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Debt is a complicated animal.  When most people want something they cannot afford, they search for ways to finance the purchase.  For consumer goods, often it’s credit cards.  For housing, they turn to mortgages. And just as desirable as using debt to purchase something is wanting to get out from under it.  This post examines 5 simple ways on how to pay off your mortgage faster.

If You Can, Avoid a Mortgage Altogether

Commonly, people see their ideal starter home as a 3-bedroom, 2-bath house in a nice neighborhood with great public schools and safe sidewalks.  But perhaps you want a nice condo or apartment in a hip urban area or a ski lodge in Tahoe.  Regardless of the type of house, you face one of two choices to acquire it: either take out a mortgage to finance it or buy it entirely with cash.

As you can imagine, many more people opt for the former than the latter.  Why? Because not many people have hundreds of thousands of dollars (depending on where you live) earmarked in their bank accounts to make an outright purchase a reality.

So I ask, how will you ever learn how to save money and get the most out of life?  Your best option involves walking into a bank, talking to a nice person behind a desk and presenting yourselves for the financial equivalent of a physical in exchange for a mortgage.

If you’d like to avoid this process, you’ll need that pile of cash I mentioned earlier.  A pile of cash accumulated through saving a high percentage of your income over an extended period of time while eschewing much of life’s activities along the way.  Certainly a possibility, but a mortgage can be an easier, though cumbersome path.

Once you sign those papers to put the house in your name, you’re strapped with debt.  If you’re looking for a quicker way out than your 15- or 30-year payment schedule, consider the 5 simple ways listed below to pay off your mortgage faster.

How to Pay Off Your Mortgage Faster

In many cases, a home is a family’s largest asset.  It can make sense to move quickly toward owning it outright.  But paying off a mortgage early can be a daunting task.

Some lenders can assess prepayment fees or block your attempt to pay off your mortgage ahead of schedule.  Make sure you check your terms before proceeding with any of these methods.

Nationally, the median monthly mortgage payment is $1,030 according to the latest American Housing Survey by the U.S. Census Bureau.  This is up only slightly from 2011 when the median amounted to $1,015.  And according to Experian, the national average outstanding mortgage balance was $201,811 in 2016, up 9.5% from 2007.

Despite the slight growth in median payment amount, you still want to explore options for paying off your mortgage faster and reaching financial freedom.  As a note to the methods discussed in this article, I used a 30-year 5% fixed mortgage with a $186,500 balance.

1. Switch to Bi-Weekly Mortgage Payments

Reduces 30-year mortgage by 4 years and 9 months.

By cutting your monthly mortgage payment in half and opting to pay every two weeks, you can ease your financial burden in two ways.  First, this spreads out the cash flow demand needed to pay your monthly bill and second, this also slips in one extra monthly-equivalent payment per year.

For example, if a person pays $1,000 per month every 12 months, they pay $12,000 per year towards their mortgage.  If a person chooses the bi-weekly method, they pay $500 every two weeks 26 times per year, amounting to $13,000 per year.  This extra $1,000 per year can amount to serious savings down the road.

If families can swing this in their budget, it can reduce their time spent paying for a 30-year mortgage by almost 5 years.  For my mortgage example, the borrower will pay $32,381 less in interest over the shortened life of the loan.

Also of note for this method, make sure to tell your lender to apply the extra payments directly toward your principal balance- not to the following month’s payments.

How to Set Up a Bi-weekly Mortgage Payment

  • Locate the principal and interest portion of your payment on your monthly statement and simply divide the number by two. For example, $1,000 per month turns into $500 every two weeks.
  • Make sure to include the tax and insurance portion of your payment each month.
  • Check how your lender handles bi-weekly mortgage payments. Some lenders process them while others refuse to accept partial payments at all.  Regardless, do not pay a fee to initiate a bi-weekly mortgage payment plan.
  • If your lender doesn’t allow a bi-weekly plan, set aside your bi-weekly payments into a separate account and use that money to make your full mortgage payment on every second deposit.

