How to Pay Off Your Mortgage Early

Should you payoff your mortgage early? I asked that question a couple of weeks ago, and the majority of respondents said “yes.” With that in mind, I thought I’d put together a list of strategies for doing just that…

Refinance your mortgage to a shorter term

If you refinance your mortgage to a shorter term, say from thirty to fifteen years, you can dramatically reduce the time required to payoff your mortgage. You can see for yourself by playing with a mortgage prepayment calculator. As an added bonus, rates are typically lower on shorter term mortgages.

The downside here is that you will have to pay closing costs, etc. (unless you opt for a “no-cost” refinance). Your mortgage payment will also increase, but what did you expect? You’ll be paying off your mortgage significantly faster, so it only makes sense that you’ll pay more per month.


Biweekly mortgage payment plans

I’ve written about biweekly mortgage payment plans in the past. The trick here is that, by sending in half of your monthly mortgage payment every two weeks, you end up making the equivalent of an extra payment every year.

Don’t believe me? Do the math. Instead of making 12 monthly payments, you’ll make 52/2 = 26 biweekly payments — the equivalent of 13 monthly payments. This will shave years off your mortgage. Moreover, if you’re paid on a biweekly basis, this approach might match your budgeting process better than monthly payments.

The downside to biweekly payment programs is that, while many lenders offer these sorts of programs, most of them charge a fee for the privilege. While it might seem easy to justify such fees based on your long-term savings, there’s a better option…

Overpay a fixed amount every month

When we bought our first house, I started sending in an extra 10% of our total payment as an additional principal payment. Ultimately, this works out to the equivalent of 1.2 extra mortgage payments each year — on par with the biweekly plan, but without the extra fees. Since you’re sending a fixed amount everything month, this is also very easy to automate.

Pay next month’s principal this month

This is an idea that I first read about in “Wealth Without Risk.” It goes like this… When you sit down to make your mortgage payment, send an additional payment equal to next month’s principal.

If you’re not sure what next month’s principal payment will be, just double the amount from this month — that’s close enough. In case you weren’t aware, your mortgage statement should break this down for you, listing the amounts going to principal, interest, and taxes/insurance.

The primary advantage with this approach is that it really puts your mortgage payments into hyperdrive. Over time, the amount you are paying toward principal will increase, meaning that you’ll pay down your mortgage faster and faster as the months go by.

There are two primary disadvantages to this approach. The first is that the amount of your overpayment is variable (increasing each month) such that it can be hard to automate your payments. The second is that it becomes increasingly difficult to keep up with the payments since the overpayment continually accelerates as the interest portion of your payment dwindles.

The haphazard approach

If all else fails, I recommend that you at least take what I’ve termed here the haphazard approach. Whenever you run across a small windfall, simply forward it to your mortgage company as an extra principal payment. Get a check from your reward credit card? Send it in. Get a tax refund? Send it in. Find ten bucks in the gutter? You know the drill… Send it in.

Aside from the fact that this approach doesn’t put any additional strain on your budget, paying down your mortgage with found money can be kind of fun. The downside is that this approach is generally less effective than the alternatives. After all, your additional payments will typically be smaller, and will come at somewhat random intervals.

Closing thoughts

The above list is by no means exhaustive, but it’s a great starting point. If you have any other suggestions, please share them in the comments. If you’d rather invest than prepay your mortgage, that’s fine. In fact, some of the above strategies can be applied to juicing up your investments. For example, make that extra “principal” payment into a brokerage account.

The important thing is to do something.

125 Responses to “How to Pay Off Your Mortgage Early”

  1. Anonymous

    We are on a track to paying off our mortgage within the next 2 years. We took out a $300k 30-year mortgage in 2012 @ 3.625% (price of this home in greater NY – $385k) and after we saw the total interest paid over the life of the loan ($190k+) it wasn’t worth it and our house would not sell for that total price! Right now we have about $199k left. We don’t buy the theory of put more in investments; we want peace of mind and being in our early 30s we have time to take that risk with a 70-80% stocks after 2 years. I do want to add that we are in the 33% income tax bracket and paying extra is challenging but def. worth it!

  2. Anonymous

    I have 20 yrs to go on my $54k, 30 yrs morgage. I put 10% extra every month to principal. I am thinking about refi to shorten the term,BUTit is only going to lower the interest by less than 1%.I will also try to set up bi-weekly pay’t as well. Is it worthdoing it? Pls advise. tks.

  3. Anonymous

    Champagne, would you make the annual payment NOW, or would you save up $600 per month for a year first? Your extra principal payments only start saving you interest AFTER you make them. If you’re shoveling $600 per month into a savings account, it isn’t saving you any interest in the meantime. Does that make sense?

  4. Anonymous

    champagne1076, each month you pay interest on the remaining principal. When you pay more each month, that principal is smaller the next month than it would have been if you didn’t pay extra and saved it for the end of the year. So you would pay more in interest that way, even though you are paying off the same amount in principal. But the difference (some of which might be discounted if you claim a mortgage deduction) might be so small that having adequate cash on hand for emergencies might be a better consideration for making a big annual payment.

  5. Anonymous

    i purchased my home in Jan 2012 at 115,000. with 4% interest. i pay an additional $600-$1,000 for principal faithfully every month but i would rather make an annual payment instead. i was advised that i save more money over the yrs if i pay an extra $600 each month instead of an annual payment of 7200 which would be the same. how is that?

  6. Anonymous

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  7. Anonymous

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  8. Anonymous’s where I am…I’m a Widow, husband was a Guild Member,Custom Knife Maker. died, I have house w/fully equiped,best u/can buy, equiped shop,apx $20, thousand, 3bd/2bath/garage,on canal/quit street/low taxes,33143,want to advertize in KnifeMaker’s Guild Mag..Come On $30,000…should I pay off mortgage first? Advertize in KnifeMaker’s Guild?
    to just sell it?? Need to get out of here..I know of no other Guild Members in this area..don’t want to loose a lot on equipment/or just sell as is & save the $30,000 for downpayment on next place???

  9. Anonymous

    I presently have a 15 year mortgage @ 5% and I owe 139,000. What would be the best way to pay this down in a shorter time period and save interest cost? Send in extra with each payment or mail in extra payment towards principle etc. All feedback welcomed.


  10. Anonymous

    I agree with Brian about keep fund liquid. I learned my lesson the hard way. We bought rental house in 2004 for 330K (we rented, live in different area, 2 hours drive from that rental house), negative cash flow of 650 per month. I was a fan of prepay mortgage, avoid interest. Therefore, I prepaid our mortgage every month with extra money (refund from tax, bonus, live in tight budget to save money for prepay mortgage…). At that time, we had emergency fund of 6-8 months. In 2008-2009, we are unable to rent the house for 10 consecutive months. After that, we were able to rent it out with lower rent, result in negative cash flow of ~1000 per month. All our emergency fund were used to pay for that vacant period, and repair the house after previous tenant move out, change carpet. That house became under water in 2009, and we had paid ~70K in prepayment. It was a loose situation with upside down mortgage, run out of emergency fund, continue negative cash flow of 1K per month. In the end (2010), we had to let it go even though we lost so much money in it. I can not handle the negative cash flow any more. I need to start fresh and rebuild emergency fund to prepare in case I lost my job.

  11. Anonymous

    Renee, not knowing how much longer you have, but an approximation is dividing your mortgage payment by the extra amount. You are paying 81.87 on principal each month so dividing your mortgage payment by that gets 25.8. So basically for every 26 months you pay, that is one less month you have to pay on the end, plus the interest saved. You will also have around $1000 more in equity each year.

    As for is it worth it? That kind of depends on the interest rate and what you would otherwise do with the money.

