I’ve mentioned before that our mortgage is currently our only debt. And I want that last debt GONE. One way to eliminate it might be to downsize our home, but unless I can get hubby on board (not gonna happen!), we’ll just have to focus on repaying our mortgage as quickly as we can. Below is a list of strategies we’re using to help us reach that goal.
Before I get to that, I should probably mention that just because you have a mortgage doesn’t mean you should pay it off early. With today’s ultra-low interest rates, you should make sure other financial priorities (paying down high-interest debt, funding your retirement, saving for your kids’ educations, etc.) are addressed first. But once they are, paying off your mortgage early is a great way to own your home sooner and reduce the overall interest you pay to your lender.
Now, back to that list…
1) Shop around for the best interest rate
Our mortgage was up for renewal earlier this month, so we started checking interest rates a few months ago to get a sense of what the rates were and to check for promotions. Because of this, we were confident that the rate we ended up getting was the best available. To get a sense of how important a low interest rate is, consider this – on a $300K 25-year mortgage, a drop of just 1% in the interest rate results in savings of almost $40K over the life of the mortgage!
2) Shorten your amortization period
The mortgage we got back in 2012 had a 25-year amortization period. So, 5 years later, we should be renewing with a 20 year amortization period, right? Well, to reach our goal sooner, we decided to shorten our amortization period to 15 years instead. This increased our payments significantly, but we know we can handle those higher payments, and the math sealed the deal for us – doing this decreases the life of our mortgage by 5 years (obviously!) and results in interest savings of almost $15K.
3) Make accelerated bi-weekly payments (as opposed to simple bi-weekly payments – yes, there’s a difference!)
This results in making one extra monthly mortgage payment each year, which decreases the life of our mortgage by 1 ½ years and results in interest savings of over $4K.
4) Make use of prepayment options
Most lenders allow you to ‘prepay’ your mortgage, either by increasing your payments or making lump-sum payments, or both. Starting this year, we’ve resolved to make double payments at least five times every year until our mortgage is paid off, using the same strategies I’ve discussed before (I used a bonus to make 4 extra mortgage payments this year). Those extra payments pack a big punch because they go right against your principal. Making those 5 extra payments per year would decrease the life of our mortgage by 2 ½ years and result in interest savings of $8K.
Obviously, any one of these strategies alone will help you pay off your mortgage sooner and/or reduce the total interest you pay, but do all 4 simultaneously and the numbers are staggering! With that kind of money on the line, it’s definitely worth looking into…