how to pay off your mortgage faster

Mortgage hacks for how to pay off your mortgage faster. Because nobody wants to be paying their mortgage for 30, or even 15, years!

What exactly is the American Dream?

This phrase used to loosely represent the ability for anyone to be born with very little money, work really hard, and propel them and their families into a more prosperous life.

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But this ideal has been squandered for many due to the {almost} irresistible ability to finance our ‘American Dream' now, lifestyle inflation, and cost-of-living inflation.

Home ownership is oftentimes tied to prosperity and is a physical manifestation of the American Dream for many.

However, being locked into a mortgage for too long can really clip your wings, grounding your American Dream in a not-so-good way.

So today we're going to talk about mortgage hacks for current homeowners to help with how to save money for other areas of your life, and mortgage strategies for homeowner-hopefuls to ensure that the financial obligation tied to your home does not squash your opportunities.

So, how to pay off mortgage in 10 years? How to pay off mortgage in 5 years? Let's take a look.

  1. How to Pay Off Your Mortgage Faster Calculator
  2. Should You Pay Off Mortgage Early or Invest?
  3. Mortgage Hack #1: Refinance Your Mortgage into a Shorter Loan Term
  4. Mortgage Hack #2: Equity Accelerator
  5. Mortgage Hack #3: Create Your Own Refinance (but skip all the paperwork and closing costs)
  6. Mortgage Hack #4: House Share 'til It's Paid Off
  7. Mortgage Hack #5: Get Rid of Your PMI and Keep Sending the Payment in Anyway
  8. Mortgage Strategies for Future Homeowners
  9. Mortgage Strategy #1: Avoid PMI from the Start
  10. Mortgage Strategy #2: Don't Buy Until You Can Afford a 15-Year Mortgage
  11. Is Paying Off Mortgage Early Lump Sum or by Monthly Payments the Smartest Move?

How to Pay Off Your Mortgage Faster Calculator

Do you already own a home? I'm about to show you several mortgage hacks to get you out of debt much sooner than the traditional mortgage payoff process of 30 years.

No matter which one you choose, you will want to use a calculator to show you how much progress you'll make using that strategy.

Why?

Well, first off, it will motivate you to make some changes. And secondly? It'll motivate you to keep going once you've been using the new method for awhile and are getting some debt fatigue.

Here's the “how to pay off your mortgage faster” calculator I like to use: 

Now, before we dive into the hacks, I've got one more thing for you to consider. Honestly, it's a question my husband and I are working on right now as well.

Should You Pay Off Mortgage Early or Invest?

We all have a limited about of money to work with.

So, naturally, we want to know the best way to use this limited resource to get the most “bang for our buck”.

That's why my husband and I — and you — have started to ask ourselves “should you pay off mortgage early or invest the money?”

Some reasons we've discussed for why you should pay off your mortgage early: 

  • Debt freedom: We would be TOTALLY debt free — we currently are debt-free, since 2010, except for our mortgage.
  • New Monthly Cash Flow: Opening up a monthly cash flow of approximately $900/month for us (“only” $900/month because we would still need to save up to pay our annual insurance and property taxes).
  • It's Guaranteed: When you invest your money, there is no guarantee you won't lose some of the money you invested. Stock markets go up and down, right? But when you pay off your mortgage, the money does the work with a guarantee. You come out of it being able to subtract the amount paid off from your liabilities, and your net worth increases. Period.

Some reasons we've discussed for why we should invest the money instead: 

  • Stock Market Returns Could Be Greater than Our Interest Rate: We're fortunate to have an interest rate on our mortgage of just 3.5%. That's pretty low, as far as the mortgage rate history goes. Is it possible that we would earn more than a 3.5% return on our money if it was invested in the stock market? Yes, it's definitely possible.
  • Tax Write-off: I don't agree with this one, and honestly we don't pay enough mortgage interest to get the tax write off (and haven't in 5 years), anyway. But I'll throw it out there. If you pay enough in mortgage interest, then you can take a mortgage tax deduction on your tax return to help offset the costs.
  • Prepayment Penalties: You need to check with your mortgage company to see if they'll slap any prepayment penalties onto your for paying off your mortgage early.

Pssst: here is much more information + a calculator to figure out whether you should pay off your mortgage early or invest the money. 

Mortgage Hack #1: Refinance Your Mortgage into a Shorter Loan Term

There are some real positives to refinancing your mortgage into a shorter term besides locking in a strategy to pay it off more quickly (you can read all about our experience with refinancing our mortgage here).

These include building equity faster into your home (because the amount you are paying off of the actual principal loan is much higher on a shorter term loan than on a 30-year loan), and you generally get a lower interest rate (because you are less of a risk to lenders since you will have the loan paid off more quickly).