  12. Anonymous

    Good you have a strategy, but you at your young age need to speak to someone with expert financial advice. You have to begin thinking about setting aside for retirement when you are nice and young, as you are. As far as holding on and collecting rents-great, but remember you still have taxes and repairs (and condo fees if it is all condo) to deal with. Hopefully the real estate market will turn sooner rather than later and those investment properties will be worth something at sale time. Also, think about life insurance. Get it while you are young and healthy and go whole life rather than term, so when you hit your 40s and 50s, and starting to take medications or having some health issues, you won’t be stuck with enormous premiums. Whole life is the way to go, and you can even borrow against the policy, or cash out, etc. in an emergency. Also, think about a college fund for those future children of yours. Great to get all this done while so young! Good for you.

  13. Anonymous

    Our house is worth about 450,000 dollores, our payment is 2,118.13 a month I always round it to 2,200 dollares is it worth sending the exta money, and if so how much shourter can my loan be paid off.

  14. Anonymous

    central72, you can try to recast your mortgage which basically keeps your loan identical as far as interest but they go off you existing principal balance instead of your original loan amount, it wont do much but it can save you $100-150 a month.

  15. Anonymous

    Is there a way to pay off mortgage early on a ‘simple interest’ loan? Just found out today that the mortgage I have on a rental is ‘simple interest’. I have paid $900 month for 4 yrs now and my balance is only $14,000 less than when I started! Need help!

  16. Anonymous

    Georgia, I would save for retirement, especially if you are in your 50’s AND the money you are talking about can be tax sheltered in a retirement account. The extra money paid to the mortgage in your case won’t save you much in interest if you are selling within one year, and there is no guarantee that you sell your house for what you are asking for it. Of course, most investments are not guaranteed either, but the long term possibility to do better with them will probably be more rewarding than any interest saved.

    But if you are not maxing out your tax sheltered retirement options, you lose the opportunity to do so with each passing year. Then decide if you want to pay more on your next mortgage when/if you get one. Just something to consider.

  17. Anonymous

    This sounds great. However, we are in our late 50’s and plan to sell our house within a year. Would it still be worth us paying the principal as suggested or investing that money in hopes of increasing our retirement savings?

    Thank you. We’re not sure which way would be best for us.

  18. Anonymous

    I read this article today and wow I am doing it right. My monthly payments on my home is $1441. I pay each month $1600 instead and have been for over three years. Now the mortgage company really hates me they send me emails telling me I do not have to make the extra payments well—— yes I do it is good for me. HA mortgage company take that.

  19. Anonymous

    lukas (post 100),
    i couldn’t agree more with what you said. live like no other, to live like no other. i’m 22 years old, married, first time homebuyer, no kids (dont plan on it anytime soon). we are 100% debt free, with flawless credit. my wife and i gross about $3,700 a month. we have rented for some time and decided now is the time to buy. we found a townhome for $69,900 about 1,000 sq. ft. in southern utah. our plan is to pay $1,700 extra each month. total payment will be about $2,100. with a tight budget and living well below our means, this property will be paid off in 3 years exactly. saving us approx. 65,000 in interest. we plan on living in each property we buy, until 100% motgage free. i think this is an incredible plan and opportunity to be introduced into the world of rental properties.

    after we are 100% mortgage free on this townhome, we will purchase a similar type property, around $75,000-$100,000. renting out the first property we will collect roughly $650 a month (based on current rent amount). we will then add this amount to our original $2,100 bringing the total to $2,750 a month to our 2nd property ( of course we will have to budget for the continued cost of hoa’s- $71 a month, and property taxes- about $50 a month). we can pay off this property in 3 years as well. we will continue to do this for the rest of our lives.

    from the time we pay off property #1 it will take about 10 years to recover our entire investment from renters. thereby gaining an asset appreciating in value, and providing monthly income for the rest of my life. this same concept applies to each property we buy. incredible.

    my strategy blows any kind of stock market return out of the water. averaged out over the 36 months of me making an extra $1,700 a month payment, i will get a 100% “return” on my investment through interest savings. some can argue this is not making money, but i believe that saving money is earning money.

    i really like the idea of starting out very small. i feel confident and protected in paying the mortgage. total monthly cost is $100 less than current rental rate. positive cashflow right from the start…amazing. we are on track to close tomorrow 6/28/10 which means we will get the first time homebuyer credit and receive $7,000…. woohooo. what better time than now?

    i would like to hear any input on this matter for or against or adding to.

    ps. i believe in having an emergency fund

  20. Anonymous

    I personally agree with Lukas. I used the money that I could have used to buy a more expensive house to give a large down payment on my house. I did NOT allow the loan officer (let alone an agent) to tell me how much I could qualify for. I calculated how much I can pay comfortably each month. My mortgage company could care less whether or not I might have an emergency and no money to cover because I am leveraged out making end meets after I mail my mortgage payment. So I am able to double my principal each month and have done so for over a year. I could have bought a house that costs two times what I paid for my house. Thank goodness I did not fall in that trap.

    Currently I double my principal and put some leftover in the stock market. Paying down my principal is my highest priority and I use it as means of diversification because I am quite aggressive with my stock market investment approach/system.

  21. Anonymous

    Heres my opinion. I feel if you can only afford to pay an extra $10-100 a month in principal, then you bought a house above your means, I believe in a system I made up myself, the live like Shit for a couple years and then the rest of your life worry free. Its about sacrifice. Example, if you get aproved for a 300K house, dont go buy a 300K house, go buy a 125K house and make well over double payments every month (your house will be payed off in probably 5 years if that) and you will still have plenty of money each month to put into a savings account. PLus money to put into investments. After 6 months, you having liquiid cash, you have money in stocks, you have equity in your house, and you have a low house payment if you lose your job, etc. Its a no lose situation. Now heres where the fun comes, after 3-5 years and your house is paid off, your 125K house is now paid off. Sell it, go buy a 250K house and put down 125K, your payment is the same and start over, but continue to put money in savings and investments. On a side note, the worst thing ever that I learned (it took me 27 years by the way and Im 28) DO NOT BUY A NICE EXPENSIVE NEW CAR. Its the worst thing to do, you pay interest on the loan, you lose 5K when you drive off the lot, you lose your butt when driving it cause of mileage and many other ways. My wife and I make over 150K a year combined. You pull up to our 160K house, I have a 99 cavalier (paid off obviously) and she drives a cheap mercedes (it costs us 15K) and yes we lost our asses on it, but I just realized about this “New car thing”. It will not happen anymore. However, weve been able to buy cheap houses cash, flip them for a profit and increase our income this year. We send in a lot of money every month on the principal, We put some in savings, and as far as investments, I dont know the first thing, but to me, having cheap houses paid off and that could generate good rent if I coudnt sell them, is a great investment, especially when I can make 100% on my money when a flip goes successful. Anyways, again, we plan on “living like shit” for the next couple years and then we plan on easy living for life. LIVE BELOW YOUR MEANS PEOPLE, NOT WITHIN YOUR MEANS

  22. Anonymous

    I’m glad I found this thread.

    I’m 40 but my husband is 50 and we would like to retire in 12 years. We have 5 children, which we’ve agreed to pay 1 year of college for each. We bought a little bit high on our house because we needed the space, but we’re not lopsided; we’re at the required 30% house pmt ratio/income.

    We have about 2 months emergency funds liquid and another 2 months funds tied up in investments that we can’t get out for another 2 years. 2 years ago we sold a rental we had. Now we wish we had the liquid funds to buy a cheap rental to offset our tax deductions; and, property is so cheap now.
    But, my point here, do we take some money from our home equity to buy rental property (even though we don’t have a huge liquid emergency fund, and have lots of kid costs up coming) and we already pay down our mortgage a little each month, but we need to vamp it up for the 12 year goal? Doing both is that a good idea?

  23. Anonymous

    This has been an interesting thread to read. Thanks so much for the many great comments and recommendations. With mortgage interest rates still at historic lows the decision to pay early or not becomes more complex.

    I have one question/comment I would like to make regarding the supposed benefit of the deduction of mortgage interest. In my situation, my standard deduction is only slightly less that my itemized deduction (married, joint) which of course includes the mortgage interest. So I ask, am I really gaining that much by having the interest deduction?

