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How to Pay Off Your Mortgage Faster Than the Loan Term

Founded in 1951, the National Foundation for Credit Counseling is the largest serving nonprofit financial counseling organization. Find various topics in this blog, including personal finance, credit counseling, housing, budgeting and student loan help. Click here to speak with an NFCC-certified Consumer Credit Counselor.

Tali Wee HeadshotBy Tali Wee

It’s fairly rare to stay in one home for 30 years, yet that’s the purpose of a 30-year mortgage term, which is one of the most popular options for borrowers today. You might sell before the end of your term to get some return on investment, but it’s less than if you owned your home outright.

Therefore, putting as much capital in your home as early as possible is one way to plan for a sale down the road. Here are three ways to prepay your mortgage and increase your equity faster than your loan term.

  1. Make Biweekly Payments

Decrease your mortgage term by about four years by making biweekly payments, which are exactly half your monthly mortgage payment, submitted every other week. Essentially, you’re dividing your monthly mortgage payment in half and paying it every two weeks instead of the full amount in a lump sum each month. Because a couple months have more than four weeks, you end up paying 13 monthly payments per year, versus 12 with a standard monthly mortgage.

The national median home value in the U.S. is $178,400. If you put 20 percent down, or $35,680, with a 4.176 percent interest rate, your monthly mortgage payment would be $941 per month – including principal, interest, insurance and taxes. Cut in half, the biweekly payment is $470.50. That amount paid 26 times in a year means you overpay by one full payment of $941. The extra investment shortens the 30-year mortgage by four years and saves you $14,411 in interest – assuming you are already five years into a 30-year mortgage when biweekly payments begin.

  1. Pay Additional Principal

What if you can actually afford to invest more cash in your home in addition to your mortgage? Using the same example as above, you could pay an additional $200 per month toward your principal, bringing your total monthly payment from $941 to $1,141. This extra monthly investment allows you to save $28,560 in interest and shorten the loan term by 8 years and 2 months.

  1. Refinance

If you can afford to apply more than a few hundred extra per month, try refinancing to a 15-year mortgage and benefit from lower interest rates and a shorter term. You can use a mortgage refinance rate calculator to see offers tailored for your situation, based on the current balance of your loan, your property’s value and your credit score. A lower interest rate shaves off a large portion of your initial interest quote and is slightly less complicated than paying additional principal, once the refinance is complete. The entire payment increases and eliminates the guesswork for you.

With a little planning, you can use your side cash to benefit your home investment and free yourself of mortgage constraints earlier than anticipated.

Tali Wee is a Marketing Content Specialist at Zillow.com. She writes about personal finances, mortgages, and home improvements for the Zillow Blog and other Zillow partners.

Views expressed are the personal views of the author, and do not represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients.

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