Table 1 below shows the standard mortgage amortization compared to the bi-weekly mortgage amortization schedule while Table 2 shows summary information about the bi-weekly method.

Table 1 – Standard and Bi-Weekly Mortgage Amortization Schedules

Year #StandardBiweekly
1$183,748$182,687
2$180,856$178,680
3$177,816$174,468
4$174,620$170,041
5$171,261$165,389
6$167,729$160,498
7$164,017$155,358
8$160,116$149,956
9$156,014$144,278
10$151,703$138,311
11$147,171$132,038
12$142,407$125,446
13$137,400$118,517
14$132,136$111,234
15$126,603$103,580
16$120,788$95,535
17$114,674$87,079
18$108,248$78,192
19$101,493$68,851
20$94,392$59,033
21$86,928$48,714
22$79,082$37,869
23$70,835$26,470
24$62,166$14,489
25$53,053$1,897
26$43,474$0
27$33,405$0
28$22,821$0
29$11,695$0
30$0$0

Table 2 – Summary Information about Bi-Weekly Method

Bi-Weekly
Original term30 Years
Annual interest rate5%
Additional principal payment$1,000 per year
Normal payment (P&I)$1,001
Accelerated payment (P&I)$501 (x26)
Total scheduled payments$360,423
Total accelerated payments$328,042
Interest savings$32,381
Mortgage shortened by4 years, 9 months
Total payments saved$57,057

2. Make an Extra Monthly Payment per Year

Reduces 30-year mortgage by 4 years and 8 months.

This produces a similar effect as switching from the monthly to the bi-weekly payment amount shown above.  This has one extra monthly payment made per year and reduces your interest paid by $31,511.

Table 3 shows the standard mortgage amortization schedule compared to the extra yearly payment mortgage amortization schedule while Table 4 shows summary information about the extra annual payment method.

Table 3 – Loan Amortization with Extra Payments

Table 4 – Summary Information about Extra Yearly Payment Method

Extra Annual Payment
Original term30 Years
Annual interest rate5%
Additional principal payment$83 per month ($1,000 per year)
Normal payment (P&I)$1,001
Accelerated payment (P&I)$1,084 (x12)
Total scheduled payments$360,423
Total accelerated payments$328,912
Interest savings$31,511
Mortgage shortened by4 years, 8 months
Total payments saved$56,056

3. Refinance into a Shorter-Term Loan

Reduces your 30-year mortgage by however long remains on your 30-year mortgage and the 15-year mortgage.

Do you have a 30-year mortgage and extra room in your budget?  Refinancing into a 15-year mortgage could allow you to pay off your balance faster.  Doing this will also grant you a lower interest rate compared to a contemporary 30-year mortgage (shorter loan terms are paired with lower interest rates) and have you pay significantly less in interest.

Consider your available refinancing options and compare them to your current mortgage cost. If you find refinancing to save a considerable amount of money and you plan to stay in the house for a longer period of time, you should pull the trigger. Use the mortgage payoff calculator below to identify how much money you could save on interest expenses.

For comparison in our example, taking out a 15-year mortgage compared to a 30-year will result in monthly payments of $1,356 but lifetime interest of $57,629 compared to the 30-year’s $173,922.  That amounts to $116,293 in interest savings.

4. Place any Windfalls into your Mortgage

Can reduce your mortgage depending on how much you pay toward your outstanding principal balance.

During the year, you might find yourself with excess funds you don’t know how best to put to work for you.  Some examples include a tax refund, a bonus from work, and an inheritance.  If you choose to use these funds to make a lump-sum payment toward your mortgage’s balance, you can make serious progress toward paying off your mortgage.

If you receive a raise from work, make sure to place some of it in your IRA, 401(k), or other tax-advantaged account to make full use of those annual limits.  Another use of your raise could be placing the extra income into your mortgage.