    Several posters in this thread have made some strong arguments for NOT paying off a mortgage early. However, I will continue to work to pay down my mortgage early for these reasons: 1) I bought my house right so I am not concerned with loss of value; 2) the substantial interest monies I will save (i.e. earn) by paying the mortgage off early; 3) peace of mind of not having a mortgage; 4) not being beholden to a banker; and 5) I will continue to work as long as I am physically able so I’m not as concerned with a huge retirement savings.

    My employment situation is more secure than most and I actually enjoy what I do. I have my emergency savings in place. I pay for most everything with cash and have no credit card debt and no other loans with the exception of my mortgage.

  24. Anonymous

    32 yrs old, bought a 2-year old certified pre-owned car outright (no monthly payments!), paid off student loan debt, maxed out 401K, got a 6-month emergency fund, scheduled an additional 50% of the mortgage payment monthly. there’s a $12 fee at my bank to make one-time payments and they don’t offer bi-weekly payments, so the add’l payment was a no-brainer. makes more sense to overpay because we’re looking to refinance.

  25. Anonymous

    Ashley, you’re getting some great advice (and a great offer of adoption – I’m next in line to adopt you, or can you at least teach my 24 year old daughter some things?)! Seriously, on the advice side, if you follow Swamproot’s guidance, take the other $83 ($500 minus $417) and put it toward your mortgage every month and you’ll be taking a big step of getting you closer to your goal of paying off your mortgage sooner.

  26. Anonymous

    >>”I am 23, bought my house at 21, I paid my 07 car off after 1 1/2 years of owning my home (so pretty much recently)… I am now applying that $500 car payment every month to my homes principal. ”

    Ashley, I’m old enough to be your father. Can I adopt you? 🙂

  27. Anonymous

    Ashley, you are doing well. But don’t neglect the investing. If you start investing a fixed amount every month in your twenties, you can save up more by the time you retire than if you start contributing 4-5 times that amount in your thirties.

    Since you claim no knowledge of investing, look into a 2050 or 2055 target date fund at Vanguard, Fidelity or T. Rowe Price. At your age, your contributions matter much more than your investment choices with regards towards your portfolio growth, and these funds are plenty diversified to serve you until you do “learn more”.

    If you put $416.66 a month into one of these funds into a Roth IRA, that will max out your IRA contributions for the year and set you up to be filthy, stinking rich when you retire (and not owe taxes!!!), and you will STILL have money left over to put towards your house.

    Contrary to what you are thinking, this is actually a case where sticking with what you know will actually COST you LOTS in the future from lost opportunity, which could be significant. Please don’t wait until your house is paid off to start, or when you finally get that investing thing figured out, you will be kicking yourself and I say this as someone who does advocate paying off your house. Just not at the expense of saving for retirement, even in your early twenties. Other debt maybe, but not the mortgage.

  28. Anonymous

    I am 23, bought my house at 21, I paid my 07 car off after 1 1/2 years of owning my home (so pretty much recently)… I am now applying that $500 car payment every month to my homes principal. I hope to have it paid by the time I am 30. I see many people debate between paying off mortgage early and investing it especially at young ages, my problem is I know nothing about investing/stocks. So I am sticking with what I know will save me lots in the future, maybe as I learn more I can do both!

  29. Anonymous

    I guess some more good info to have for someone trying to pull this off would be: when a mortgage is sold between banks is that price higher or lower than the principal? Another friend of mine told me if I wanted to try this to stop making the payment. Don’t think I want to go that route.

  30. Anonymous

    The difference there is that a truck is a depreciating asset. At a certain point, until it goes classic, it gravitates toward worthless so it can be easier to negotiate such a deal. But a mortgage is backed by property, which, the last few years notwithstanding, generally appreciates. I believe it can be done, but its probably harder to negotiate.

  31. Anonymous

    Will a bank ever take a reduced payment to settle a mortgage. IE: I owe 20000$, I call the bank up and say I want to pay this off, will you take 17000$ cash now??
    My cousin did this with a truck loan? Anyone ever heard of this?

  32. Anonymous

    Yes, you are right, CharlieBoy. I looked into that charge, it was 2.5%. My mortgage is @ 5.5%. It just gives me more motivation to save for credit card pay off.

  33. Anonymous

    One approach, that might work is if you are getting 0% interest for 12 months on credit cards offers, select an amount that you can definitely save up for paying off that credit card debt. Apply that amount to your mortgage. Any thoughts?

  34. Anonymous

    what if after paying off your mortage and living mortgage free for several years we decided to buy another house, the market has been soft and we are thinking about renting for 2-3 years while trying to pay the new mortgage early any ideas????

  35. Anonymous

    I’ve decided that paying my mortgage off is as important as air. I’ve put it into turbo mode. First, I have been paying in advance, which has made it so my next payment is due in about 14 months. That would provide me with enough protection from a job loss. On one month, I make two separate payments (until I am 24 months ahead of schedule), on the following month, I make at least two principal payments. In a few months, I expect to make triple principal payments every other month. IT’S FREEDOM OR DEATH!

  36. Anonymous

    Fran, as moneywise said, check mortgage calculators. Also, don’t get overwhelmed with extra payments…be wise about it. Whatever extra amount you can pay towards your mortgage is better then nothing, but not at the expense of not having things like an emergency fund.

  37. Anonymous

    All I know is that Accelerated Bi-weekly payments has gone a long way to putting a dent into our mortgage. The formula is slightly different from regular bi-weekly – the amount we pay is higher (but negligible) compared to regular bi-weekly payments. We’re fortunate, because we also have in our mortgage contract a clause that allows us to do double-up payments, which we do. The double-up payments go directly to the principal; the regular payments are, of course, split between interest and principal. Also, we’re allowed to pay 10% or the original mortgage amount on the anniversary date.

  38. Anonymous

    Fran, use any of the on-line mortgage calculators to figure out how much extra you need to pay. You will just need to enter the loan amount remaining, the interest rate and the number of years.

  39. Anonymous

    I financed 108,000 at 4.75 fixed conventional for 30 yrs. How much extra do I need to pay monthly to pay off in 15 yrs. My payment now is 571.00. March will be the first yr. Thank you

  40. Anonymous

    I’m not done with paying off my mortgage yet but I have a nice system worked out and I wanted to share.

    1. 25% LTV required these days to get a home equity loan. Sorry to those of you who don’t have that yet, or have it any more with the current times.
    2. Open a check book with a bank, in my case M&I
    3. Home equity loan open with the same bank, (must be the same bank so you can move funds same day between the home equity line of credit and the check book).
    4. Setup overdraft protection on your check book to be covered by the home equity line of credit.
    3. Mortgage the house with another bank, in my case it’s a 30 year.

    The system:
    1st, Direct deposit from my wife and my job goes into the check book.
    2nd, pay all bills, setup auto bill pay the day it’s due which keeps the money working for you as long as possible.
    3rd, log into the Mortgage account and make a payment plus what ever extra principle you have in your check book to drain your check book to $0. The nice part is it tends to take 3 days before the money is drawn from my check book but it hits the mortgage the day I make the payment.
    4th, Live for two weeks with a $0 balance in your check book! The overdraft protection draws money into your check book when ever you buy something, draw out cash, or us the credit from your check book. The balance grows on the HELOC but you defer interest until the day after you needed money.
    5th, 2 weeks goes by and you get paid, pay off the HELOC, pay the bills, make the mortgage payment.
    5th, If you want to go a step further, use a credit card which is a 1 month free loan to defer payments even longer so that you can use the credit card companies money for an extra month!

    My wife and I are on track to pay off our $200,000 30 year mortgage in 4.3 years! The point is every penny you don’t spend is going to pay interest on your mortgage the day that you get it. You never have cash on hand but you have credit available for the HELOC when ever you need it for an emergency.

