Mortgage Payoff Calculator

 

How To Payoff Your Mortgage Sooner Than Expected

Would you like to pay off your home earlier than the 30 years that the lender gave you to pay your mortgage back?

Interestingly, there are a lot of ways to effortlessly pay off your mortgage earlier.  It will depend on you how fast (or faster) you want to do it.  In some instances, you won’t even notice that you’re already doing it.

Here are some ways to pay off your loan early:

Extra Payment Each Year

Here is the principle:  when you pay extra on your mortgage, more portion of your succeeding payments will apply to the principal, so you can retire your debt earlier.

  Here are some options for paying in excess of your regular payment and a sample computation based on a $200,000, 30-year mortgage with a 4.5% interest rate:

  • First, divide your payment by 12 then add that amount to each monthly payment. Or, you can pay half of your payment every two weeks (make bi-weekly payments).  You’ll effectively make one extra payment each year, saving you about $25,000, which will scrape off four years from your mortgage. You can find some mortgages that allow an accelerated, bi-weekly schedule, which is an excellent scheme.  There’s really no magic to it, it’s simple logic.  It maximizes the 13 weeks in every quarter, not 12 and the 52 weeks in a year, not 48.

When you pay one half of your mortgage payment every other week, you will end up having paid one extra full payment each year.  This works even better when your salary comes every other week because your bi-weekly loan payments become due close to each payday.

  • If you make an extra house payment every quarter (or 4 extra payments in a year), you will save $67,000 in interest. You’ll also fully pay your house 11 years earlier.
  • Round up your payments so that you put in a few extra dollars every month. For a mortgage of $200,000 at 4.5% for 30 years, you need to pay about $1,013 a month.  When you pay, round it up to $1,030 a month, or $1,050 – or if you can afford it, $1,100.  Try to do it on a regular basis so you can take a chunk off your total mortgage with less burden.

Consult your mortgage company before you make extra principal payments.  There are companies that do not encourage the practice, so they will only accept extra payments at specific times.  And some may even collect prepayment penalties.  Another important thing is this:  make sure that the company will apply your extra payment to your principal and not to your next month’s payment.

Refinance At a Lower Rate

Another way to pay off a mortgage faster is to refinance but at a much lower interest rate, or for a shorter term, or both.  Pay attention to rates and only think about refinancing if the rates fall at least one percent below your current interest rate.

One good thing to note is that refinancing may be cheaper, but it does come with other expenses.  So, be sure that you’re planning to stay in your home long enough so that you’ll somehow recover the expenses.  You can get several quotes from competitive lenders for comparison; one of them is Quicken Loans.

Even if you refinance for a lower rate, you can pay your old, higher monthly amount because that will add the extra payment to your principal. 

The amount you’ll be able to save could be hundreds or thousands depending on your situation.  One thing is sure though, you could shave off years from your mortgage term.

If you work out a shorter term, such as 15 years on a refinance, your payments will rise close to double, so make sure you have the funds for it.  A shorter term means less interest and a shorter time to retire the mortgage.  However, it also means you’ll have less financial flexibility especially when your economic situation changes.

Another way to do it is to make payments as if you had a 15-year loan.  You will effectively shorten the term without adding risk.  You can use an online calculator to compute for how much you must pay every month to follow the shorter timeframe you are aiming for.

Get Rid Of PMI

When you get a conventional loan with less than 20% down payment, your lender would likely require a PMI or private mortgage insurance. This is insurance that you pay for the benefit of your lender.  You can only request for the cancellation of the insurance when you’ve paid your mortgage down to 80% of the original value of the property.

If you’ve borrowed to cover more than 80% of your home’s value in a conventional mortgage, the lender would resort to private mortgage insurance to protect themselves in case you default on your loan.  The PMI will usually cost you 0.05% to 1% of the loan amount annually.  If you can use that money to pay for the principal (and not for the premium), that would make a big dent off your loan.

When you reach an 80% loan-to-value ratio, you can request your lender to remove the PMI although your lender should already remove it after you’ve reached a 78% loan-to-value ratio. 

If you want to speed up this process, you should increase your equity.  You can do this by making home upgrades, or if your home has appreciated in value for other reasons, you can refinance.  There are some lenders who will allow you to find an appraiser to reappraise your property to reflect its new value and increase your equity.  The best thing about this is, they won’t require you to refinance your home.

If, for example, you have a $180,000 mortgage for 30 years, your PMI charges would be about $100 per month or $1,200 per year.  If you can take out that premium, you could use that money to help pay down your principal.

Pay Extra When You Can

If you suddenly get your hands on some extra money – an incentive bonus, a tax refund, a minor prize in a lottery – use it to pay part of your loan. 

Wherever it legally came from, you can always pour some or all of those funds toward your mortgage.

Take a look at this:  You have a 30-year, fixed-rate mortgage for $200,000 at 4.5% per year.  Five years later, you inherit $10,000 from an uncle who died and use it to make a lump-sum payment on your loan.  By this action, you will shorten your term by two years and four months and save yourself interest to the tune of more than $19,000 – not a bad deal.  Remember to pay extra only when you have enough money to do so.  A good motivator is a thought that those additional payments you can make will cut the total interest you will pay on your loan.

Of course, there are some disadvantages too.  One, since extra payments could be irregular, you disrupt the set schedule of your loan and it’s going to be difficult to predict the end of your term.  And if you keep funneling your money to your loan, you might neglect to provide for your other needs.

Set a Target Payoff Date

If you are looking at a specific date when you want to be mortgage free – your 50th birthday, when your kids are out of the house, or your 25th wedding anniversary – find out how much more you will have to add to your payment.

Computing for it could be challenging, so use a mortgage payoff calculator to do the mental work for you.  Play with the numbers by putting in different extra principal payments until the final payoff date is close to your desired date.

Sell Your Larger Home

This is a radical step and not a very popular one.  But if you’re really bent on getting rid of your mortgage, you can just sell your larger home and use the net profits from the sale to buy a less expensive (but much smaller) home.

The profits from the sale of your home can allow you to pay for your new home in cash.

  And if you still need to get partial financing, you can stand proud that you have successfully reduced your debt.  The new goal now is to retire the new debt as fast as possible.  The smaller loan that you have, the easier and quicker you can do it.

Summary

To some, the very idea of paying off your mortgage early is not popular and may seem impractical.  Those who have successfully hurdled many big financial goals or have erased many debts, making their mortgage a candidate for their financial chopping board, this is a great goal.

If you follow some of these options, you may be able to retire your mortgage a decade (or even more) early.  Some might succeed in slicing off a few months from their debts.  Whatever the case, any of these strategies can help you save money in the end and push you to reach financial freedom sooner.  Should you have the resources, consider combining these approaches to really take a huge slab off your debt.