Or, you could choose to use my favorite method for paying off your mortgage faster by using the next way detailed below.

5. Fastest Way to Pay Off Your Mortgage – Invest Extra Payments

Reduces 30-year mortgage by 7 years.

Instead of making extra payments on your mortgage, you can put these funds into a low-cost, passive index fund which could have a higher expected return.  This allows the stock market to build your wealth and compound your returns at a higher rate than paying off your mortgage earlier through making additional payments.

Also, you don’t need to decide between whether to pay off debt or invest because this method allows you to do both.

You should hold your index fund investments until they have reached a level above your remaining principal, plus capital gains you would recognize on the sale.  At this point, you can sell your investments to pay off your mortgage sooner.

The historical annual average return on the S&P 500 has been roughly 10% since the 1920s.  Realizing not every year has this return, but has on average, we can model what this scenario looks like.  Also note this example excludes the effects of dividends and their tax implications.

Table 5 shows the investment appreciation of your monthly contributions compounding at 10% annually over 23 years.

Table 5 – Investment Appreciation of a Low-Cost Index Fund

Investing the Difference in an Index Fund
Original term30 Years
Annual interest rate10%
Normal Payment$1,001
Monthly Contribution to S&P 500$83
Balance after 23 years, compounded annually$83,454
Capital Gain (20% LTCG), Gains = $60,546$12,109
After-Tax Proceeds Applied To Mortgage$71,345
Total accelerated payments$360,423
Total payments made$276,276
Interest Savings$13,264
Mortgage shortened by7 years
Total Payments Saved$84,098

Instead of making an additional $1,000 per year payment toward your mortgage, you could seek a higher expected return alternative.  By making extra payments to your mortgage, you receive a guaranteed 5% rate of return.

However, you could increase your expected return by placing the money in an S&P 500 index fund.

In the example used for this post, placing $1,000 per year in the index fund spread evenly over the year (or $83.33 per month) and allowing it to grow for 23 years gives you a balance of $83,454 and a remaining mortgage balance of $70,835.

Selling those funds, paying capital gains ($60,546 in gains * 20% long-term capital gains rate = $12,109) and paying off the mortgage reduces your mortgage by 7 years.

ItemAmount
Investment Balance$83,454
LT Capital Gains<$12,109>
Net Proceeds$71,345
Net Proceeds$71,345
Mortgage Balance<$70,835>
Net Proceeds After Pay Off$510

This method yields $13,264 in interest savings but reduces the total payments you would make over the life of the mortgage by $84,098.

This is the most advantageous scenario in terms of reaching financial independence the quickest.  It also provides liquidity for those funds in case some other financial event arises and gives the borrower more flexibility to respond.

Regardless of the method used, choosing any of these options would boost your practical money management skills and set you up for tackling more personal finance challenges in the future.  Your next steps might include purchasing rental real estate and mastering tax depreciation, tax deductions and screening suitable tenants.

Related: How to Make a Lot of Money and Fail Financially

Pay Off a Mortgage Early Calculator

Use the above calculator to examine some scenarios for how you can pay off your mortgage early.  If you’re dedicated to paying extra on your mortgage, I suggest looking for areas in your personal budget where you can make cuts.  By reallocating this money toward paying off your mortgage faster, you will be able to reach financial freedom sooner.

This mortgage calculator with extra payments functionality can be a great tool for assessing how long you have until financial freedom.  You can use it for other debt types as well, not just learning how to pay off your mortgage early.

Can You Afford to Pay Off Your Mortgage Faster?

Knowing whether to pay off your house or invest is an important decision you will need to make and one many struggle with.  Before making your decision, I caution you to consider whether it is the best idea for your situation.

Life happens.  Emergencies can present which drain your funds and cause you cash flow shortages.  Know your financial circumstances and proceed prudently.

With the exception of refinancing into a shorter-term mortgage, these simple ways allow you to avoid biting off more than you can chew.  They offer financial flexibility with your funds and do not commit you to an overly onerous path to financial freedom.

