There are several ways you can pay your mortgage off faster and save thousands if not tens of thousands of dollars in interest payments. None of these methods requires that you pay a third party to do it for you. It’s simple to do it yourself without the cost of paying someone or risk being defrauded.
A case in point is Nationwide BiWeekly Administration Inc. which was sued by the Consumer Financial Protection Bureau for fraudulent billing and advertising back in 2015. Nationwide lost the case, appealed, and lost the appeal. Nationwide maintains an “F” rating with the Better Business Bureau (BBB).
Here are a few ways to pay less interest and pay off your mortgage faster all by yourself. Starting with the method Nationwide promoted but that you can easily do yourself without paying someone else.
Most people receive a paycheck once every two weeks but their mortgage payment is due once a month. If you simply pay half of your monthly mortgage each time you receive your paycheck, you will shave one payment off the end of your amortization schedule each year. In 12 years, you will shave a full year off your payments without ever noticing a change in your monthly finances.
The reason is that when you are paid bi-weekly, there are usually two months of the year when you receive three monthly paychecks. When you pay half the monthly mortgage payment from each paycheck, those two extra paychecks per year make an extra full mortgage payment each year. On a $200,000 fixed-rate mortgage at 3.5%, this method can save you more than $18,000 in interest payments over the life of your mortgage and pay off the mortgage more than two years sooner. It’s as simple as having half of your mortgage payment made automatically from each paycheck.
This is the method that should make the most sense to most people. When you pay something extra each month, you are essentially paying back the money before you borrow it. That means no interest is due on the repaid money over the remaining length of the mortgage. Many people use an amortization schedule to decide how much extra to pay each month but the truth is you can pay anything extra at any time. But using an amortization schedule makes it easy to visualize your savings.
Using that same $200,000 mortgage with a fixed-rate mortgage at 3.5% will have a first payment that includes $583 for interest and $315 towards reducing the principal owed. The second payment on the amortization schedule is $582 for interest and $316 for the principle. If you make an extra principal payment of $316 (a month early), you’ll eliminate one payment off the end of the amortization schedule. Eliminating a payment off the backend every month does two wonderful things for your future finances. It will save you approximately $31,000 in interest payments and you’ll pay off the mortgage in 15 years instead of 30 years.
Making a full extra principal payment every month can be challenging for many people in the early years of the mortgage. But keep in mind that any extra payment will have the same effect although smaller extra payments won’t deliver as dramatic of savings. Still, even an extra $50, $100, or $200 each month is going to add up to big long term savings and fewer years that you will pay on your mortgage. A good strategy for some people is making smaller extra payments during the early years and larger extra payments in later years (after your income increases significantly but your basic mortgage payment remains unchanged). The latter is a great way to make inflation work in your favor.
If you are not good at the self-discipline it takes to make voluntary extra monthly payments, refinancing can be the second-best option. But there are a few reasons why refinancing might not save as much interest money as simply making extra monthly payments does. First and foremost is that you have to pay another full round of closing costs when you refinance. And if you wrap those new closing costs into the mortgage, you’ll pay interest on those additional costs.
Mortgage interest rates currently remain at historic lows but change daily and hourly. A few short weeks ago, the 30-year fixed rate was less than a 5-year adjustable rate. Right now, the opposite is true (5-year adjustables cost less at the moment). That goes to show you how important it is to carefully watch the mortgage market in the weeks leading up to you locking in a loan.
There is lots of volatility when it comes to deciding which is the right mortgage for you. If you take advantage of today’s small savings with an adjustable-rate, you could end up paying much more in higher interest five years from now. However, if your credit score was a little low when you took out your current 30-year loan, today’s low-interest rates probably make good financial sense. But remember to include the two biggest costs when considering a new 30-year loan. First are those new closing costs that have to be paid. Second is the fact that you are starting the clock again on a new 30-year mortgage when you may only have 25 years or less remaining on your existing loan.
A 20-year or 15-year fixed-rate refinance can be the best long term financial strategy. These loans consistently have a lower interest rate compared to both 30-year fixed rates and adjustable-rate loans. However, your monthly payment might go up slightly because you are paying the principal down faster. That $200,000 30-year, fixed-rate, 3.5% loan has a $900 combined payment for interest and principle. A 20-year fixed-rate loan will have a $1,130 combined payment for interest and principle. You’ll pay an extra $230 each month but pay off your mortgage 10 years sooner and receive huge interest savings.
What do you think is today’s best mortgage strategy? Please leave a comment.
Also, our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions, inquiries, or article ideas to [email protected].