    I was tired of conventional so I figured out the extreme, hope it helps someone else to their financial freedom. I’m about $20,000 closer to mine in about 6 months!

  41. Anonymous

    Everybody, play CLOSE ATTENTION to what Linda (post # 50) says above. Do NOT neglect your emergency money. If you pay down your principal while neglecting to build a very decent emergency fund, you could lose your house if you lose your job. Your mortgage will be due even though you lost your job. My approach has been to alternate between paying more towards the principal and paying ahead of schedule. On month 1, I will make two separate (full) payments. On month 2, I will make a single payment and double the principal. So, as a result, my next payment is due in 14 months from today if I lose my job, and I have been paying down my principal at the same time. But I can afford to make the full extra payment every other month because I bought less house than I was told I could afford and I paid off my cars. I use every single extra cent towards my dream of being mortgage free someday. I expect to be free in 4 to 5 years.

  42. Anonymous

    This whole section is very informative. I started in with a new construction loan in 2006. I moved in 2007 with a 6.5% loan. I kept trying to refin, hearing the rate was going down. It was time consuming, but after contacting my local mortgage brach. In 2007, a loan for $155,000 @ 6.5%.
    Now $150,[email protected]% and still 30yrs looks and feels better, to me. I lost the original appraisal value from $175k to 150k in 08. The kicker is, I made weekly mortgage with additional $25 for 7 months. So $1200 mortgage down to $325 a week. The bank notified me 6 months into this said I late on 1 month. And they do not accept partail payment. Now I just pay $1300 a week prior to due date.

  43. Anonymous

    Patty – you have to ask Citibank what those fees are. They might be accrued interest, or escrow shortage, but you should find out from them exactly what they are. If you request a payoff statement, it should itemize everything. As far as the flood insurance is concerned, if your house is located in a FEMA designated “flood zone”, lenders will not hold a mortgage on a property unless there is flood insurance on it.

  44. Anonymous

    I want to payoff my mortgage. The Citibank wants to charge $3,000 in fees that they say is not prepayment penalties. Is this standard and is it legal? Citibank wants us to purchase flood insurance for $2,500 per year. Multiply that amount for 15-20 years and it’s obvious that its better to payoff the mortgage. But what are these fees and can I fight them?

  45. Anonymous

    Petunia, et al,

    It worked! My lender reapplied the payments, saving me approx $4400 in interest. Thanks for the advice!

    Thanks to fivecentnickel for a great website!


  46. Anonymous


    That’s exactly what I intend to do if they won’t reapply the payments. We are going to talk to them tomorrow; will let you know what happens.

    Thanks again,

  47. Anonymous

    You’re welcome, Merry.

    Also, if your lender will not agree to re-apply the payments you have already made, I suggest you stop paying your mortgage until the next payment is due in May 2010. Instead, deposit the money into your savings account, the extra payments too if you like. When your next payment is due, send the entire amount, and specify that the extra is for additional principal.



  48. Anonymous


    Thanks so much for the info. You have, unfortunately, confirmed my fears. I will do as you suggest and contact my lender. At least I didn’t get too far out on my payments! Merry

  49. Anonymous


    You aren’t saving a single cent of interest with your current method. You are simply sending in future payments early. If that is your goal, that’s great. If your goal is to reduce interest paid, then you need to send extra principal with your regular payment.

    Mortgages are not simple interest notes. With a simple interest note, interest accrues daily. If mortgages were simple interest, the amount of interest would vary due to how many days in the month and whether your payment had posted on the 30th, the 1st, the 4th, etc. However, as you can verify with your amortization schedule, your monthly interest does not vary at all based on days of the month or the exact date your payment posts.

    If I were you, I would contact my lender and see if they won’t re-apply the additional payments you have already made. Payments received mid-month could have been held in suspense and applied as additional principal on the first of the following month. (Assuming that your goal actually was to reduce interest paid.) If they agree, then you will no longer be paid through May 2010, but you will have reduced your principal balance and the life of your mortgage.



  50. Anonymous

    I have two questions. I have been making an extra regular mortgage payment in the middle of every month. Currently, my next mortage payment is not due until May 1, 2010. Is this the best way to put extra money toward my mortgage, or should I be specifying the extra money to go toward principal only?

    When is the best time of the month to make an extra payment? Assuming you make your regular payment on the 1st of every month, and you want to put extra money toward the principal, should you do that in the middle of the month, or just shortly before you make your regular mortage payment? I read once that the less time that has passed since the last time your account was active, the more money will go toward your principal and the less to interest.

  51. Anonymous

    I have a $400,000 30 year mortgage. I put 25% down and have enough cash saved up for a 7 month emergency fund. My remaining bablance on the mortgage is about $150,000. I inherteted about $100,000 that I had not expected to inherit. I plan on using a “laddering” method with 4 seperate CD’s. (6 month at 1.54, 1 year at 1.99, two year at 2.94 and 4 year at 3.05 percent. At the end of the four years I will take the full amount and apply it to my mortgage. I plan on paying extra each month on my mortgage. So essentially I wam planning on paying my mortage off in 8 years.

  52. Anonymous

    Bryan and LMoot,

    With my well-funded emergency fund in place, I am diverting extra funds to paying down my mortgage debt in 4 years. After those 4 years (1.5 to go), my same emergency fund will be sufficient for covering three times the amount of unemployment than it does now.

    By paying down my mortgage debt every month, I end up paying much less interest (debt) to the bank than if I paid it off in a lump sump even 1.5 years from now and certainly much less than when I began paying off that debt in earnest 2.5 years ago. It’s actually astounding to realize how much interest (debt) I avoid paying the bank by paying extra each month versus paying in a lump sum at the end. That amount far outweighs any amount over the standard tax deduction.

    With a well-funded emergency fund, why pay down credit card debt? Why pay down car loan debt? Why pay down personal debt? Why pay down house debt? Because when debt is $0, then my emergency fund is worth more months of coverage and my obligations are easier to meet.

    I know you are urging people to see Tax and Financial Advisors. My sister is one of those and she has paid off her house. In addition, people need to beware of financial advisors who, instead of charging a flat fee, give “free” advice and make money off of the investments instruments they steer customers to.

  53. Anonymous

    LMoot – thank you, I couldnt have said it better (believe me, I’ve been trying). Equity in a house is one of the highest risk places to park your money, and one of the least prudent. It has no rate of return, it is not safe and it’s not liquid. It was a good strategy 30 years ago, not today. As I’ve said before “Liquidity is Key”.

    Perk – the point is to have access and control of your (home equity) money, not to get rich by investing it. And to be in a position to be able to pay off your mortgage IF you choose to when YOUR assets equal or surpass your debt. I strongly urge homeowners to involve their Tax and Financial Advisors when structuring such a strategy. I would feel much better 15 years from now knowing that I can pay my mortgage off if I want to, than knowing I have my mortgage paid off and not much in liquid assets. Also, you will be suprised at how many people give extra money to their lender every month with the goal of being mortgage-free by the time they retire only to learn that the tax on their 401k income will have to be offset to maintain their pre-retirement lifestyle, so they end up taking another mortgage (if they qualify) to get their money back out of the house.

  54. Anonymous

    “”””This whole thread is outstanding. So many people are in trouble on their houses/mortgages because instead of paying the loan down over time, they kept adding to it to take out the equity. A gradual paydown would have eliminated the entire mortgage mess.

    Going forward, anyone with a mortgage, or planning on having one, needs a viable plan to pay it off early. Not only will this build equity, but it will also open up more options in the future. How important is that??? – KEVIN”””””

    The future does not always supercede the NOW. Not paying down the mortgage is NOT why people are in trouble. Not having adequate liquid savings is why people in trouble. My current mortgage is $600/month. I could pay $1000/month, every month. Then, I get fired. I have less savings than I would have if I just pocketed the extra $400 a month, and do you think that because I’ve been “paying down my mortgage” that my payments will decrease, or that they will forgive me if I’m late a month or two? Paying down the mortgage does NOTHING to secure the present (and what good is the future of your asset if you lose that asset). Like I said, I could be $400 over my mortgage until the last payment, and that last payment will STILL be the original amount of $600. Paying down the mortgage does NOTHING for my current financial situation (and less for my future financial situation) than merely saving the money and paying it off at once.