Why We Aren’t Paying Off Our Mortgages Faster

My wife and I have two mortgages we’re currently carrying, one for my rental condo and another on the multi-unit house we currently call home.  On the other side we have long-term tenants and an AirBnB on the backside of our part.

We are likely to sell the condo in the coming year to raise money for the down payment on a house we plan to buy together to start our family.

The rates on both loans are attractive (4.50% on the condo and 3.675% on the double) and not cumbersome given the cash flow earned from our tenants.  The low rates and the steady rise in interest rates since the election have made refinancing less appealing to us.

Because we are likely to sell the condo, it doesn’t make sense to begin paying off the mortgage early.  Nor does it make sense to refinance if we plan to sell the condo in the coming year.

When we move out of our double, we will likely continue normal payments on the mortgage because the rate can’t go any lower.  We’ll also rent out our side in addition to the other in order to produce positive cash flow.

However, if the double becomes a burden financially and a headache to manage, we may elect to sell it down the road as well.  But as of right now, both properties are low-maintenance and producing income while appreciating in value.  Therefore, we won’t be paying off our mortgages faster than necessary.

Further Reading:
How to Sleep Tight: 9 Bloggers Discuss Their Sleep Hygiene
9 Self-Employment Tax Deductions to Optimize Your Tax Return


About the Author and Blog

In 2018, I was winding down a stint in investor relations and found myself newly equipped with a CPA, added insight on how investors behave in markets, and a load of free time.  My job routinely required extended work hours, complex assignments, and tight deadlines.  Seeking to maintain my momentum, I wanted to chase something ambitious.

I chose to start this financial independence blog as my next step, recognizing both the challenge and opportunity.  I launched the site with encouragement from my wife as a means to lay out our financial independence journey to reach a financial independence and connect with and help others who share the same goal.

Disclaimer

I have not been compensated by any of the companies listed in this post at the time of this writing.  Any recommendations made by me are my own.  Should you choose to act on them, please see my the disclaimer on my About Young and the Invested page.

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Join the discussion 16 Comments

  • I wonder if part of the reason why I haven’t spent a ton of time considering paying off our mortgage early (other than throwing a bit extra at it every month) is because we live in a HCOL area and have a mortgage to match. If the balance started under $200k I think it would be way more tempting.

    • The higher balance makes the idea more daunting. It seems like a much bigger task and less manageable I’d have to imagine. But even throwing a little bit extra each month can shave some time and interest off the mortgage. Plus, throwing any windfalls you might have in the future can help as well. Thanks for reading.

  • Susie Q says:

    This post is terrific. Another approach that I used when I had a mortgage was to double the principal part of each monthly payment. The approach is nice in that it eases you into increasing payments because the principal part of your payment is quite small and increases by a small amount every month. As your income hopefully grows over time, so does the additional principal payment. I had a quick question. Why are the total payments saved more than the interest savings? I must be misunderstanding something something about “total payments saved.”

    • I included that because this represents swapping investment proceeds for mortgage payments (inclusive of principal and interest). Because, in effect, using the option to invest the extra payments you would have made toward the mortgage reduces the overall payment time and amount you had to pay. I needed a way to capture that dynamic and felt this view provided that effect.

  • GenX FIRE says:

    We are doing a combination of all of these options. First we refinanced our 30 year 2 years in after we paid down below the jumbo loan limit. This is after putting 22% down in cash. We got a 3.25% loan at that point. After that we made 5% to 10% extra principal payments as we could. We also invested extra savings and each year put a cash chunk in value of a few monthly payments as a principle payment. This past week we paid off 1/3 of the principal with some cashed out investments and some saved cash. We may pay down half that again this year depending on how things go. In all cases we cashed in investments that were held more than 1 year to minimize capital gains. We currently plan on making 15% of our mortgage payments in extra principle payments each month making our loan last 9.5 more years.

