This is the final post in a series on paying off the mortgage in half the time. We’ve discussed choosing a 15 year mortgage over the traditional 30 year and the how refinancing can save you tons of interest. What should we do if we can’t refinance and are stuck in a 30 year mortgage? We can make accelerated payments.
Monthly Accelerated Payments
It is possible to reduce the balance on a mortgage and save tons of money simply by sending the bank a little extra each month. Applying $100 extra to to principal reduction can save you thousands of dollars in interest over the life of the loan.
For example, in August 2006 we breached the 100,000 point of our mortgage. 40% of our payment was still going to interest and it would take us another 10 years before the house would be paid off. However, had we started sending an extra $100 a month we could have
- Paid the house off 14 months sooner
- Saved almost $5,000 in interest
- Not had to produce another $15,000 of monthly payments
It’s not easy but every little bit helps. Applying extra to your loan has the same effect as compound interest (with video) has over a long period of time. I showed an example last year of how I turned $100 in extra principal payments into $120 in mortgage reduction. Now THAT is a great rate of return!
What happens if I make bi-weekly payments?
It might be easier for someone that is paid every two weeks to make a half-payment rather than depleting their checking account on the first of the month. This is commonly referred to as bi-weekly payments.
Bi-weekly payments have a similar effect of regular accelerated payments and will cause someone to make an extra full payment once a year.
By making 26 bi-weekly payments you end up sending the bank 13 whole payments. The result is a loan to be paid off 3 years early and could save up to $15,000 on a 30 year, $200,000 mortgage at 4.5%.
How to pay off a house in half the time
If you have a 30 year mortgage for $200,000 and pay an extra $500 a month you will have your house paid off 16 years sooner.
Here are some ways to find $500 to put towards your home loan:
- Take on a part-time job that pays $125 a week
- Ask for overtime or extra hours at work
- Cut spending in areas of your budget
It’s not easy but every little bit helps. I showed an example last year of how I turned $100 in extra principal payments into $120 in mortgage reduction. Applying extra to your loan has the same effect as compound interest (see video here) has over a long period of time.
One of the last debts most Americans will pay off is their home. It seems like a dream but it is a real possibility. In fact, it is highly recommended that you have your house paid off before retirement. Don’t wait! Take action to make accelerated payments on the mortgage now and have it paid off in half the time.