Early Mortgage payoff – Hit the Accelerator!

Here’s a nifty little trick to pay off your mortgage sooner without causing you financial stress. Call your home loan servicer and ask that you go from once a month to a bi-weekly payment schedule. They will split your payment in half, and you pay once every two weeks. There is very little difference financially to the borrower, but the financial impact is absolutely staggering. Using an example of a $600,000 loan @ 6% interest rate, the loan will be now paid off in 24.42 years and save the consumer a whopping $148,872.04 in interest expense vs. the typical once a month payment plan. This is a big deal, and every borrower should at least know that the option exists. Instead of 12 payments per year, you are making 26 half payments which has the effect of adding one additional monthly payment per year over the standard plan. This is hardly noticeable over the short term, but has a profound impact over the long haul.

A word of warning—it’s a good idea to set up an auto-pay plan, so no payment deadlines are missed. Bankers love to charge interest and late fees—don’t add unnecessarily to their revenues.

Let’s take his one step further—add an additional $100 to each payment. The payoff time incorporating both techniques now drops to 21.8 years, and the interest saved hits a mind-boggling $355,642.57!

Please keep in mind that interest rates may well drop significantly during the life of your loan and odd-term mortgages are always available, yet most people don’t know it. Example: you’re 3 years into a 30-year mortgage @ 6%. Suddenly you have an opportunity to refinance @ 4.5%. Instead of resetting back to a 30-year payoff, you do have the option of a 27-year term at the new rate. This will further reduce your interest expense and keep you on track for the early payoff and a huge savings in interest.

Thanks for reading my article. I approach home lending from a perspective of financial planning since a mortgage and, more specifically, the equity you build in your home over time, can be your largest asset/investment. Let’s maximize that investment.

Scott Lawson