  55. Anonymous

    Question: Why would you gradually give your money to someone else to earn interest on? Not only removing your opportunity to invest, CD, or save it and earn the interest for yourself, but also the security of having accessibility to liquid cash?
    If you know you want to pay your mortgage off in x amount of years, you should “overpay your principle” in a high yielding savings account, or ladder a CD (put a certain amount of money into a CD every 6 months-a year, for up until you plan to pay off the mortgage all at once). Of course this only works if you have the discipline to not touch the money. I can’t imagine though, WILLINGLY giving money that I won’t be able to control until I get the house sold to someone else to invest and make money off of. Why would you do that? You’re essentially giving away profit and losing money to have someone babysit your money, without paying you interest.

  56. Anonymous

    From Bryan:
    “4.) For the homeowners who use the mortgage interest tax deduction– every extra dollar paid toward principal permanantly wipes out a portion of Uncle Sam’s contribution. This is a factor many dont consider until it’s too late. I strongly advise consulting a CPA about a mortgage payoff strategy.”

    Also make sure to take account of capital gains taxes on investing money and then using it to pay off a house in a lump sum. No one seems to argue against investing and making money because one pays capital gains tax on those earnings. Yet people turn around and argue to not pay interest on a loan off early because of a tax deduction. The tax deduction argument is to pay out $1 to save $0.25 (or $0.33).

  57. Anonymous

    A very simple approach, that shaves atleast 10 years off your mortgage.

    Appropriate tax refund every year towards an extra mortgage payment.
    eg. 150,000 over 30yrs @ 5.5 with 20% down

    say an additional 1200 in from yearly tax refund will shave atleat 10 yrs.

    how about that. 🙂

  58. Anonymous

    Hello Nickel;
    Since ten yeras ago, I have a mortgage at 7.38% at 30 years term. On every month, I am sending and extra money for eralier pay off. So, I have reduced the in ten years the length. I have always wondering wihich will be my final interest rate when I finished to my mortgage. Can you please help to calculate it? Thank you.

  59. Anonymous

    Don –
    As Swamproot said, it’s very situational. In my opinion, You are thinking along the right lines. If you would like, I can help you figure out which is the best approach. I use a program that will do a side by side comparison of using principal reduction vs. asset accumulation to pay off a mortgage, and all the interest costs and savings over specific periods of time. It will certainly help you and your wife make an informed decision and pursue your chosen plan with confidence. Drop me an email if you would like me to assist. I am a Mortgage, Liability And Cash Flow Advisor by trade. Because you are a “fivecentnickel”er, I will offer my service at no charge. [email protected]

  60. Anonymous

    Swamproot – 1.)You hit it on the head! “it is an issue that is individualized and there is no stock answer to IF you should pay your mortgage early”. It is totally situational and too many factors should really be considered for an individual to decide if it is suitable for them. Thank you… that is the answer to this forum!
    2.) I really am not talking about 2 different things because they are interconnected, to compare paying off a mortgage in extra principal payments to saving and paying yourself, the liquidity factor is a big consideration ( house rich-cash poor).
    3.) A HELOC is a nice way to supliment your liquidity until you have it in cash, BUT… you are borrowing the extra payments you made to your principal and paying interest on it! If you want to send me a couple hundred bucks each month and not want to earn interest on it, I’ll take it, and when you need to access it, I’ll charge you interest and if you don’t pay that interest, I’ll own your house. Deal?
    4.) For the homeowners who use the mortgage interest tax deduction… every extra dollar paid toward principal permanantly wipes out a portion of Uncle Sam’s contribution. This is a factor many dont consider until it’s too late. I strongly advise consulting a CPA about a mortgage payoff strategy.
    5.) The rules have changed!! Granddaddy had a pension, he had no credit cards, he kept the same job and lived in the same house for 30 years, college costs were so reasonable, he paid cash, when he retired, he did not need a tax write-off because his pension and social security covered everything. Paying off the mortgage was definately the right thing to do 20 -30 years ago. And he got a gold watch to boot : )

  61. Anonymous

    Bryan, I have also been thinking of that. Saving it till the 10 year mark and paying the remaining balance. I have looked around a little at diff options to save money and earn more interest than what my mortgage payment is. Even if I saved the money in my account and only earned a little interest, I’d still have a safety net for the unexpected and the diff will be minimal anyway. The emergency fund is an absolute must. We have gotten rid of almost all unnecessary frills. If we want to do something pay for that use instead of months where you don’t use it. I work with a couple folks that have cars, trucks and RV’s with grown kids back at home (whole other issue) but I see too many stretched too thin and set up for failure. As I explained this to the wife, we pay off in 10 and have 20 to continue to save at a higher rate or let her stay home or we continue and the way we are and be done in 30. We can be virtually debt free in 10 years and early 40’s by then or be like a lot of others here struggling and not being able to enjoy life at retirement. Thanks again Bryan for the info in all the posts, it got my rusty wheels spinning and thinking again.

  62. Anonymous

    Bryan, MY way of thinking would be not to buy a house at the top of a bubble. 🙂

    But I think you are talking about two different issues. ONE of them is about having the liquidity to survive for several months if you lose your job. This is what the Ramseyites call the Fully Funded Emergency Fund. Don should absolutely save enough cash on hand to handle that contingency. I and I don’t think most people who advocate paying off your house early would argue against that point.

    But MY house hasn’t really gone down in value, in fact I’m pretty sure I could sell it for more. I can qualify for a HEL or HELOC if I need it. I can lose my job and my wife can still make the mortgage. In a few years, MY house will hopefully be paid off early, and I will no longer be mailing a substantial portion of my income off to never be seen again. I will at that point have a whole lot less to worry about, certainly less than the client of your associate. But I will concede that it is an issue that is individualized and there is no stock answer to IF you should pay your mortgage early.

    I don’t think the rules have changed. If you buy what you can afford, prepare for emergencies, save money, don’t spend more than you make, then you will still be OK. Just like granddaddy use to say. 🙂

  63. Anonymous

    Swamproot – It’s not about earning more than the interest you are paying. It’s about liquidity and having control of your money. There have been very detailed studies on saving vs. paying extra pricipal and saving always came out better. Equity is not always accessable, in fact it’s the worst place you can put your money. A recent example, aclient of an associate of mine bought a house 2 yers ago for $800,000. He put $400,000 down and took a $400,000 mortgage. The house was recently valued at $400,000. His hard earned down payment is GONE. If he put $160,000 down, and saved the difference, he would now have $240,000 in the bank. Sure, he’s upside down, but at least he’s liquid. Now what if he loses his job? He has no equity so there’s nothing to tap into… it’s GONE. In the second scenario at least he has money to survive and cover his costs while he finds another job or figures out his next step. AND if he was not upside down… he cannot tap into the equity because he doesnt qualify to BORROW IT BACK. Your way of thinking is the reason so many people have lost their homes to foreclosure in recent years. But It’s understandable because that’s the way we have been conditioned to think. The mortgage one selects and how they manage it will have far-reaching impact on their personal and financial well being. It really has to be worked into the overall financial strategy and not treated as a compartmentalized obligation. The rules have changed… we have to stop living by the money rules that our parents and grandparents lived by. It’s a totally different environment.

  64. Anonymous

    Bryan, you speak of paying off principal like its throwing money down a well, saying it “is lost forever”. But that isn’t the case, it removes the liability that the principal dollar represents. Unless the rate of return on the money you save is greater than the interest rate on your mortgage you couldn’t have more money left over. To earn better than mortgage interest rates of return, you would probably need to put the money you are saving into something illiquid or volatile, or else it would be a more obvious thing to do. Equity in your house is something you can tap if you need to and having it is like having insurance. Of course the same can be said about a big pile of cash. But by not paying it on principal, you ARE letting it grow for the mortgage company.

