Some homeowners expect to stay in their houses or condos “forever” so they want to pay off their mortgage as fast as possible. If you are 100 percent certain you want to pay off your home loan as fast as possible, here are three helpful suggestions:
1. Don’t get or convert to a biweekly mortgage. The basic idea behind a biweekly mortgage is to take your monthly mortgage principal and interest payment, divide it by two, and have that amount automatically withdrawn from your bank checking or savings account every two weeks. The result will be cutting a 30-year amortized mortgage down to about 22 years, depending on its interest rate, thus saving the interest for those last few years of the mortgage.
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However, very few lenders offer true biweekly mortgages. But there have been several scams where entrepreneurs offer to convert an existing 30-year mortgage into a biweekly mortgage. They charge a stiff set-up fee, typically $395 or so, plus $5 to $7 per month, for something you can do yourself.
Worse, the payments are withdrawn from your bank account every two weeks and then put into the entrepreneur’s account until the regular payment is remitted to your mortgage lender each month. Lenders do not have to accept biweekly payments and most refuse to do so because it creates a bookkeeping nightmare.
The result of these biweekly mortgage schemes is to make the equivalent of 13 monthly principal and interest payments every 12 months. You can do that yourself! Just divide your amortized monthly principal and interest payment by 12 and add that amount to each monthly payment sent to your mortgage lender. Be sure the additional amount is very clearly labeled “extra principal payment” so the lender doesn’t accidentally credit it to your property tax and insurance escrow account. You will accomplish the same result as a biweekly mortgage, but without the risk or added cost of a third-party entrepreneur getting involved. Depending on your mortgage’s current age and interest rate, you will cut its life by about eight years and save thousands of interest dollars.
2. Pretend your 30-year mortgage is a 20-year, 15-year or 10-year mortgage. The interest savings on a 15-year fixed-rate mortgage compared to a 30-year mortgage are about 50 percent. But the extra monthly payment to get the loan paid off in 15 years is substantial — more than most homeowners can comfortably afford or want to pay.
That’s why I suggest obtaining a 30-year mortgage when buying a home or refinancing its mortgage. Then pretend it is a 20-, 15- or even a 10-year mortgage. Try making the extra payments for a few months. If you continue doing so month after month, you will save thousands of interest dollars by shortening the life of the mortgage.
To get your 30-year mortgage paid off faster, here are the approximate extra percentages of your current monthly principal and interest payment to add for “extra principal payment” to accomplish your goal:
- 20-year mortgage payoff = 10 percent monthly payment increase
- 15-year mortgage payoff = 20 percent monthly payment increase
- 10-year mortgage payoff = 50 percent monthly payment increase
To calculate the exact extra principal payment to add to each monthly payment to reach your prepayment goal, use a financial calculator to enter the variables for interest rate, remaining mortgage balance and number of payments remaining to arrive at the exact increased monthly payment needed.
3. Don’t worry about a prepayment penalty. Some home loans have prepayment penalties if the mortgage is paid in full during the first two, three or even up to five years. The purpose of these prepayment penalties is to prevent borrowers from repeatedly refinancing frequently, thus depriving the mortgage lender of the anticipated interest earnings.
But most home loans allow annual principal prepayments of at least 20 percent without any prepayment penalty. Chances of your exceeding this 20 percent annual principal prepayment limit are extremely remote. If that should happen, ask the lender to waive the prepayment penalty on the slight extra prepayment. Most lenders will do so.
(For more information on Bob Bruss publications, visit his
Real Estate Center).