in an extra check of $1,300 in addition to that month’s mortgage payment.

 

  • Lump sum payments can be made at any time of the year you choose. However, most lenders set restrictions as to how many times per year you can make lump sum payments. If you’ve got an especially large lump sum (say, $30,000 from an inheritance) you can pay a small fee to have your loan recast.  This means that the lender will recalculate the amortization schedule (the table showing future principal and interest payments) and lower your monthly payment.  You’ll also pay less interest overall.  This won’t lower your interest rate though.

 

  1. Send a second check each month. As stated above, most of your mortgage payment goes toward interest; in many cases up to 75% of your payment is applied toward interest. Beat this catch 22 by sending an extra check to be applied only toward your principal.  This would be in additional to your normal monthly payment.

 

  • By doing this, you quickly decrease the amount you owe on principal over the course of just a few years.

 

  • Only send as much as you can afford. It can be anywhere from $50 to $300 or more. Though paying off your mortgage faster is a priority, it makes little sense to unnecessarily dig yourself into a hole.

 

  • Many people opt to send biweekly payments toward the principal.  This option comes with more flexibility. If your income decreases, or if other expenses increase, you can stop making extra payments at any time without penalty.

Other conventional methods of paying off your mortgage faster include refinancing your home or opting for a balloon mortgage. The latter is discouraged for the average homeowner.  You can avoid the hassle of these more complicated processes by simply working strategically with your existing mortgage.  A word of caution: ensure that your loan doesn’t have a prepayment penalty.  Even if it had one, you may already be beyond the prepayment penalty period. Be sure to ask your lender.