Note that while there are many positives to this, there are also some cons.

For example, your monthly payment will likely go up, so make sure you can absorb this extra cost.

Depending on the interest rate difference, this may not be a problem; when we refinanced from a 30-year mortgage to a 15-year mortgage, our interest rate dropped from 5.5% to 3.5%, so we were able to shave an amazing 15 years off of our debt repayment for just an additional $200 per month.

Also, since you will be paying more in principal and less in interest, you may no longer pay enough in interest to take the mortgage interest tax deduction come tax season (this actually happened to us!). Although this is a great thing, it might take away any tax return you've been used to getting.

Finally, there are closing costs involved with refinances.

Mortgage Hack #2: Equity Accelerator

There's this very interesting new mortgage product in the United States that homeowners in the UK and Australia have been using for years. It's called a Mortgage Equity Accelerator. Basically, borrowers deposit their paychecks into a HELOC (Home Equity Line of Credit) account that, every month, applies every unspent dime against the mortgage loan balance. On top of that (and the real magic to it) is while your paycheck sits in this account waiting to be spent on bills, the full amount is applied to your mortgage. So for part of the month, several thousand dollars has been taken off of your principal loan amount, resulting in less interest accrual each month. Since less interest is being charged, more of your typical monthly payment goes towards principal rather than interest.

Interesting, right? Of course there are a few cons, such as HELOCs come with variable interest rates (something that is fine in low-interest times, but that may bite you later when interest rates go back up).

Mortgage Hack #3: Create Your Own Refinance (but skip all the paperwork and closing costs)

Here's a mortgage payoff trick: If you don't feel like going through a refinance (I don't blame you), you can create one by yourself to pay off mortgage early.

To pay off mortgage faster using this method, you'll first need to find out how to send in extra payments to your mortgage lender. And not just extra payments so that they can do what they would like with them (which usually means putting the money towards interest), but you want to know how to ensure any extra money you send in will be applied to your principal debt.

After that, send in one extra payment a year. This will shave years off of your mortgage debt, just as if you had refinanced into a shorter-term loan. To make this as painless as possible, you'll want to sync your mortgage payment with your bi-weekly paycheck cycle. Pay off mortgage faster!

Pssst: Wondering how much do you save by making an extra mortgage payment? Use this handy calculator to find out for your own situation.

Do extra mortgage payments go towards the principal?

This is a really, really, important question, especially if you're going to be sending in extra payments. Make sure you call your mortgage provider and find out the answer, plus how to get around the money going towards interest rather than towards principal (yes, it does make a difference).

Mortgage Hack #4: House Share 'til It's Paid Off

Do you have a crazy mortgage payoff goal, like Derek from LifeandMyFinances.com who has vowed to pay off his 2011 home purchase by the end of this year? I've got an easy way for you to meet it: house share until your mortgage is paid off.

My aunt does this, and it's enabled her to live in a beautiful area of Washington D.C. for over 20 years (not to mention in a beautiful home).

You can find roommates, or floor-mates, and sign one year leases with them. Or, you can post an extra room on a site like AirBnB.com. Not into the roommate thing? You can also post areas of storage on sites such as StoreatMyHouse.com.

Send all of your extra money from the rent into your mortgage lender on top of the normal mortgage payment. Then when the mortgage is paid off, you can just not renew your lease contracts when they are up.

Mortgage Hack #5: Get Rid of Your PMI and Keep Sending the Payment in Anyway

Are you paying Private Mortgage Insurance on your home? This isn't something that insures you in the event of loss; it insures your lender in the event that you default on your loan and potentially go through foreclosure. The monthly cost is typically $50-$200 (it's a percentage of your overall mortgage loan amount), and you are assessed this fee if you have certain types of loans or if you put less than 20% down on your home when you purchased it.

Wouldn't you rather get rid of this and keep sending in the extra payment to take off the principal of your home?

If you've had work done on your home, or your house value has risen in the area, then you can get a lender-approved appraisal to show that your loan-to-value (LTV) ratio is now below 80%. Or perhaps you've been paying on your home long enough that you have put enough equity into it to take the PMI off.

Discuss with your lender how much more it will take on your particular loan to have the PMI removed. Then once it's removed, send in the same payment you are accustomed to anyway (ensuring the lender takes the extra off of the principal), and shave a few years off of your mortgage repayment period.

Pssst: one more bonus strategy. Decrease your insurance premiums (homeowner's) to drastically cut expenses, and then put that extra cash directly onto your mortgage payment.

Mortgage Strategies for Future Homeowners

Not a homeowner yet? Great!

