Here Are 5 Ways to Crush Your Mortga Debt and Pay off Your Loans Early

Pay off your mortgage early and live debt free with these 5 methods and tips.

By HOM Editor
August 2020

Becoming a homeowner is a shared dream across the world, but a never-ending mortgage is not. It takes the average person 15-30 years to pay off their mortgage, and considering the latter is a huge portion of one’s adult life, shooting for closer to 15 years is clearly a more appealing option. According to Kevin O’Leary, personal finance expert and co-host of Shark Tank, “If you want to find financial freedom, you need to retire all debt — and yes that includes your mortgage. You should aim to have everything paid off, from student loans to credit card debt, by age 45.”

Based on a 2018 American Economic Association Papers and Proceedings study, more than 70 percent of Americans between the age of 56 and 61 were in debt in 2010, meaning the majority of Americans will most likely retire with debt. To get an overview of the average personal debt of an American, based on Experian’s 2019 Consumer Debt Study, that number is $90,460. Although, the thing about a mortgage, in comparison to other types of bills, is that your home appreciates in value over time, making owning a home a solid investment.

Despite the pace in which you’re paying off your mortgage, you can always count on that purchase being a beneficial financial choice. An analysis from CoreLogic shows that homeowners with mortgages in the U.S. have seen their equity increase by a total of roughly $590 billion since the first quarter of 2019. That is an increase of 6.5%!

There are a variety of options that make your monthly payments possible, but if you don’t want to be paying your home off for 30+ years, these methods and tips will help you pay off your mortgage earlier than planned, ultimately living carefree and debt-free.

1. Tax Returns and Bonuses

A very common way to get ahead on your mortgage payment is by applying a chunk of your tax returns and/or bonuses to your upcoming payment. While it may be tempting to spend that hard-earned cash on something more “fun”, the sooner you get your mortgage paid off, the sooner fun can be a main priority. This exercise is a great addition to any other efforts being made to crush your debt since a one-off payment is easy to handle and typically doesn’t affect your bank account since it’s extra income being used before it even hits the bank.

One thing to keep in mind when making extra payments towards your mortgage: always apply it towards the principal.

2. One Extra Payment

If you have some extra cushion in your bank account, making one additional mortgage payment each year will surely put a dent in your balance. In most standard 30-year mortgages, around half the total interest you pay will accrue in the first 10 years of your loan, so the sooner you can make extra payments the better.

Rather than digging into your savings, try cleaning out your garage or closet and having a yard sale to toss together some extra funds. Another exciting option for growing your income is starting a side hustle. The average side hustle brings in $1,122 per month, but only takes up about 12 hours of your week, making it a manageable additional workflow opportunity. Paying an extra $1,122 each month can cut more than 20 years of payments off your plan if, let’s say, you have a 30-year $200,000 mortgage at 5% interest. If you live in a two-income household, you can go ahead and double that, which could have you paying off your entire mortgage in as little as 10 years.

3. Refinance

If your interest is rather high, refinancing may be a considerable way to reduce your monthly payments, especially if some financial changes have occurred as of late. Many experts say that if you can save at least one percent off your existing mortgage, it’s likely a good idea to refinance. If you have a $225,000 mortgage and can refinance your interest rate from 5.15 percent to 4.15 percent, you could save about $1,620 throughout the year. But the most appealing aspect of refinancing is you can cut your mortgage length in half. Sure, your monthly payments will increase but it is worth it in the end. Not only will you say goodbye to your mortgage in half the time, but you’ll save thousands on interest fees as well–potentially $90,000 in interest.

How the overall market is doing will play into how low of an interest rate you are able to get. but there are other factors to take into consideration as well, such as closing costs that come along with refinancing.  These closing costs typically include credit fees, appraisal fees, points, insurance and taxes, title and escrow fees, and lender fees – and they sure do add up.

4. Round-Up Your Monthly Payment

This tip is a magic trick. It is essentially the piggy bank of paying off your mortgage early. By rounding up your monthly payments to the nearest hundreds, you’ll slowly start to see your principal amount paid down at a better rate while saving on interest. The great thing about this creative trick is that you’ll hardly notice that extra money coming out of your account. On that note, you may also think it’s too small of an amount to actually make a difference and be able to physically see. Although, if you round up each month, you can pay off hundreds of your principal amount each year, and nearly $10,000 over the course of 10 years. Once you start to normalize these round-up payments, you’ll forget you’re even making them!

5. Pay Bi-weekly

If you are eager to pay your loans off early but are struggling to put aside the full amount each month for your mortgage payments, switching to bi-weekly payments may be the perfect choice for you. Bi-weekly payments are a beneficial option if you’d rather pay smaller amounts at a time and save money in the long run. Bi-weekly payments are just what their name leads you to believe–making a ½ payment every other week as opposed to paying a full payment once a month. This payment option is a total of 13 payments, adding an extra payment to your yearly installments but with the mindset of spending less at a time. Some companies don’t offer this option, so if it is something that interests you as a new homeowner, be sure to look into the guidelines for your loan and ensure there aren’t any restrictions when it comes to bi-weekly payment plans.

To make things even easier on yourself, set your payments up to be automatically deducted from your bi-weekly paychecks so you never miss a payment and (fingers crossed) don’t notice the large chunk of change disappearing. Since most employees are paid on a bi-weekly basis, this payment plan likely feels more natural and it squeezes in that extra yearly payment at a feasible pace. As an assistant professor of real estate at Wharton School of Business, Ben Keys shares, “The thing I like about it is that it’s automatic. A lot of research has shown that a ‘Set It, and Forget It,’ method really works for people.”

While the only true way to pay off your mortgage early is to pay more, there are a handful of creative ways to budget and make increased payments a possibility without affecting your lifestyle and causing financial struggles. The great part about these tips and tricks is that paying small amounts here and there make handing over more money easier to digest. As Ben Keys says, “The automatic nature of it, where you don’t have the temptation to spend the money on something else, locks that money away. This a really good way to commit to saving.”