  65. Anonymous

    Don – The $1,400 a month you are now saving will go alot further if you kept saving it every month and continue to EARN compounding interest for the next ten years, THEN pay off the mortgage. I dont know your specifics but you will probably have money left over after paying it this way. This would really be “paying yourself first”. As I’ve said it prior posts… “saving” interest is not the same as “earning” interest. Keep total control of your money. Every extra dollar you pay toward principal is lost forever (until you sell or refi). Unless you are liquid enough to cover your living expenses in the case of an unforseen financial setback, I urge you to truly pay yourself first. $1,400 a month can grow substantially…. let it grow for you, not your mortgage company.

  66. Anonymous

    My wife and I refied and since the orig lender messed up the escrow, we will now save little over 400 a month. We are paying what the old rate was and now that the kids are out of day care and private school to public we are using the additional 1k a month in a savings for 6 months and paying 3 at a time and should knock the 30 year to about 10 and still give us money to fall back on if needed. We should save about 160k in interest. lay low for 10 and enjoy the remaining 20. We got rid of all the unneeded things and work with what we need and adjust as we go. Stop paying others and pay yourself…

  67. Anonymous

    Linda @ #50,

    Are you specifying that the extra funds are for principal reduction? If not, you should start.

    Call Citi Financial and tell them you intended those extra monies to be applied to your principal balance and ask nicely to have this corrected. Don’t take “no” for an answer.

  68. Anonymous

    We think we are getting cheated by Cit Financial on our mortgage. It said on the back of our statement that any amount made that was over the amount of the monthly payment would go to principal….we have been paying a little extra each month…nothing went to principal. When we asked about it they told us they “don’t work it that way”….anyone have a problem like this? only one time did our principal drop (we paid early) and they told us we can’t pay payments earlier than every 30 days. WHAT?

  69. Anonymous

    Mark – Very nice!! Do you have sufficient liquid funds to cover you inthe case you lose your job? If so, you’re in great shape. Otherwise you might consider putting the $250 towards that. In 2 years, even if you stuck it in the mattress, you’d have $6,000 that you cannot access if you used it for principal paydown.

  70. Anonymous

    I have a 40 year mortgage with a variable rate of .65% below prime. I went for this last year due to the fact that my payments were low. Most people would spend the saving, but I put it against the mortgage. Putting an extra $250 against the principle. I did this for 2 reasons. One is that if I lost my job I could stop the extra $250 and get my life back online. And the other due to the fact that I know the amount of $250 is hitting the principle. I watch my finances and I am very happy I did it this way.

  71. Anonymous

    jj san – You are probably hearing about one of the Money Merge Account type products. They set you up with a Line of credit from which your income is deposited to and all your bills are paid from. They also provide you with computer software to manage and monitor it. From what I’ve seen tey do work, owever you need alot of discipline to work it successfully. Some people swear by them and some hate them. I suggest you research it, look at some of the video presentations they offer and see if it is for you. The more opinions you get on this one, the more confused you will get. You have to decide based on how it fits you. By the way, many of these companies charge for the software, I’ve heard $3,000 +, but not sure. And if you can cut 22 years off your mortgage, it’s well worth it. Good Luck!

  72. Anonymous

    does anyone out there have any experience working with any of the websites promising that you can pay off your mortgage in 8-12 years and it not involve any bi-weekly or extra annual payments? jj san

  73. Anonymous

    “Cash is King” and Liquidity is Empowerment!!!
    I can’t say it enough….. if people managed their finances to build a proper level of liquidity, I would bet that around 70% of the foreclosures that happened over the past year and a half, would have been avoided.

  74. Anonymous

    Bryan, your answer at post #34 was equally brilliant. Liquidity is an important consideration when making extra payments on a mortgage. Once paid, the cash won’t be available for other purposes, especially now that mortgage money is harder to get than in the recent past.

  75. Anonymous

    Great answer Kevin! You are absolutely right.
    Gloria – the correct answer to your inquiry can only be given after someone you trust reviews your overall financial situation. If anyone tries to give you advice on what to do without thoroughly understanding the above, don’t take their advice, it’s as good as one of those Eight balls that you shake and turn over. Good Luck !

  76. Anonymous

    Gloria, you’re looking for a yes or no answer of course, but the only answer that can be given without knowing anything about you or your circumstances is MAYBE. There are about a dozen questions that need to be answered before anyone can provide any reasonable guidance on your situation.

    You probably need to discuss this with an attorney, accountant or other trusted financial advisor, preferrably one who knows you and your situation fairly well, and doesn’t stand to benefit from your decision.

    Age, employment and income, assets, assets after loan payoff, future intentions, family situation, future cash needs, non-mortgage debt and other questions all need to be addressed before anyone can give a yea or nay opinion on the payoff, and you certainly don’t want to be sharing any of that on the web. Good luck!

  77. Anonymous

    my mortmage balance is $89.000 and i am thinking to pay it off total, but i am not shure if this is the smart thing to do, my monthly payment is 667,70 do you have any sugestion on this and if so, what would be a better way to make profit out of the $89.000 as of today is just in a money market acct.

  78. Anonymous

    This whole thread is outstanding. So many people are in trouble on their houses/mortgages because instead of paying the loan down over time, they kept adding to it to take out the equity. A gradual paydown would have eliminated the entire mortgage mess.

    Going forward, anyone with a mortgage, or planning on having one, needs a viable plan to pay it off early. Not only will this build equity, but it will also open up more options in the future. How important is that???

  79. Anonymous

    Bryan –

    I think we are more in agreement than not.

    Basically, have enough cash or equivalents (fuel, ammo, alcohol could end up as cash equivalents if things get bad enough – forget gold and other metals) to cover your emergency situations.

    Beyond that (what, $50k max), I think dividing extra savings up between looking for great deals due to deflation and getting a guaranteed 6% or so return by paying off a mortgage early is a great way to go.

  80. Anonymous

    Petunia –

    In comment 35, Eden wrote:

    “Yes, having access to the cash would be nice, but it doesn’t seem worth it.”

    My response was to show why it is worth it.

    As to your second point, I totally agree. This is the era of instant gratification but living as if the the money rules and practices are the same as those of our parents and grandparents. The rules have dramatically changed and not too many bothered to pay attention.
    If people do not start planning properly, what we just went through will be nothing compared to what lies ahead. I don’t like to be negative, but reality is going to kick many people quite hard when it’s too late for them to do anything about it. and the results will be people being under-insured, unable to afford health care, no or insufficient retirement funds, and outliving their retirement funds. It’ going to be a real Bang for the Boomers. I hope they at least take better care of their health because I think they’ll have to work for many more years than their parents/ grandparents.

  81. Anonymous


    I don’t think anyone is arguing for not having an emergency fund.

    And I agree that the vast majority of those who lost their homes are not victims of the “mortgage crisis”. In fact, I believe that the vast majority are victims of their own poor planning.

  82. Anonymous

    Eden – First of all, I would hope that a 1% return is fairly short term, so we can’t use today’s savings returns for long term comparisons. Secondly, Many of the folks who have lost their homes to foreclosure in recent years were not victims of the “mortgage crisis”, they had unanticipated financial circumstances that they did not have a big emergancy fund to cover themselves while fixing the circumstance. That, if anything, is a major reason to not pay down additional principal until one has liquidity (do you know anyone who lost their job lately?). The $800 monthly principal contribution is lost until you sell or refinance the house. While the $800 monthly investment (regardless of the rate of return) is always accessible in the case of an emergancy or even an opportunity. Liquidity is key and the equity in a house is one of the worst places to keep your money, but that’s a completely different discussion. The bottom line is if you have 6 to 12 months of living expenses in a safe, accessible place, you can handle practically any financial set-back a lot better than having no extra money to continue paying for the mortgage you worked so hard to pay down.

