How to Pay Off Your Mortgage Early - Your Path to Financial Freedom

Difficulty: Moderate

Instructions

Things You'll Need:

Mortgage Amortization chart (see steps on how to get one)
Your mortgage papers, and/or
The phone number of your mortgage loan officer
Discipline

Step 1

Don't be intimidated by the amount of steps here .. much of it is just background information so that you can be more effective and educated in paying down your mortgage. It really is not complicated! So, let's get started:
Step 2

Find out what the current balance is on your mortgage. You may be able to get this online or from a recent statement. Otherwise, you can call your mortgage company.
Step 3

Review the terms of your mortgage. Take note of the current interest rate, the number of months left on the loan, and the exact dollar amount of the payment that is going toward the loan interest and principle (do not include taxes and insurance or other escrow amounts).
Step 4

Mortgage amortization

Using the information from step #2, get an amortization chart for your mortgage. This lists the beginning balance of your loan, the date of each payment, the amount applied to principle and interest and the balance owing after the payment. This may be available from your mortgage company, either by request or online. Otherwise, there are many online sources for a mortgage calculator (see resources below).
Step 5

Now take note of any prepayment penalties. Even if a mortgage has a prepayment clause, you will usually be allowed to prepay a certain percentage of the loan balance each year, such as 5%, without penalty.
Step 6

Next look for any service or processing fees for making extra payments. Most mortgages will not have such a fee, but you want to check to be sure.
Step 7

Determine the posting policy of your mortgage. If you make a payment, when will it be credited for interest calculation purposes? Some mortgages will only credit on one day of the month, such as the 1st or 30th, regardless of when you actually make the extra payment.
Step 8

Use the information gathered in the steps above as a guide to how often, what day of the month, and any limits on how much to prepay.
Step 9

Now take a look at your amortization chart. Note how much you are actually paying each month on the principle of your mortgage. I'll show an example line below:
Step 10

Payment: $801.52 -- Interest: $643.08 -- Principle $158.44 -- Balance: $130,901.00
Step 11

Most of the payment is interest

In this example, $158.44 of the total payment is going toward paying down the mortgage. The rest is just interest. By the way, this is a typical example. Most of your payment is just interest for the first many years of the mortgage.
Step 12

In our example, if you pay an extra $158.44 with this month's mortgage payment, you will now be paying your mortgage off a month early. While it is easier to track by using the exact figures, you can adjust these to fit your budget. For example, a $40.00 extra payment will take about a week off the mortgage term. A $315.00 extra payment will take about two months off the mortgage term.
Step 13

If you have an adjustable rate mortgage, keep in mind that when the rate adjusts, the payment will be calculated based on the original payoff date, and not an accelerated date. So you will need to account for this every time your rate and payment is adjusted.
Step 14

Now, whenever you get a bonus or a few refund checks or even a raise, just gather it up and make an extra principle payment on your mortgage. Note: If there will be a processing fee for making extra payments, either bunch them into one extra payment or add them on to your regular payment.
Step 15

Remember that the amount needed to make a full extra monthly principle payment will change (increase) each month as the loan balance decreases.
Step 16

If your mortgage company credits your payments on or near the date you make them, then there are other very effective methods that don't even require any extra payment money. One is simply to make payments early. For example make your regular payment on the 5th even if it is not due until the 25th. Another method, if your mortgage company will accept a partial payment (most will not), is to break your payment into weekly payments or bi-monthly payments. To use the example in step 8, make a payment of $400.76 two weeks before the payment is due and make the balance of $400.76 on the due date. Paying early is a simple and very effective method in reducing the total interest. (Check with your mortgage company first regarding partial payments.)
Step 17

Think of it... just making two extra principle payments a year will take about four years off of a 30 year mortgage. Making an extra principle payment each and every month will cut a 30 year mortgage down to a 15 year mortgage. Ahh .... the sweet taste of financial freedom!