12 Expert Tips to Pay Down Your Mortgage in 10 Years or Less
Purchasing a home is a dream for pretty much everyone. But, taking on that massive debt can prevent you from retiring earlier, sending the kids to college, or taking that dream vacation. Like any other debt, if you’re able to get rid of your mortgage as soon as possible, the better off you’ll be down road.
This may sound like an uphill battle that you can’t win, but if you follow these 12 expert tips, you may be able to actually pay your mortgage off within a decade.
1. Purchase a home you can afford
“If you want to finance a home, you’ll need to get prequalified first,” writes Mike Timmerman, who paid off his mortgage in just two years. “The bank will look at your overall financial picture and spit out an amount that you’re likely to get a loan for. Some people use this number to set a housing budget, but not me.”
“The bank is just guessing. I examined my monthly budget and determined what I wanted to spend on housing,” Timmerman adds. “ It ended up being much less than what the bank told me I could afford.”
2. Understand and utilize mortgage points
Whenever people are curious about how much their mortgages cost are going to cost them, lenders will provide them with quotes that include loan rates and points. Stephanie McElheny, the Assistant Director of Financial Planning at Hefren-Tillotson in Pittsburgh, says that “one point is equal to 1 percent of the loan amount (ex. 1 point on a $200,000 mortgage would be $2,000).”
McElheny adds, “there are two kinds of points, discount and origination fees:
- Discount: prepaid interest on the mortgage; the more you pay, the lower the interest rate.
- Origination fee: charged by the lender to cover the costs of making the loan.”
If you plan on staying in your home for the foreseeable future, it may be worth paying for these points since you’ll end-up saving money on the interest rate of your mortgage. You could save that extra cash each month and put it towards your overall mortgage payment.
3. Crunch the numbers
“Call your mortgage holder or look at the latest statement. You’ll need the current outstanding balance. Once you have that number, you’ll need to calculate what the payments will be to pay off the mortgage in five years,” says Neal Frankle on the Wealth Pilgrim.
Frankle continues, “You can either ask the mortgage company to do the math, or you can do it yourself. If you do it yourself, you can use the following formula in Excel:
Let’s say your outstanding balance is $200,000, your interest rate is 5 percent and you want to pay off the balance in 60 payments – five years. In Excel, the formula is PMT (interest rate/number of payments per year, total number of payments, outstanding balance). So, for this example you would type =PMT (.05/12,60,200000). The formula will return $3,774. That’s the monthly payment you need to make if you want to pay off your home mortgage of $200,000 at 5 percent over five years.”
Frankle says that, “The same mortgage paid off over 30 years is only $1,073 a month, so be prepared when you do this calculation. It will be much higher than your current payments. Now you have your number. You might find that the payment is twice or three times your current mortgage. Remain calm.”
4. Pay down your other debts
“A crucial rule of debt repayments is: clear the most expensive debts first,” suggests Martin Lewis, founder of MoneySavingExpert.com. “Do so and the interest doesn’t build up as quickly, saving you cash and giving you more chance of clearing debts earlier.”
As a rule of thumb, “Clear high-interest credit cards and loans before overpaying your mortgage, as they’re usually more expensive.”
5. Pay extra
“Each time you pay extra on your mortgage, more of each payment after that is applied to your principal balance,” says best-selling author and radio host Dave Ramsey.
“Here are some options for paying extra and examples of how extra payments will affect the average $220,000, 30-year mortgage with a 4% interest rate:
- Make an extra house payment each quarter, and you’ll save $65,000 in interest and pay off your loan 11 years early.
- Divide your payment by 12 and add that amount to each monthly payment or pay half of your payment every two weeks, also known as bi-weekly payments. You’ll make one extra payment each year, saving you $24,000 and shaving four years off your mortgage.
- Round up your payments so you’re paying at least a few extra dollars a month.
- Increase your payment when you get a raise or bonus.”
Dave recommends that you “check with your mortgage company before you make additional principal payments. Some companies will only accept extra payments at specific times, or they may charge prepayment penalties. And always make sure the additional money is applied to the principal and not next month’s payment.”
6. Make biweekly payments
“A biweekly mortgage is one on which the borrower makes a payment equal to half the fully amortizing monthly payment every two weeks,” explains Jack Guttenberg, aka: The Mortgage Professor. “Because there are 26 biweekly periods in a year, the biweekly produces the equivalent of one extra monthly payment every year. This results in a significant shortening of the period to payoff. For example, a 4 percent 30-year loan converted to a biweekly pays off in 310 months — or 25 years, 10 months.”
