Dear Money & Crisis Reader,
Folks will try to tell you “debt is a tool.”
There might be an inkling of truth to that. But you should know that it’s a dangerous tool — one that cuts both ways.
You might be able to use it to buy a car or a house. But when you’re in debt, your money (and the things you owe money on) aren’t your own.
All it takes is a single crisis to undo all your hard work and knock you back to zero.
After the bubble burst in 2008, the biggest money lenders in the world were hemorrhaging cash. They scrambled their debt collectors to recoup their losses — and it was American families who paid the price.
In the following years, over 10 million families across the U.S. lost their homes to debt.
And nothing’s changed since then. We’re in just as much debt as we were before the Great Recession and just as unprepared for the next crisis.
According to a Pew Charitable Trusts report, 47% of baby boomers have mortgage debt, 41% have credit card debt, 13% have school loans and 36% have car payments.
This could spell disaster when the next financial crisis hits.
That is, unless you can pay off your mortgage before then…
Folks tend to find the idea of paying off their mortgage rather daunting. And I understand we’re talking about hundreds of thousands of dollars here.
But mortgage is a debt like any other and can be paid off early with simple strategies and techniques.
Even if you’re only able to pay it off a few years early, any extra money you put toward the mortgage can result in tens of thousands of dollars in interest saved.
Here are some of my top strategies for paying off your mortgage early.
Payoff Accelerator #1: Make biweekly payments.
This strategy is a great way to rack up extra payments toward your loan without even noticing.
Instead of paying your standard mortgage every month, you simply pay half that every two weeks.
Some folks find the logic behind this confusing. But it’s actually quite simple.
Some months are longer than others, which means the time between loan repayments will differ.
On this plan, you’ll be paying every two weeks no matter what.
With 52 weeks in the year, you’ll be making 26 payments in total toward your loan — which is the equivalent of 13 months’ repayment if you were paying monthly.
Important Note: Some companies may charge prepayment penalties or only allow payments on certain dates. Check with your mortgage company first.
Payoff Accelerator #2: Make lump-sum payments when you have extra cash.
The year-end bonus… a nice, fat tax refund… an unexpected inheritance…
It’s tempting to blow a windfall of cash on big-ticket items and expensive luxuries.
After all, it only comes along once every so often.
But depositing large lump sums of cash is a great way to shave time and future interest off your loan. Most mortgages will allow you to prepay up to 20% of the principal every year, free from any fees.
My strategy for dealing with temptation is to deposit the windfall as soon as you get it so you’re not tempted to spend it. (Of course, I like to skim a little off the top for a nice dinner with my wife first. I’m only human.)
Note: Include a note on your extra payment that you want it applied to the principal balance — not to the following month’s payment.
Payoff Accelerator #3: Pay a little extra every time.
You don’t need big lump sums of cash to save money on your loan.
Committing just a little extra money every repayment will drastically reduce the interest owed and time it takes to repay.
Let’s say you have a $120,000, 30-year, fixed-rate mortgage at 4.5%. If you add an extra $70 to your monthly payments, you’ll pay it off almost five years earlier and save over $22,000 in interest.
How much extra you decide to pay is up to you. But remember that a few dollars paid early will work much harder for you.
And there you have it. Three simple strategies for paying off your mortgage early.
In the future, we’ll show you other techniques for paying off debt — as well as other debt-repaying strategies that will end up costing you money.
As always, if you agree or disagree with anything here — or even just want to chat about financial prepping — you can send me an email by clicking here.
All the best,
Editor, Money & Crisis