970. Laura reviews when and how to pay down your mortgage ahead of schedule and save money.
970. Laura reviews when and how to pay down your mortgage ahead of schedule and save money.
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Welcome back to episode 970 of Money Girl–I appreciate you downloading the show! I'm Laura Adams, an award-winning author, on-camera spokesperson, female money speaker, and founder of The Money Stack, my Substack newsletter. Free subscribers automatically receive my Money Success Toolkit, which includes the exact templates I use to manage my finances.
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If you’re a homeowner or want to be one someday, it’s important to know how a mortgage differs from other types of debt and how to prioritize it. This post will review who should and shouldn’t pay off their home loan early. Plus, you’ll learn seven hacks to become mortgage-free if it’s wise for your financial situation.
Advantages of paying off a mortgage early
The primary advantage of paying off a mortgage (or any debt) ahead of schedule is paying less interest. For example, if you owe $250,000 on a 30-year, fixed-rate mortgage at 6.5%, your monthly payment is about $1,580. If you keep the home for 30 years, you’ll pay approximately $318,000 in interest alone.
But if you get a $50,000 windfall and use it to pay down your mortgage in the fourth year, you’ll pay off the loan in 20 years instead of 30. Plus, your total interest will be reduced from $318,000 to $177,000, saving you $141,000!
Disadvantages of paying off a mortgage early
While saving interest is terrific, it’s important to remember that a mortgage is a relatively inexpensive debt that comes with tax benefits, making it less expensive. Right now, the going rate for a 30-year, fixed-rate mortgage is just over 6%.
Once you send extra money to a mortgage, it's tied up in your property. If you unexpectedly lose your job or suddenly have a significant expense, you won't be able to get that money back quickly, if at all.
Additionally, you may lose the opportunity to invest your extra money for higher returns than your after-tax mortgage interest rate. For instance, investing in a mutual fund in a Roth IRA that earns 7% on average is better than paying down a mortgage that costs 5% after taxes.
While getting rid of any debt is ultimately good for your finances, paying it off in the correct order is essential. Always consider your mortgage in the context of your entire financial situation.
For instance, if you don’t have emergency savings, aren’t regularly investing for retirement, or have high-interest debt (such as credit cards), it’s never wise to send extra money to your mortgage.
Living mortgage-free may sound good, but the bottom line is that it’s not always the best use of your money. You’re much better off saving for emergencies, getting rid of expensive debt, and shoring up your retirement before paying off your home ahead of schedule.
RELATED: The right time to refinance your mortgage
7 hacks to pay off your mortgage early
When your finances are in great shape, paying down your mortgage can be an excellent money move. Here are seven hacks to reduce your home loan faster.
1. Make bi-weekly payments.
With a bi-weekly mortgage payment schedule, you pay half your mortgage every other week, instead of sending one monthly payment. Since there are 52 weeks in a year, this hack allows you to pay the equivalent of 13 monthly payments instead of 12. It works well if you get paid every other week, so the biweekly loan payments occur close to payday.
Let’s go back to my example of a 30-year mortgage for $250,000 at 6.5% interest, with a monthly payment of $1,580. If you make biweekly payments, you’d pay $790 every other week. Sticking to that biweekly schedule would cut your interest by just over $75,000, and you’d pay off the loan in 24 years instead of 30.
Check with your mortgage lender about the best way to make biweekly payments so they apply them correctly to your principal and interest. If they hold your funds in an escrow account until your payment due date, that won’t reduce your loan balance or cut your interest.
RELATED: How do I get preapproved for a mortgage?
2. Make an extra payment annually.
If you can’t get a mortgage lender to apply biweekly payments to your principal as you send them, another hack is to make one extra payment a year that gets fully applied to your balance.
For instance, if your mortgage payment is $1,580, save $132 a month in dedicated savings. At the end of the year, you’ll have an extra payment to send to your lender.
Make it clear that you want the entire amount applied to your principal balance by entering "apply to principal" in the memo section of your paper check or online payment. Or you can make an extra payment through your online account, where it may be easier to indicate that you want the extra amount fully applied to your principal balance.
3. Pay extra each month.
If you’re determined to pay down your mortgage early, every little bit will help. Instead of saving to make a large additional payment once a year, consider paying extra each month.
Let’s use the same example: a $250,000, 30-year, fixed-rate mortgage at 6.5%. If you add an extra $100 to your monthly payment, you’d pay it off five years earlier and save over $58,000 in interest.
4. Send any windfalls.
While you can pay off your mortgage slowly and steadily by regularly paying the same amount each month, you don't have to be consistent. There's nothing wrong with sending one big windfall when you can.
If you get a bonus at work, a tax refund, or an inheritance, put all of it toward your mortgage and then return to making regular payments. You won't even miss the money.
LISTEN ALSO: Should I use extra cash for savings, investments, or debt?
5. Round up your monthly payments.
If you don't have much extra money to pay off your mortgage early, an easy hack is to round up your monthly payments. For instance, if your payment is $1,580, why not just pay $1,600? Again, be sure to indicate that the extra should go toward paying down your principal balance.
6. Determine your target payoff date.
If you have a specific date when you want to be mortgage-free—such as by your 50th birthday, when your kids are out of the house, or when you retire—figure out how much extra it will take to achieve your goal.
Since the math is complicated, use an online mortgage calculator, such as those at Calculator.net or Dinkytown.net, to crunch the numbers. Enter different amounts of extra payments until the final payoff date is close to your target.
7. Eliminate private mortgage insurance (PMI).
Lenders charge PMI when you take out a conventional home loan and pay less than 20% down. However, once you pay down your mortgage to 80% of its original value, you can request cancellation of PMI. Getting rid of that premium frees up money you can send to your mortgage principal instead.
ALSO READ: Should I invest extra money or pay down my mortgage?
To sum up, paying off a mortgage ahead of schedule should be the last financial priority for most people. You should only use these hacks to pay off your home early if your finances are in excellent shape. That means you:
That's all for now. I'll talk to you soon. Until then, here's to living a richer life!
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