  83. Anonymous

    [email protected]

    While I agree that a big emergency fund is important to have before making significant extra payments, saving those payments over the intended payoff period is very expensive.

    E.g. a $350,000 balance at 6%, $800 extra per month, 1% earned in a savings account. Back of the envelope, this would cost me nearly $100,000 in extra interest if I were to bank the $800 for ten years and pay off a lump sum. Yes, having access to the cash would be nice, but it doesn’t seem worth it.

    Yes, these numbers are imprecise and you could find other numbers that make more of a case for saving the money, but you would still miss out on significant interest savings.

  84. Anonymous

    Unless you have a strong emergancy account established, making extra mortgage payments can be dangerous. If you want to pay off your mortgage in 6 years, figure out what it would take each month then put that amount into an interest bearing account every month for the next six years, THEN pay the mortgage off with one big payment! This way you pay yourself first, maintaining control and access to your money for as long as possible. Life Happens in good ways and bad, at least you will always have choices by maintaining access to your money. And you will be EARNING interest for the next six years instead of SAVING interest (there’s a big difference).

  85. Anonymous

    I’ll second the just-do-something approach. I went in, about five years ago, with a goal to pay off my mortgage using whatever means were available. If I could only pay $200 extra per month, I did it. A couple of months I paid $2,000 extra due to some windfalls. Like others said, it wasn’t pretty but it worked: I paid my mortgage off last summer.

    One thing I found was that even small payments help. If all I could afford to overpay was $10 a month, that would have still been enough to pay my mortgage off a full month early. So every 10 bucks you can scrape up helps. Every $100 you can scrape up helps more.

  86. Anonymous

    We used a combination of paying the next month’s principal and the haphazard approach when we came into extra money. I say whatever method that you use to pay it off early is a good one. Find what works for you.

  87. Anonymous

    Like DDFD, I read advice just before I closed on my house a week ago that rounding up was the best way to go. If you can’t round up to the nearest $100, go for $50, or even $10. Since rounding up to the nearest 10 meant adding 73 cents, I’ve decided to round up $10.73, hoping that when I get the new budget figured out (with utilities and stuff), I can keep adding $10 until I’m rounding up to the next $100. This is my goal!

  88. Anonymous

    Seth #28 – No, that won’t result in any interest savings. Interest on your mortgage is calculated on a daily basis only in the event of payoff. Whatever your outstanding principal amount is after your payment is made, that is the amount the next month’s interest is based on. (Notice that your interest due does not vary based on how many days are in a month. If interest was calculated on a daily basis, you would notice that you owed a bit more interest on April 1 than you had on March 1, but the opposite is true.) It was strategic thinking on your part, though. 🙂 If you were to send in $500 on the 15th, I suspect your lender would simply code it to “suspense” pending the receipt of the other $500, then apply the $1000 as usual.

    Eden #29- That is what I do, too. I have a budgeted amount which I pay, and raise it a bit each time I have a raise or eliminate a monthly expenditure.

  89. Anonymous

    I generally use the “overpay a fixed amount” method. I also increase the amount I pay every year to simulate the normal rent increases I would face anyway. Over the years a 3-5% annual “rent” increase really adds up and helps pay down the mortgage more quickly. Of course this would only work if your salary is increasing at a similar rate.

  90. Anonymous


    I’m not asking about the biweekly plan. I’m asking about paying semi-monthly, 24 (not 26) half-payments/year.

    Details in my original post, #25.

    Can anyone answer?

  91. Anonymous

    Countrywide (now BofA) applies extra monies to past due, escrow shortages, then principle in that order.

    When I first started I was using the haphazard method. When I refinanced to a lower fixed 30year mortgage I just kept making the same payment that I had been paying. Now that all my other debts are paid I pay at least $1k to the principle each month. My target date for having the house paid off is May 2012.

  92. Anonymous

    Seth, that’s the biweekly payment plan. It adds up to an extra payment a year. I am not sure if it makes for less interest costs, because of the way mortgage interest is done on a fixed-rate fixed-payment mortgage – i bet it depends on the bank.

    Our mortgage servicer offers the biweekly payment system if you set them up to draw directly from your bank account, and they charge a fee for that, which made me leery of it. I’m not sure what the bank would do if you just sent in the biweekly payments yourself – probably someone here does that and knows how it works.

    In the past our current mortgage servicer has done stuff like double-billed us for the same month because we paid before some arbitrary date in the month, and randomly decided that for overpayment we should be assessed a late fee, so I don’t do auto-deduct.

  93. Anonymous

    What about making two half-payments a month (different from one payment every two weeks)? Instead of making a single monthly payment on the 31st of each month of, say, $1000, you make a $500 payment on the 15th and a $500 payment on the 31st?

    You’re still paying $12,000 per year, but the bank sees half of that amount 15 days early, month after month.

    Does this work? It looks like it would shorten the loan considerably and reduce total interest. Or is the logic incorrect?

  94. Anonymous

    Swamproot, I’ve had car notes that would do similar to that. If you pay extra, then the balance due the next month would be less than normal (extra payments are “pre-paying” the next months bill). Interest-wise, it is a wash (you are not paying more interest if the note is amortized this way and you pay it off early).

    I wish mortgages were this same way as well — then there would be less “risk” in paying off a mortgage early. If you lose your job, your money is not “locked-up” in the house: you will have a few months (or years) of $0 non-payments to make until you ‘catch-up’ and then the normal payment schedule resumes.

    This would eliminate a large barrier (at least for me) for paying off a mortgage early.

    Unless mortgages change, it is strongly advised that you have 6-12 months in liquidity (cash or similar emergency fund) _before_ paying extra on a mortgage — depending on whether you have a two-earner (6 months) or single-earner (12 months) household. This also means that people who are buying a new home for the first time: you should also have 6-12 months in CASH on top of the down-payment you are making for the new home purchase.

  95. Anonymous

    Here is another approach for some people. Some mortgage companies will allow you to do a “recast” of your amortization for a fee. My mortgage company, US Bank, will allow you to make a payment of 10% of the remaining balance and then adjust your monthly payments to reflect the lower balance against the remaining time left on the note. It costs a flat $250. Might not be too practical with a 300,000 balance, but with a balance under 100k, it would seem a reasonable thing to do.

    I was hoping to do this to lower my payment, and then keep paying the same thing. I also overpay a fixed amount (around 15%) on the same check, and it is always applied to principal.

  96. Anonymous

    @Jim #15 – switching to a 15 year mortgage is going to actually lower our required payments, because interest rates are so much lower now than when we first got the house and the 15 year loans have lower rates again.

  97. Anonymous

    Here’s my pre-payment trick with a safety net in this economy. I send 1/12th of one extra annual payment each month to my ING account where it sits earning 1.5% interest. If I have a job loss or something, I can tap my emergency fund + the extra house payments.

    No job loss or catastrophic event comes along…I send it to the mortgage company. That way, I don’t lose the flexibility in the meantime and it still means I make 1 extra payment each year.

  98. Anonymous

    My husband and I have also used a variety of techniques. We started by adding a little extra to the principal each month, then we refinanced to a shorter term and recently started paying bi-weekly. We hope to have two mortgages for two separate homes finished off in 13 years max!

  99. Anonymous

    Similar to your “Pay next month’s principal this month”, I’ve used the “Pay double the interest this month” approach (not sure if it’s been published). The side effects are that you are keenly aware of how much money you are wasting via interest payments, and also the monthly payments will be decreasing (since the interest portion will decrease rapidly).

    However, since January — I’ve abandoned this approach to hoard cash into a greater than 6 months emergency fund…

  100. Anonymous

    I like the haphazard approach because at least its better than doing nothing and builds a sense of momentum in paying off the mortgage. Its a good thing it has also worked for others.