You may not think it's great that you're not (especially if you're swooning over properties on MLS.com and Pinterest-DIY renovation projects), but this means you can set yourself up for mortgage success and sidestep some of the common pitfalls people enter into without knowing it (isn't it nice letting others be the guinea pig sometimes?).

Mortgage Strategy #1: Avoid PMI from the Start

The easiest way to avoid PMI is by making sure you have at least 20% of the cost of the home ready for a down payment. And remember, your closing costs are not typically included in the down payment amount. So you need to save 20% down payment plus several thousand dollars for the closing in order to avoid PMI.

Still want to purchase without 20% down? Here's a tip: You can potentially shift the PMI costs onto the seller of the home. By finding a loan that allows prepaid PMI Insurance at closing and then having your seller cover part or all of the closing costs, you will not be responsible for the PMI despite having less than 20% to put down. Another option is to go for a VA loan if one is available to you, as they do not include PMI even if you do not have 20% to put down. (Note: there is an upfront funding fee that is tacked onto these types of loans, so you don’t get away completely unscathed).

Mortgage Strategy #2: Don't Buy Until You Can Afford a 15-Year Mortgage

By taking out a shorter-term loan to begin with, you will be rewarded with a lower interest rate (because you're a lower risk), you will build up equity into your home quicker (in case you move and sell you leave with more of the money you paid into the home), and of course you will get out of mortgage debt about 15 years earlier than the norm.

Is Paying Off Mortgage Early Lump Sum or by Monthly Payments the Smartest Move?

I got a reader question once, and with their permission, would like to share it with you.

“I have a question for you. In paying down a mortgage, is it better to make a one lump sum payment of $5,000 once a year or better to break the extra payment up into monthly payments of $416.67? I was having this conversation with my boss, and he informed me that you pay down your principal a lot faster when you break the payment down to a monthly principal payment. Any help is appreciated. Thanks.” – Helen

I ran the numbers to see if what her boss said (to break the payment into a monthly principal payment) would help in how to pay off mortgage faster.

Putting the $5,000 down in one, yearly, lump payment will save you more interest over the course of the loan than if you made additional monthly payments of $416.66 until you reached the total of $5,000 each year.

Using Bankrate’s mortgage calculator, I ran the two different scenarios on the following assumptions: $100,000 mortgage, 5.5%, 15 years, first year of the mortgage, with a typical monthly payment of $817.08 ($358.75 towards principal and $458.33 towards interest each month).

One year after making a $5,000 lump payment (on top of the typical monthly mortgage payments), your loan amount will be $90,326.86. Spreading that lump sum of $5,000 over a year into $416.66 in additional monthly payments will have brought your loan amount down to $90,456.90 at the end of that same year. This is a difference of $130.04 in only one year, and on a “small” mortgage, so the actual savings could be more substantial over the life of a larger mortgage loan.

Of course your overall interest savings also depends on where you are in your loan. If you are in year 14 of 15, then you will not have much savings at all. This calculation was done in year 1 of a 15 year mortgage loan, with the lump sum being made in the beginning of the year. This means that in this scenario, your interest saved will continue to increase over the 14 year term left on the loan.

Don't forget to celebrate that last mortgage payment, whether you get there in 2 years, or 15!

MAN do we want to get our mortgage paid off early – we need to know how to pay off your mortgage faster. This woman outlines 5 mortgage hacks (refinance mortgage tips are part of it, but not all of it!) for current homeowners, plus 2 mortgage payoff tips for people who aren’t homeowners yet and want to start the right way. #mortgage #payoffdebt

5 replies
  1. Derek@LifeAndMyFinances
    Derek@LifeAndMyFinances says:

    I have thought about house sharing. Sure, it would help me pay off my mortgage that much faster, but do I really want to let someone into my house for an entire year? I just don’t see that going well (personally). I’ll use the peace and quiet to get more work done and make up the funds some other way. 😉

    • Amanda
      Amanda says:

      It’s definitely a personal choice, for sure! My Aunt loves the community she’s surrounded herself with, so for her, it’s worked out well.

  2. Laura
    Laura says:

    Thanks for that! My fiance and I are closing on a house at the end of July and are excited. I definitely agree with what you are saying, but for us the 30-year mortgage is the only option (no PMI, though). I would rather take that out than give away the rent money every month. Our plan, though, is to put any extra money (above and beyond emergency savings, retirement savings, wedding fund, and child(ren)’s fund) into the mortgage in hopes of making it more like a 20-year mortgage. The interest rate at 3.75% definitely does not deter from that.

    • Amanda
      Amanda says:

      Congratulations on your new home! That’s great that you won’t have PMI (puts you ahead of many others right there), and also a great interest rate. Good luck to you both:).

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