How to save money and pay off your mortgage faster.

You can save a lot of interest and pay off your mortgage faster. Below are techniques to pay down your 30 year mortgage in 24, 18 or 15 years. I posted a related entry that includes a spreadsheet you can download for free to help you pay off your mortgage faster. I suggest you read this post first to give you some more details.

How To Pay Off Your 30 Year Mortgage In 24 Years

How would you like to pay off your 30 year mortgage in only 24 years and save tens of thousands of dollars in interest? You can do it and you'll only be making the equivalent of one extra payment per year. There is a requirement that your lender allows you to make biweekly payments instead of your normall monthly mortgage payment. With a biweekly payment, you pay half of your normal monthly mortgage payment every two weeks instead of once a month. You'll wind up making 13 payments a year instead of 12.

You need to check with your lender to see if you can do this. More importantly, you need to find out if under the terms of your mortgage your biweekly payments will be immediately credited towards your principle. Sometimes lenders will offer bimonthly payments where you pay 1/2 your mortgage payment twice a month. Usually on the 1st and 15th of every month. Your savings here are very minimal. Some lenders may put your payments into an escrow account and credit the payments at the end of each month. You don't really save anything here either.

If you set up biweekly payments with your lender and each biweekly payment is credited as it is received the savings are pretty big. Let's say you have a $250,000 mortgage at a 6.5% APR for 30 years. Your monthly payment will be $1,580.17 and over the course of the 30 years you'll wind up paying $318,861.22 in interest. Now if you could make biweekly payments that get credited on receipt you would be paying $790.09 every two weeks and you'd pay off your mortgage in about 24 years. The total you would have paid in interest would be $243,038.10. That's a savings of $75,823.12.

If your lender doesn't allow biweekly payments but you can make extra payments without penalty, you can pay an extra 1/12 of your monthly payment every month and you'll save almost the same as a biweekly payment plan. In our example you would pay an extra $131.68 every month.

There are some online biweekly mortgage calculators online that you can Google for to try out different values. But before you do read on.

How To Pay Off Your 30 Year Mortgage In 15 Years

So you want to save even more money and pay off your mortgage even faster? This is going to involve putting more money towards your mortgage every month but in a way that grows over time. You just bought your house and put down a big downpayment, you had moving and probably at least some minor remodelling expenses. You don't want to put a lot of extra money towards your mortgage right away. And you don't have to but you have to put some.

One night when I couldn't sleep, I was at my computer with the TV in the background. Some infomercial came on where the guy mentioned you can pay off your mortgage in 15 years and it got me thinking. Now I don't know if this is what he meant but the first thing that popped into my head when I thought about it is "That's simple, just make 2 payments per month!" Maybe you're thinking "I can't afford to pay double my mortgage every month!?!?!?!" Well you don't have to.

Your mortgage payment is split up into two parts. The interest payment and the principle payment. Every month you pay interest that is due on your principle balance and a portion that goes towards paying down your principle. All you need to do is add what the next's months mortgage would be to this month's payment. This will get you down to 15 years. and save you about half the interest you normally would pay. With this method though, the extra payments ramp up quite a bit towards the end. An alternative would be to take the figure for what the current month's principle payment is and add that much extra. This will bring your 30 year mortgage down to 18 years and the calculations are easier and the payments won't grow that much.

Let's take our $250,000 30 Year Mortgage at 6.5% and the 30 to 18 payment plan and see what happens. In the first month's payment, the principle portion is only $226.00. So you add that much extra to that months payment making it $1,806.17 instead of $1,580.17. The next month, the part that goes towards your principle will be $228.45. If you hadn't made that extra payment the month before, only $227.23 would go towards your principle this month. Your second months payment will $1,807.40, not that much more than the previous month's. By the next year your payment will be $1,821.31. Not too bad. 18 years from the start of your loan, your last payment will be $2,212.55, that's only 22.5% more than your first months payment. And in the end you would have payed off the mortgage faster and saved $185,159.84 in interest. You said 40% of the interest versus making the normal 30 years worth of payments.

You might be asking, why not just get a 15 year mortgage at a reduced interest rate? A comparable 15 year mortgage rate would be around 6%. At 6% your payment for a 15 year mortgage with the numbers we've been using would be $2,109.64 per month.Using the method described above, your monthly payment starts at only $1,806.17. That $300 can come in handy for repairs, remodeling, moving etc. You don't even reach the 15 year mortgage until after the 12th year in the 30 to 18 payment plan. On top of that you've saved over $20k in interest. Another benefit is if something happens and you can't keep making the extra payments, you can go back to the normal monthly payment which is only $1,580.17 per month. No refinancing and associated costs needed. Just make sure you are allowed to make extra payments on your mortgage without a penalty. Below is a chart comparing the 30 to 18 and 30 to 15 plans with a traditional 15 Year Fixed Rate Mortgage.

The table below shows some key figures:

	Traditional 30	30 to 18	30 to 15	Traditional 15
Number of Payments	360	218	180	180
Smallest Payment	$1,580.17	$1,806.17	$1,807.40	$2,109.64
Largest Payment	$1,580.17	$2,212.55	$3,151.55	$2,109.64
Total Interest Paid	$318,861.22	$185,159.84	$159,339.04	$129,735.57
Interest Saved	0.00%	41.93%	50.03%	59.31%

Criticisms

There are some reasons not to do this. Mortgage rates are pretty low so even though you're saving a lot of interest, you might be better off investing that extra money in something with a higher rate of return. For instance, you could invest in a S&P 500 index fund that appreciates about 10% average over the long run. It is also easier to cash out of that. If you wanted to cash out of your house you need to sell it or take out a home equity loan.

If you have a balance on a high interest credit card, you'd be better off putting the extra money towards that first.

One thing you could do is put the extra premium payment into other assets with a rate of return better than 6.5% and at intervals you feel comfortable with, cash some of that out and pay down your principle.

Even with the criticisms some people prefer to be free of their mortgage sooner.

Related Links:

Alternative to Money Merge Account - includes link to download a spreadsheet to help you implement these techniques.