Ways To Pay Off a 30 Year Mortgage In Less Time and Save Money

I have sold a lot of homes over the years and most have involved a mortgage.  Buyers usually choose a long-term mortgage, such as, a 30 year mortgage, to lower their payments to a level that's more affordable.  The main differences between 15 and 30 year loans are straightforward. Fifteen-year loans have higher monthly payments, but you pay less interest, while 30-year terms have lower monthly payments, but you pay significantly more for the house in the long run.  In some cases, more than double the initial purchase price.  However, long-term mortgages are good, in my opinion, because they allow options.  For example, you can choose to pay-off your mortgage in 15 years, but if you fell on hard times, you wouldn’t be locked into the higher payment of a 15 year mortgage.  There are several ways to pay off a 30 year mortgage in less time to save considerable money.  Below are some good examples.

• 1)  Pay one extra monthly mortgage payment per year towards your principal. In a scenario with a $100,000 mortgage at 6 percent interest for a 30 year term; the principal and interest payment on this loan would be about $600.00 per month. With taxes and insurance the payment would run closer to $800.00 per month. If you pay an extra $800.00 in principal per year on this mortgage, you would have it paid off in just over 22 years, or eight years sooner.
• 2)  Open a separate checking or savings account to hold your mortgage payment. Deposit one half of your mortgage payment into this account every two weeks. At the first of the month make your normal mortgage payment from this account. There are 26 two-week periods in each year, so at the end of the year there will be the equivalent of another mortgage payment in that account. Use this to pay on your mortgage. Don't spend money on a service that will do this for you. You can do this method on your own.
• 3)  Increase your mortgage payment by a fixed percentage each year. ERA realty calls this the "Three Percent Rule." During the first year you make your normal mortgage payment based on the 30-year note. For the second year, you add 3 percent to the payment amount per month. Add three percent of the prior years payment and make that payment for the next year. If you do this each year, you will pay off a 30 year mortgage in about 15 years. The three percent that you are increasing the payment each year is probably less than the amount that the cost of living increases, so it should only have a minor affect on your finances.
• 4)  Budget your money using a deliberate financial plan each month. By using a financial plan, you can probably find money to allocate to your mortgage to pay it off sooner. Every small amount of money that you pay towards your mortgage helps. Set a goal to pay your mortgage off in a certain amount of time and stick to it.

So you can see by the above it is easier than you think to pay off that 30 year mortgage sooner.  However, the drawback is that most people lack the discipline. According to the Federal Deposit Insurance Corporation (FDIC), 97.3 percent of people do not consistently pay extra on their mortgages. Many people lack the discipline to send in the extra money every month when it’s not mandated by the bank. However, what this statistic doesn’t mention is how many of the 97 percent would have fallen behind on their mortgages if they were locked into a 15-year mortgage.

Which is right for you?In the end, your financial situation will determine the right mortgage term. If you can make the higher payment, have a substantial emergency fund, and can meet retirement and other savings goals, a 15-year mortgage is a good way to own the home in half the time and pay substantially less interest. If just one of those conditions is not met, or if you are somewhat comfortable with debt and risk and wish to get a higher rate of return with other investments, the money saved each month with the 30-year mortgage payment may be better used elsewhere. You can always send in extra payments.

A relative of mine bought a new home 5 years ago and has a 30 year mortgage.  He faithfully pays extra every month.  It's really impressive how his principle is going down so fast and if he keeps it up, he'll have his 30 year mortgage paid in just 10 years.  What about you? Do you have a 15-year mortgage or 30-year mortgage? Do you prepay? What are your thoughts on risk versus higher returns?