Your mortgage is likely the single biggest loan you’ll ever have. Naturally, the sooner you can pay it off, the less it will cost overall. Essentially, paying down your mortgage faster means paying more than the minimum amount due.
Though the concept sounds easy, putting yourself in the mindset of paying even a little bit extra toward something that doesn’t offer immediate gratification can be hard. Should you use that $1,000 to take a vacation now or pay off your mortgage one month sooner (a benefit that won’t be felt for a while)?
That’s a difficult choice to make.
Fortunately, some of the methods used to pay things off quickly require only a few little changes.
The "Little Extra" Hack
Whether you set up automatic payments for your mortgage or write a check every month, add a little bit extra to the amount. Some people like to round up the amount; if the regular payment is $786, they’ll round it up to $800. The nice round number makes it easy for budgeting.
Another way is to just add a set amount to each payment, such as $20 or $50. Don’t feel like any amount is too small. In fact, by adding just a small amount to your monthly payment, you’re not as likely to miss the money, but it will still have a positive effect on reducing your mortgage faster.
The Bi-Weekly Hack
If you get paid every other week rather than twice a month, you know the benefits of having the “bonus paycheck” that comes throughout the year (when you get paid three times in a month rather than the usual two). You can use this to your advantage when it comes to your mortgage as well. Instead of once a month, another mortgage payment option may include paying half of your mortgage every other week. Instead of 12 full payments, then, you end up making 26 half-payments, or 13 full payments, throughout the year.
That extra payment can mean you’ll pay it off as much as five years earlier!
The Bonus Hack
Throughout the year, you’re likely to get a little extra money here and there. It might come from the company’s annual bonus or it might be a big birthday check from your parents. When you get a bit of extra money, the natural tendency is to splurge on something you won’t normally have the money to buy.
The smarter move?
Put it toward your mortgage. Since the money is somewhat unexpected, you aren’t as likely to miss it when you hand it over to the bank. If you don’t want to give up your “fun money,” though, make a deal with yourself to apply at least a percentage of this money toward the loan.
The Refinancing Hack
In some cases, renegotiating your mortgage can help you pay the loan off more quickly. For instance, if you have 20 years left, you might refinance into a 15-year loan - saving you five years.
Alternatively, you could refinance at a lower interest rate but continue to make the same monthly payment you’re paying now. With the lower rate, a higher percentage of your payment is going toward the principal balance. However, there are fees associated with refinancing, so it doesn’t always make sense for everyone. A financial advisor can help you determine if these methods are right for you.
Why These Methods Work
Every month, you make a payment; a portion of said payment goes to pay down the principal balance and the other goes to the lender as interest. The percentage of that payment for interest depends on the current principal balance. In the initial years, a larger percentage of the monthly payment goes toward the interest, a fact that surprises many people.
Any extra money you pay goes toward the principal balance, and the next month, the portion of the payment that goes toward interest is slightly less. Since all of these hacks work on chipping away at the principal balance – even just a little at a time – you pay less interest and pay off the mortgage sooner.
Things to Consider
Adding a small amount to the monthly payments or making bi-weekly payments doesn’t have a big impact on your day-to-day finances. However, if you’re currently working on paying off debts that have higher interest rates than your mortgage, such as credit cards, the smarter move is to focus your efforts on paying off those balances. Once those balances have been paid off, you’ll have a lot more money to put toward your mortgage.
Working toward paying off your mortgage sooner doesn’t have to bring you a lot of stress. By staying focused on your goal and making small steps, you’ll find that you are setting the stage for a more comfortable future.