Paying off a mortgage early reduces overall debt which, in turn, frees up money for any other purchases you may want to make…who wouldn’t want to take advantage of that?? While a mortgage is a significant amount of debt that is amortized to be paid off over many years, I have a great tip that will help reduce your mortgage principal balance faster, expire the debt much more quickly, AND give you significant savings on interest payments. So, what’s this great tip, you ask? Here it is:
MAKE 13 PAYMENTS IN A 12-MONTH YEAR.
Check and make sure that your mortgage doesn’t have a prepayment penalty. If it doesn’t (many do not) then making the equivalent of one extra monthly mortgage payment each year can shave anywhere from 4 – 8 years off of a 30-year fixed-rate mortgage (depending on your specific interest rates and mortgage terms). Now, you may be thinking something along the lines of ‘BUT I DON’T HAVE AN EXTRA THOUSAND OR SO DOLLARS AT THE END OF THE YEAR TO DO THIS!?’ and that’s fair enough…most of us don’t. But here’s the really good news that makes this trick so easy: you don’t have to make that extra payment all at once.
By dividing that extra payment into 12 smaller payments (one for each month of the year) you can make small payments that, at the end of the year, add up to the extra payment. For example, if your monthly mortgage payment is $1,200, divide this by 12 to get $100, and then add this in to each month’s payment ($1,200 + $100 = $1,300 each month). I don’t know about you, but for me it’s a lot easier to come up with an extra $100.00 a month than it is to scrape $1,200 together at once. Following this method, at the end of the year you’ll have made a full month’s extra payment (or 13 payments in the 12 month year) which will significantly reduce your payoff period as well as money spent on interest.
Here’s a quick example that I ran using a mortgage payoff calculator that gives you an example of what this would look like with a 30-year $250,000 mortgage loan at a 4.5% fixed interest rate:
- Monthly Payment (without additional): $1,266
- Monthly Payment (with an additional $100): $1,366
- Payoff period reduced by making extra payment: 4 years 2 months
- Interest payments saved by making extra payment: $33,107
That’s a lot of time and money saved! I invite you to follow the link above to play around and see how much you can save under different scenarios…I’m sure you will be pleasantly surprised!