Ask Ray About Real Estate: Three ways to pay off your mortgage early

If owning a home is the “American Dream,” then owning a home without a mortgage is the dream taken to a higher level.

Refinancing to take money out of your home is “out.”  Paying off your mortgage early is “in.”  Having lived through the foreclosure crisis, more homeowners want the security and psychological benefit of paying down their mortgage as quickly as possible.  Here are three simple ways you can pay off your mortgage early, saving you big money.  

Just pay more

If you want to see magic, just play with a mortgage calculator to see how adding a small amount to your principal here and there can shorten the length of your 30-year mortgage.  Start by adding $100 per month to your mortgage principal.   

The lower your principal, the more money from your payment is applied to the principal each month, as less goes to paying the interest portion of your payment.  

One of the easiest and most painless ways is to round your payments up.  If your monthly mortgage payment is $2,759 per month, just round it up to $2,800.  When you pay extra, make sure the extra is applied to the principal balance, not just set aside for next month’s payment.  (Before you make any extra payments, read the fine print in your mortgage contract to make sure you will not incur any prepayment penalties.)

Refinance to shorter term loan

You can refinance your 30-year mortgage into a 10, 15, or 20-year mortgage.  15-year mortgages are the most common.  Your monthly mortgage payment will be higher, but probably not as high as you think.  Plus, most lenders offer lower interest rates for their 15-year loan programs.   A 15-year mortgage commits you to a higher payment each month. Unlike the voluntary extra principal payment, above, you’ll have to pay extra each month with a 15-year mortgage.  Suppose you have a 30-year mortgage for $500,000, at 4.3 percent interest.  Your monthly payment with principal & interest would be $2,474.  Over the life of the mortgage you’ll pay $890,000 for a $500,000 loan.  If you had a 15-year mortgage for $500,000 you would have a lower interest rate of 4.1 percent and your monthly payment would increase to $3,724 per month.  Over the life of the mortgage you’d pay $670,000.  In this scenario, you’d save more than $220,000 in additional interest payments by converting your 30-year mortgage to a 15-year mortgage.  What could you do with an extra $220,000?

Switch to bi-weekly payments

Biweekly payments take advantage of the fact that there are 52 weeks in the year and 12 months. If you pay half your regular mortgage payment every other week, you'll have made 26 half-payments, or the equivalent of 13 full monthly payments, at year's end.  By simply making two payments each month instead of one payment, you’ll chop off about six years from a 30-year mortgage.  That’s a savings of about $150,000 over the life of your mortgage.  Can you imagine a more painless way of earning $150,000?

Check with your bank or mortgage lender to see if they will set up a biweekly payment plan. Some do it for free; others charge. Ask the bank to credit all extra payments toward principal so you save more on interest expense. Some banks set aside the extra payments until the end of the year, which defeats the purpose of paying early. Make sure you understand how your lender will handle the extra payment before you begin paying.

RAY AKERS is a licensed Realtor for Akers & Cargill Properties in Seattle. Send your questions to or call 206-722-4444.