How to Pay Off Your Mortgage Early
Housing (Photo credit: james.thompson)
Many people want to pay off the mortgage on their house early. They want the flexibility to have less money going out the door every month. They want to be debt-free and not have to worry about living paycheck to paycheck. Is this you? Maybe your skeptical and don’t think it is that big of a deal to pay it off faster. Well, let’s start with an example. Let’s say you buy a house and get a 30 year mortgage for $200,000 at 3.8%. If you kept the loan to the end of the term you would have paid $135,489.29 in interest. This means the total amount you paid for the house would be $335,489.29.
If you bought a house and got a 15 year mortgage instead at 3.11%, you would pay only $50,518.36 in interest. Bringing your new total to $250,518.36. This is a difference of $84,970.93! I don’t know about you but I am interested in saving that kind of money.
So how do you do this?
Create a Financial Gameplan
Track your expenses on a monthly basis and determine what your surplus is. That is, after all your bills are paid and investments are funded, how much extra money do you have left over each month.
Increase Your Monthly Payment
Calculate what a 15 year payment would be by going to Bankrate.com. Then if you have enough surplus, begin paying that payment toward your mortgage each month.
Decrease Your Expenses
If you have little-to-no surplus, go through you financial gameplan (budget) line by line. Ask yourself, ‘how can I spend less in this category?’ By doing this you could free up extra cash to pay down your mortgage faster.
Refinance to a 15 Year Fixed
If you currently have a 30 year mortgage at an interest rate above 5%, consider refinancing to a 15 year fixed. The current average national rate is 3.11% on a 15 year. This could save you a few thousand dollars a year in interest just by making this move.
Make One Extra Payment Per Year
If you want to wear the minimum amount of flair, you can make one extra payment per year. In the 30 year scenario above, you would pay your home off 4 years sooner.
Do you have a plan to pay down your mortgage early? What is it?
15 Year VS 30 Year Mortgage
I hope you are sitting down because this is one of the most shocking things that I have ever learned. Believe it or not their is significant difference between a 15 year conventional and a 30 year conventional mortgage. Let’s look at an example. According to HousingTracker.net, the median home price in Arizona is $175,000. For our purposes, we will use this as the actual loan amount. According to bankrate.com the national average for a 30 year is 5.09%. At the end of 30 years you will end up paying $341,671.35 (Click here to see for yourself).
If you were to do a 15 year mortgage instead, you would get it for a lower interest rate, which currently the average is 4.51%. After 15 years you would pay a total of $241,133.91.
Conclusion:
A 30 year conventional mortgage will cost you significantly more than a 15 year and in this example it is a difference of $100,537.44! I don’t know about you, but there is a lot I could do with 100 g’s.
You may ask, why would anyone get a 30 year then? The reason is that the monthly payment is higher for a 15 year, however, if you buy a house you can afford then this won’t even be an issue. In fact, you will come out smelling like roses in the long run.
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