    This approach was a risk reduction strategy as we were balancing our risk tolerance in the market and our guessing when this bull run would end. In short each year we took some profits from the previous year (13 months or older) and put them in the mortgage. If all goes well, before my son goes to high school, we will have no mortgage.

    I should add that we are fully funding his 529 to a planned value of $200k by his freshman year, and maxing out our 401k contributions. After that, we save more, and some of that goes to these extra mortgage payments.

    • Young and the Invested says:

      That’s a well-balanced approach to eliminating your mortgage while also saving for retirement and your son’s education. It sounds like you’re in good shape.

      We’re looking at the current bull market and wondering how much left it has to run as well. We have a portion of our house down payment funds in the stock market right now but have plans to transition to short-term treasuries (<3 mo duration) to change our focus to capital preservation instead of appreciation. We intend to buy a house in the next 18-24 months and want our down payment money to be there for when we need it.

      We've already trimmed 25% of our stock holdings in that down payment account and plan to move the rest in the next month or so.

  • GenX FIRE says:

    Well its good to hear that another person agrees with our plan . I call that a sanity check, and it’s appreciated.

    I will say that I see your moves as sound as well. We pretty much did the same thing, although we were in the bottom to the early part of this bull run when we bought our home in 2012.

  • Doug says:

    Great article, I enjoy the blog overall as well. My wife and I have always paid more every month. We bought during the financial crisis of 2008. We got a huge discount and have paid around $500 extra every month. We’re currently building a new home and will have paid off our existing home in 10 years. We’ve debated renting but will sell the current home out right. I’m not one to have debt so I imagine we’ll continue to pay off as quickly as we can once we move to the new place.

    • Young and the Invested says:

      Thanks for the kind words.

      And it sounds like you got a good deal given when the market was crashing you bought. If you value financial freedom over investing elsewhere, then paying off your mortgage early makes the most sense.

      My condo has been a great investment and I’d continue to hold onto it if we didn’t need the equity in it to buy a house. It proved to be a great first home and has been a wonderful investment. My only regret is not having bought another.

  • Mr. M says:

    Your not trying to pay down debt unless it hurts. You have to give up what you want in the short term to have freedom in the long term.

    • Young and the Invested says:

      Financial Samurai had a similar thought which I whole-heartedly agree with: when your young, if it isn’t hurting you to save, you’re not saving enough.

  • PAI says:

    Excellent post with lots of good options. I am always hesitant to invest extra payments with the assumption the stock market will rise faster than loan interest. I know lots of people like this route. If you had tried to pay off a home loan in 2000s rather than invest, it would have turned out to be the best decision. Over the past decade, however, it would not have been the best decision. These questions are about loan payoff vs investment are tough because you never know the future. What will stocks do? What will happen to home prices? You provide a nice array of options to consider. I wish I would have stumbled on your blog sooner!

    • Young and the Invested says:

      The classic dilemma of expected return versus guaranteed return. I operate off the long-term average return for the market in the example provided, but clearly that isn’t necessarily representative of reality. Your scenarios prove strategy number 5 is flawed for that very purpose and inherently depends on favorable market conditions like we’ve had since 2009.

      This would not have worked the decade before. However, if you would have invested over the entire time horizon, you still would have come out ahead, IF you could have gotten a low interest rate in the early 2000’s comparable to what we’ve had available the last decade. For the stock returns to be favorable in comparison, you need to have a lower hurdle rate, in this case, the mortgage rate available on a 30-year conventional loan.

  • Hey
    It’s a nice post.
    Thank you for sharing.
    Chip away at your mortgage stability with a little extra each month….

  • Megan Adler says:

    It’s interesting that you mentioned you can switch payment to bi-weekly instead of monthly payments. My husband and I are thinking of taking out a loan for a house we are interested on. I’ll share the article with him and this will help us take a more informed decision when taking out a mortgage loan.

  • Gelt Financial says:

    Well written and to the point. I appreciate the detail in this article!

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