Pay off Your Mortgage Faster Quicker Sooner

Imagine a young couple leaving the bank right after they signed for their mortgage. The banker fully explained their amortization schedule for their new mortgage. They had already known that their mortgage would start at $300,000, their interest rate was 5% and they would be making payments of $1601.07 for 30 years. What they didn’t fully understand is that the total that they would pay over these 30 years was $576,386 and $276,386 of that was interest. They also found it hard to believe that after their first 5 year term paying a total of $ 96,064 their mortgage balance was $275,285. Of the $96,064 they paid, their balance was reduced by less than $25,000. They were shocked to say the least.

If you have a mortgage and were unaware of the costs you likely felt the same way. Can you change this? Of course. Increasing payments, doubling payments, and making lump sum payments will all benefit you. The only way to pay your mortgage off quicker and save interest is by throwing more money at it, there is no silver bullet! How do you do this?

First, contact your bank and find out what your prepayment privileges are as you will have to work within their guidelines to avoid penalties. Some banks allow prepayments only on the anniversary date, some allow double payments on regular payment dates and some allow lump sum payments or increased payments anytime up to a certain percentage of your original mortgage. There are many other variations, each bank is different. This is something to think about when you are shopping for a mortgage. The more flexible the prepayment privileges the better.

I am going to compare difference scenarios based on the mortgage information above.

The easiest way to implement a plan to pay down your mortgage faster and save you money is to switch from a monthly payment to a bi-weekly payments. You simply divide your monthly payment by 2 and pay every second week. Although it doesn’t feel like it, you are essentially making an extra mortgage payment a year. Results:

Mortgage paid off 4.7 years earlier, $49,880 saved.

Bonus from work or saved up some cash? Make a lump sum payment of $6000 on every anniversary date. Results:

Mortgage paid off 11.75 years earlier, $118,717.60 saved.

In contrast to the $6000 lump sum payment on the anniversary date, you will be better off making an extra monthly payment of $500. Same amount of money out of your pocket. Results:

Mortgage paid off 12 years earlier, $122,649.44 saved.

Double up on a monthly payment twice a year as you can afford it. Results:

Mortgage paid off 8 years earlier, $83,874.61 saved.

Generally everyone’s financial position improves over the years. You receive raises, student loans get paid, etc. Let’s increase our monthly mortgage payment by 5% per year. Results:

Mortgage paid off 12.67 years earlier, $109,452.59 saved.

Let’s look at at 10% increase per year. Results:

Mortgage paid off 16.17 years earlier, $141,146.17 saved.

The best advice I feel I can give is not to put your mortgage on autopilot. Actively track your mortgage payments and balance. You will find it motivational to see what you are saving.

I recommend using a calculator from Vertex42. You can keep track of your mortgage and play with the numbers to see how you can save yourself thousands.

I do want to bring to your attention that when you look at your numbers keep in mind that it is based on your current interest rate. When your term is over you will have to renegotiate and will likely end up with a new rate. If the rate is lower you can keep your payments they same and your amortization period will be shorter or you can keep your amortization period the same and your payments will decrease. If the rate is higher it will be just the opposite. You can increase your payments to keep your amortization period the same or you can keep your payments the same and increase your amortization period. Naturally I would suggest trying to keep your amortization period shorter as you will save money.

Renewing the original example after the first 5 year term at 4% will result in a new mortgage payment of $1,448.06 saving $153.02 a month to keep the original amortization period of 30 years. Renewing at 6% will result in a new mortgage payment of $ $1,761.29 costing an extra $160.22 to keep the original amortization period of 30 years.

I encourage you to start making extra mortgage payments early and often! The result will be a savings of tens of thousands of dollars!