Dr. Guttenberg adds that this “makes sense for borrowers who have the capacity to pay more than required but need the discipline of a well-defined routine.” And, since some banks for this, you can create your own by opening a new bank account where “you deposit half the payment every two weeks, and withdraw the full monthly payment every month for submission to the lender. At the end of a year, there will be enough in the account for a double payment.”
7. Be frugal
Andrea Stewart and Honer were able to pay off their mortgage in just 7 years. They began by planting a garden in their backyard. “It’s actually easier to go into your backyard and pick things than go to the grocery store,” Honer said. “We like the organic element as well as it’s a huge bill cut.” This not only saved on their grocery bills, but also on their gas since they didn’t have to drive the store as much.
The couple also crunched the numbers and found that they could live from only one income. That second income went towards their mortgage. “I think we were always frugal to begin with — we’re both savers,” Stewart said. “One of the things we asked ourselves when we made a purchase was, ‘Is this really going to make us happy?’ … We try to have experiences like traveling and things like that, yeah, but I don’t think [we like] a lot of stuff.”
8. Hit the principal early
“Over the first few years of your mortgage, it may seem that you are only paying interest and the principal isn’t reducing at all,” says Nila Sweeney, managing editor or Property Market Insider. “Unfortunately, you’re probably right, as this is one of the unfortunate effects of compound interest. So you need to try everything you can to get some of the principal repaid early and you’ll notice the difference.”
“Every dollar you put into your mortgage above your repayment amount attacks the capital, which means down the track you’ll be paying interest on a smaller amount. Extra lump sums or regular additional repayments will help you cut many years off the term of your loan.”
9. Use your tax refund
As noted earlier, the way to quickly pay off your mortgage is to make extra payments as long as your mortgage allows you to,” says investor and writer Dan Dzombak. “For many people, that’s easier said than done.”
“One strategy that can make this a reality for you is to use your tax refund to make one large extra mortgage payment a year.” Back in 2015 it was “estimated 75% of taxpayers will get a refund this year, and so far for the 2015 tax season the average tax refund is $3,586, a 10.5% increase over last year’s tax season.”
“Making one extra mortgage payment of $3,600 every year has roughly the same effect as making a $300 extra monthly payment: You can pay off your loan roughly 12 years early.”
10. Pour every bit of extra cash into your mortgage
“Obviously, the highest-interest debt takes priority. But if you have an adequate emergency savings fund and your mortgage is your only debt, don’t even ask yourself what you’ll do with extra money when it falls into your hands: Add it to your mortgage payment, designating it as additional principal.”
11. Refinance your mortgage
“Refinancing your mortgage loan can help you in a few different ways,” writes Morgan Quinn for GoBanking Rates:
- You can shorten the loan and brave through higher payments until it’s paid off.
- You can get a lower interest rate.
Quinn adds that, “These refinancing options could allow you to pay off your mortgage early — years early, even — and save you thousands in interest, as refinancing a mortgage gives you the opportunity to draft up a brand new loan.”
“If you don’t have much — or any — equity in your home, you might qualify for the Home Affordable Refinance Program. To qualify for HARP, you must meet the following requirements:
- You must be up to date on your mortgage.
- Your home must be your primary residence.
- Your loan must be owned by Freddie Mac of Fannie Mae.
- Your loan must have been originated on or before May 31, 2009.
- Your current loan-to-value ratio must be greater than 80 percent.”
12. Rent out space
With the sharing economy in full-swing, it’s easier than ever to rent out an extra bedroom, garage, or parking space. If you go on vacation for two weeks, consider listing your home on Airbnb so that you can make a little extra money while you’re away. That extra money could all be added to your mortgage payment.
You could also go all-out and rent your entire room, like personal finance writer Sean Cooper.
He explains in LearnVest that in 2012 he found “a newly renovated, one-story bungalow with a basement apartment, in a great location near Lake Ontario.” He would live in the basement and would rent the main floor in order to pay off his mortgage. He says, that his “real estate agent was nice enough to help show my property to prospective tenants in July 2012, before I even moved in, and soon I had rented out the house.”
Cooper was also frugal and had a second job on the weekends, but he was able to knock-off $100,000 on his mortgage in just two years by renting out his home.