  101. Anonymous

    Nice post! I’m always an advocate of financing for a lower term whenever possible. I’m of the opinion that when I buy a house, if the payment is too high at 15 years, I’ve got too much house and can’t afford it. That’s a personal choice and by no means something I expect of others. I just don’t want to be indentured to a house payment for 30 years. The interest I’d be paying on that loan would probably cause me some anxiety. So, my plan would be to do the 15 years and then I’d probably do what LRG posted above – move biweekly payments to a savings account and then pay one payment at the end of the year. Of course, if I sell a script and make it big with my writing career I’ll just pay cash ahead of time…but, I’ve got the 15 year plan as a back-up! 😉

  102. Anonymous

    I like the method of keeping a 30 year mortgage and paying extra towards the principal every month.

    If you go to 15 year then you’re locked into paying larger payments. But with a 30 year you have the option of making extra payments as much as you want or can afford, but if you lose your job or whatever you can scale back to the smaller standard payment. So the 30 year mortgage with extra payments is the best flexibility.

  103. Nickel

    Chris: I’ve always heard that you should make the extra payments with a separate check, and specify that it should go toward principal. While that’s a good strategy (just to be on the safe side), I’ve always made a single payment that includes the overage, and I’ve never had a problem with a lender mis-applying them. Maybe I’m just lucky.

  104. Anonymous

    Great thoughts. Just make sure your mortgage company will actually apply those to the mortgage and not “bank” those funds for the next months payment. That is one of the sneaky things some mortgage companies will do.

  105. Anonymous

    I do a combination of overpay and haphazard – I never put less than $100 of overpayment towards the mortgage (~10% give or take) and usually put $200-$400 extra (sometimes up to $1000-$1200) depending upon the state of our bank account and any windfalls or how I happen to be feeling as I pay the mortgage that month.

    Got rid of our 2nd mortgage in ~3 years, and we are currently in the process of refinancing to a much lower rate right now that will really allow us to accelerate our principal payments.

  106. Anonymous

    The first few years we owned our house, we had roomates, so we paid double the whole mortgage payment. It was really satisfying because, as Dave said, in the first few years every bit of principal you pay off is a *ton* of interest saved.

    Now it’s just us and we pay a little extra every month, basically just rounding up to the nice even number that’s in my budget. If we stuck with that it would turn our thirty year mortgage (now 7 years old) into a 18 year mortgage, just about.

    But we are right in the middle of a refinance for a shorter term at a lower rate. From the date that goes through, if we keep making the payment we make now, we’ll be done in about 8 years.

    It will also give us more flexibility; the required payment on the new mortgage is lower, so if something goes wrong our total overhead is lower.

    Ultimately we’d like to sell this big old house and buy or build a small, energy-efficient house – but the market hasn’t been cooperating with us right now. We’re actually looking at self-financing a teardown or an empty lot right now while they’re ridiculously cheap (there’s a very small house in our neighborhood listing at $3000 right now) and sitting on it until we can sell our house for what we paid for it or higher.

  107. Anonymous

    I like the haphazard approach. If you get bonuses and have a little side business, it can really knock down that principle balance quickly.

    I DO plan to refinance though, but will probably do it with a very short term loan (10 – 15 years). We’ve lived in our current home for 5 years and I have 2 more before the rate resets.

  108. Anonymous

    @Dawn: regarding refinancing, I will do so if the costs together with a better rate warrant I do so, otherwise I will not. This is of course going to be different on each individual basis.

  109. Anonymous

    All are good ideas, especially the “just do something” idea! I paid off two home mortgages (bought one house, paid it off in 10 years, wife fell in love with a larger home, moved, paid the new house off in 7 years) by running out an amoritization schedule and paying extra principal every month. The first years it is easy to do because most of your house payment is interest so it lops off many months at a time. After a while, I used savings to lump-sum pay out the rest of the mortgage. (Yes, you have to save money in bank accounts, mutual funds, etc. too for liquidity. This notion of either put all of your extra cash to the mortgage or none is BS. You can split the difference and do both.) An old book called “The Banker’s Secret” gave me the original idea. The author suggests nickle and diming away your mortgage. Belive me, not having to pay on a mortgage every month has given me maximum flexibility in saving for retirement, changing to a lower paying and less stressful job, and freeing up cash for travel.

  110. Anonymous

    If you have the discipline to prepay, it doesn’t always make sense to refinance.

    I’ve been prepaying from the start and am on target to pay the dang thing off in 6 more years, essentially paying off a 30-year loan in 20 years. I’m now paying an extra $425 monthly, but with a $64,000 balance, i don’t think it makes sense for me to pay the not inconsiderable refinance costs when i can achieve the same thing by prepaying and most importantly, retain the flexibility to pull back on the prepayments if, god forbid, i lost my job and were laid off. I could restart prepayments whenever i got a new job.

  111. Anonymous

    You’ve written an excellent piece here.

    I’m a huge fan of paying off the mortgage early – in fact I did it!

    What was most helpful to me was to budget very carefully and throw as much cash as I could towards the debt.

    Now I’m mortgage free and loving it!

  112. Anonymous

    It’s worth noting that making bi-weekly mortgage payments is exactly the same thing as making 1 extra monthly payment at the end of the year.

    The net principal reduction after 365 days is the same with 26 bi-weekly payments or 13 “monthly” payments.

    What this means for me…
    I make bi-weekly transfers from my checking to my savings account. My mortgage payment is withdrawn monthly from my saving account. (mortgage is with the same bank) Then at the end of each year, I will make a one time principal payment with the surplus that has built up from the bi-weekly transfers.

    This will avoid any fees for bi-weekly payment programs and allow automation on a bi-weekly basis.

  113. Anonymous

    My effective Mortgage rate is 2.71%. I will never prepay that loan unless I sell, retire early (in 20 years), or loose the tax deduction it gives me.

    Plus the payment is less than 10% our our income, I barely even notice it’s there.

  114. Anonymous

    I am guilty of the haphazard approach, but it worked (past tense!) for me. In 2001 I bought my current house with a 30 year loan and 20% down payment. Pretty standard. Most annual bonuses and my minuscule “second job” income from that point on went to principal, as well as a nice special company cash award. In 2003 I refinanced to a 15 year mortgage, and reduced my principal by a nice sum by deciding I would not buy a car at that time. Fast forward to January 2009 and, voila, mortgage paid off with one last bonus check.

    It wasn’t a pretty process, or even very scientific, but it worked for us, and I guess what works is what works. As an extra note, using this approach, as the post mentions, put no strain on us…it was all “extra” money other than the monthly payments themselves. And while it is arguable about whether pre-paying a mortgage is a good idea, we did not lose that pre-paid money in the financial market’s implosion, the monthly financial freedom since January is great, and it just feels good.

  115. Anonymous

    First let me say that I cannot currently refinance due to being “up-side-down” on my home. 🙁

    However, I have a plan…

    Shortly my high interest debt will be gone and I will have only mortgage and student loan debt. At this point I plan to pay very large extra principle payments on my 2nd mortgage, thus lowering the balance within just a few years.

    As soon as I have the balance low enough to refinance, I will refinance both mortgages into a shorter term single mortgage (most likely 15 years).

    Once that is done I will then pay double principle payments every month thus paying the mortgage off in half the time of the new term.

    Following this plan should allow me to have my home paid off within 10 years. That said, it is also written into the plan to have a fully funded emergency fund along with maxed out retirement plans prior to hitting the mortgages hard.

    In a nutshell…

    Year 1 – finish paying down high interest debt.
    Year 2 – max out retirement accounts using percentages gained from our debt elimination. And use the left over surplus to begin paying extra toward 2nd mortgage principle
    Year 3 – continue paying extra toward 2nd mortgage until I can refinance into a 15 year single mortgage (equity)
    Years 4-10.5 – pay double principle amounts every month allowing me to pay off mortgage in just 7.5 years

    My goal is 10 years, so I plan on making that 6 months up somewhere along the way.

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