How to Pay Your Mortgage Off Early

The average homeowner with a 30-year mortgage can end up paying almost twice the amount of their original mortgage by the end of the 30-year loan term. This is an extraordinary amount of extra money going into the pockets of the lender in the form of interest payments. When you prepay your mortgage, you basically pay extra principal to reduce the overall loan balance, thus reducing the total amount of interest you will pay over the life of the loan. This article will give you some tips and suggestions on how to prepay your mortage, and hopefully save yourself thousands of dollars in cumulative interest payments.

Things You'll Need

• A decent understanding of your monthly budget
• Good record keeping skills

Instructions

1. Determine the long-term objective for your home ownership. If it is simply a more "temporary" house that you know you're not going to want to keep over the long term, or that you may move out of in the next 3-5 years, then it would not make sense to plow tons of money into putting a dent in the principal on the loan. But if you plan to keep your house over a longer period of time (at least a decade or more), it would definitely be advantageous to systematically prepay your mortgage, as it will save you thousands of dollars over an extended period of time.

2. It has often been said that you cannot determine where you're going until you first of all locate where you're at. With this in mind, obtain the proper paperwork from your lender that will show you the current outstanding loan balance, as well as your interest rate. Find out how much you still owe, and how much of it will go to principal vs. interest. This can be done by requesting an amortization schedule from your lender.

3. Utilize a mortgage calculator to run different scenarios as far as how long it would take to pay off your mortgage in different time frames or given different amounts paid over and above the regular monthly payment. You can easily find a mortgage calculator online...just search for the term "mortgage calculator" in Google/Yahoo/MSN.

4. There are several ways you can go about prepaying, and only you know what your particular financial situation is. Here are some suggestions for prepayment: (1) Make a habit of paying one extra payment per year. Divide your regular monthly payment by 12 and pay that amount each month on top of your regular payment. (2) Prepay a certain percentage of the regular monthly payment each month, for example 2% or 5%. Just tack it on to the normal payment that you send in every month. (3) If you have refinanced your mortgage and now pay a lower mortgage, act like you're still paying the old (pre-refinance) payment every month. This will be extra money going towards principal. (4) If you get a raise or any kind of increase in income, use that extra money to pay extra towards those mortgage payments. (5) Set yourself up on a bi-weekly mortgage payment plan. Since interest accrues on a daily basis, paying one half of the monthly payment every two weeks can knock off some of that accruing interest. It will equal out to paying an extra mortgage payment over a year's time. Over the long haul, it will do wonders in reducing your principal balance and the subsequent interest paid as well.

Tips & Warnings

• Any time you pay more than the regular monthly payment as designated by your lender, you need to make absolutely sure that any extra money you send is earmarked for payment towards the principal. Make sure that the lender understands this; otherwise, if you just send in extra money without any clear instructions as to what it's for, they will more than likely apply it towards interest first rather than principal. Remember, they're trying to make their money (interest) up front first; that's why the amount of interest you pay is very large up front, but then decreases over time.

• If you are paying for PMI (private mortgage insurance), make sure that you're not paying for something that you no longer need. If you have reduced your principal balance by 20% or more, you really don't need PMI anymore. Remember, PMI is to protect the lender against defaults until enough money is paid into the principal by the borrower (usually 20% of the loan amount) to compensate for any potential losses due to defaulting on the loan. If you have reached that 20% threshold, you can effectively ditch the PMI, and then use that money to pay more towards the principal balance of your loan.

• Keep very meticulous records and document EVERYTHING. Make sure that the lender is accurately recording the proper allocation of your payments.

• You need to make sure that you have all your ducks in a row so that when it's time to meet with the lender to get their final confirmation that the debt is indeed paid in full, there will be no "nasty surprises". I guess this is in line with the last tip stated above--document EVERYTHING and be very thorough with your records.

• Contact your lender and make sure that there is no penalty for prepaying your loan.