Buying a home is likely one of the biggest purchases you’ll make in your life. And while paying your own mortgage is far more rewarding than putting money towards a landlord’s mortgage, thinking about a payment schedule of 30 years might feel like a really long time.
However, you can potentially pay your loan off faster and save money in the long run without making huge sacrifices right now. It also means building more home equity in a shorter amount of time, especially if the local market remains strong.
Your first step is to take a look at your mortgage statement. You’ll see that payments are split between the principal and interest. If you’ve recently purchased a home, a larger chunk of your money is being applied toward the interest. Eventually, that disparity swings the other way. But that does take time. So, what can you do now?
One of the easiest options is to apply extra payments (big or small) to your loan principal*.
Let’s take a look at a couple of simple examples.
You just purchased a home for $500,000 and put 10% down. You have a 30-year fixed loan for $450,000 and a 3% interest rate. That makes your monthly payment about $1,897. Over the life of your loan, you’ll pay nearly $233,000 in interest with a payoff date set for August 2051.
Scenario 1: You pay an extra $100 every month toward your mortgage principal:
- You’ll save $20,318 in interest payments.
- You’ll pay off your loan 2 years and 4 months earlier.
Scenario 2: You pay an extra $50 a month and apply your holiday bonus of $2,000 to your mortgage principal every year:
- You’ll save $40,292 in interest payments.
- You’ll pay off your loan 4 years and 8 months earlier.
If you want to plug in your own numbers, check out this amortization schedule calculator.
*Always review your loan agreement or contact your bank to find out their specific process for applying additional payments to your principal—or seek advice from proper legal or financial professionals.
Before You Put Extra Money Toward a Mortgage
Buying a home is a significant expense which is why you’re given decades to pay. And you can certainly stick with the current schedule, especially if you’re not in the right financial situation to pay extra. So, before putting more cash toward your principal, ask yourself these questions:
- Do I have minimal/no high-interest debt (e.g. a credit card) that needs to be paid off first?
- Do I have money tucked away for an emergency fund that covers at least 3-6 months of my current expenses?
- Will I still be able to make payments to my retirement fund and save up for a vacation or other financial goals?
If you can say yes to all of these questions, you should be good to go. But keep an eye on all of these areas over time. Racking up credit card debt due to an unforeseen expense or suddenly losing your job, perhaps due to a global pandemic, could quickly change your finances.
Remember that your mortgage likely comes with a far lower interest rate than credit cards. And putting all of your extra money towards shortening a 30-year mortgage loan does you no good if don’t have cash in hand for an emergency.
Also, consider whether or not you want to put your extra money into a different investment such as stocks, which may yield a higher return. On average, ROI in the stock market has been much higher than mortgage rates, but it’s not without big risks. You’ll likely need to weather some ups and downs over the long term and will need to be prepared to take a few hits along the way.
More Options to Pay Down Your Mortgage Quickly
A lot can happen over the life of a 30-year loan, especially in your own life. You may advance in your career and earn a higher salary. You might finish paying off your car loan, win big in Vegas, inherit a sum of money, or experience some other change that frees up cash flow.
If so, you have a couple of options available to help tackle your mortgage.
Pay Bi-Weekly or Make an Extra Payment – Your mortgage payment schedule is based on 12 payments per year. Instead of making your full monthly payment, make a half payment every two weeks. This will result in a total of 13 payments for the year. If possible, you can also budget to make one extra payment at some point during each year.
Based on the $450,000 loan mentioned above, one extra payment every year would shorten your loan by 3 years and 7 months while saving you $31,574 in interest.
Refinance to a 15-Year Loan – Sure, your monthly payment will go up quite a bit, however, you will pay off your mortgage loan faster and pay less in interest. Again, using the $450,000 loan:
30-Year Fixed at 3%
- Monthly payment $1,897
- Approximately $233,000 in total paid interest
- Payoff date: August 2051
15-Year Fixed at 2.5%
(Shorter loans often come with lower interest rates)
- Monthly payment $3,000
- Approximately $90,100 in total paid interest
- Payoff date: August 2036
There’s no doubt that if you can swing it, being mortgage-free in 15 years and saving $142,900 in interest is a pretty big deal.
Mortgage Recasting – If you win big in Vegas or otherwise come into a large chunk of change you want to unload, at least $5,000 for most lenders, you can make one lump-sum payment toward your principal. A lender will then reamortize the loan according to the new balance.
While the result is a lower monthly payment, you can continue to pay your original amount and apply the surplus to the principal which would help you pay off your mortgage faster. Note that this option is not available if you have a VA or FHA loan.
Next Steps for Reducing Your Mortgage Schedule
Whether you just purchased or have owned your home for some time now, the options to pay off your mortgage faster all come with their own upsides and downsides. There will be paperwork and fees that come into play, so it’s best to understand the big picture before moving forward.
To help you make the best possible decisions for your circumstances, it’s a good idea to speak with a financial advisor or your lender directly.