In our article “Paying Your Mortgage Early” we covered some of the mathematics behind paying a mortgage early. It’s very important to do this in order to minimize the amount of money that you are putting into the banks pocket. For every dollar extra you pay in interest, that’s a dollar you can’t use to feed your family, to save for the future, or use to pay off other debt.
But most people already know that they should pay extra on their mortgage. So, we are going to take this one step further and discuss some methods that people use to help make it easier to make those extra payments. If you’re trying to sell your home, then be sure to read how to sell your home quickly.
The first thing I must suggest is to get out of the “perpetual mindset.” On a 30 year mortgage, it’s easy to accept that you’ll be paying forever on it, but take control, put that mortgage onto a shorter timeline and break the perpetual mindset.
Once you’ve accepted and understand that your debt can be eliminated, you must then form a plan. That is where we are going to try to help. Below we are going to provide some ideas that we’ve heard of, and some ideas that we have employed to take what seems to be an indefinite debt and put it onto a definite timeline.
The 15 Year Mortgage
The 15 year mortgage is brilliant if you can afford to do it. If you can’t, then consider putting more down or getting a cheaper home to make it work. Often you can get a lower mortgage rate with a 15 year, and you’ll pay a ton less in interest!
Advantages: You pay less in interest, it force you to be disciplined, and you won’t be in debt forever.
Disadvantages: If you budget too tightly then you can find yourself in a bad financial pinch. You must be vigilant
The 15 Year 30 Year Mortgage
This tip comes from a reader of the blog that mentioned a very interesting idea. Why not figure out what the 15 year mortgage would cost, build your budget around the 15 year mortgage and get a 30 year mortgage. Then make payments like you would with the 15 year mortgage and if something bad happens, then you have a little breathing room.
Advantages: You can pay your mortgage off in less than 15 years. If something bad happens you can lower your monthly payment that month without being behind or defaulting.
Disadvantages: It requires discipline. A new bedroom set isn’t an emergency, and if it is to you, then this method will probably fail. People can always find a way to spend extra money, and if you can’t convince yourself to consistently pay the extra money, you’ll end up paying on the mortgage like it is a 30 year.
Buy The House
Not literally, unless you can. This is the method that we employ for buying our house. What we do is find out what percentage of the home we want to own by the end of the year. Generally we will choose a number arbitrarily, and if the number proves to be too big, then we will scale it back a bit.
Advantages: By picking the percentage of the house you want to own, you are taking complete control of the mortgage. Additionally, it gets easier and easier to buy more because as you’re buying these percentages, the amount of interest paid each month is declining. Obviously this happens with all methods of paying ahead, but it’s considerably noticeable when you’re buying by the percentage.
Disadvantages: It is easy to overshoot how much you want to buy, and if you aren’t familiar with how much house you buy on a regular mortgage schedule, you might find the percentage you are capable of purchasing to be minuscule and depressing. Additionally, this method requires a good amount of math to do it properly, but doing all of this math really helps you to understand the ins-and-outs of your mortgage.
Buy Next Month’s Principal
This is the simplest of the methods and works off of the idea that you’re paying interest this month so you can pay down the principal, so why not pay more? All you need to do to accomplish this is to make an amortization schedule of your mortgage (this is a spreadsheet that shows you each payment broken down by interest, and principal). Then, when you’re making your payment, simply look at next month’s payment to see how much the principal would be and add that to this month’s payment.
If you need something to make an amortization schedule, then you can use our Mortgage Calculator which allows you to view the Amortization Schedule.
Advantages: This method is easy to employ, requires little extra effort, and helps to pay the mortgage off quickly. This will pay the mortgage off in less than 15 years.
Disadvantages: It requires discipline, and towards the end of the mortgage it gets difficult to afford such large payments, but at that point, even if you start slacking, you’ve avoided a large amount of the interest.