For many people, their mortgage carries an interest rate that's lower than they could average in retirement or investment accounts. And that means the "extra" money you could throw at a mortgage might actually earn you a lot more elsewhere.
With a low mortgage interest rate, homeowners are "so much better off putting that money in a Roth IRA," says Jill Gianola, a certified financial planner and the author of "The Young Couple's Guide to Growing Rich Together."
And if you have extra money and an employer that offers matching retirement contributions, that option might give you a higher return for your money than paying off a low-rate mortgage, says Eric Tyson, author of "Personal Finance for Dummies."
Then there's the college aid factor. If you're applying for need-based aid for your kids, that home equity could count against you with some colleges, he says, because some institutions view equity as money in the bank.
If, after those caveats, you want to pay off your mortgage early, here are four ways to make it happen.
JUST PAY MORE
Divide your monthly principal and interest by 12 and add that amount to your monthly payment. End result: 13 payments a year.
Let's say you got a $200,000 mortgage at 4.5 percent. After five years of making the minimum payments, you add an extra 1/12th of a month's principal and interest to each monthly payment. Doing so pays off the mortgage three years and three months earlier, and saves more than $18,000 interest.
Here's a breakdown of the numbers:
_ Minimum payments only
Monthly principal and interest, years 1-5: $1,013.37
Monthly principal and interest, after year 5: $1,013.37
Years and months to pay off loan: 30 years
Total interest: $164,813.42
_ Add 1/12th to payment
Monthly principal and interest, years 1-5: $1,013.37
Monthly principal and interest, after year 5: $1,097.82
Years and months to pay off loan: 26 years, 9 months
Total interest: $146,737.89
Your savings: $18,075.53
Before you make anything beyond the regular payment, phone your mortgage servicer and find out exactly what you need to do so that your extra payments will be correctly applied to your loan, says Joel Doelger, director of community relations and housing counseling for Credit Counseling of Arkansas.
Let them know you want to pay "more aggressively," and ask the best ways to do that, he advises.
Some servicers may require a note with the extra money or directions on the notation line of the check.
REFINANCE WITH A SHORTER-TERM MORTGAGE
Want to make sure your mortgage is paid in 15 years? Refinance to a 15-year mortgage.
Let's say you got a 30-year, fixed-rate mortgage for $200,000 at 4.5 percent. Then, five years later, you can refinance into a 15-year loan at 4 percent. Doing so pays off the mortgage 10 years earlier and saves more than $60,000 (if you exclude closing costs on the refi).
Again, a breakdown of the numbers:
_ Minimum payments only
Monthly principal and interest, years 1-5: $1,013.37
Monthly principal and interest, after year 5: $1,013.37
Years and months to pay off loan: 30 years
Interest rate: 4.5 percent
Total interest: $164,813.42
_ Refinance to 15-year fixed
Monthly principal and interest, years 1-5: $1,013.37
Monthly principal and interest, after year 5: $1,345.45
Years and months to pay off loan: 20 years
Interest rate: 4 percent
Total interest: $103,539.27
Your savings: $61,274.15
Those shorter-term mortgages often carry interest rates a quarter of a percentage point to three-quarters of a percentage point lower than their 30-year counterparts, Tyson says.
You must qualify for a new mortgage _ which means paperwork, a credit check and, likely, a home appraisal. Plus closing costs.
And even with a lower interest rate, that quicker payoff means higher monthly payments. And this method is a lot less flexible. If you decide that you don't have the extra money one month to put toward the mortgage, you're locked in anyway.
Unless the new interest rate is lower than the old rate, there's no point in refinancing, says Doelger.
Without a lower rate, you'll get all the same benefits (and none of the extra costs) by just increasing your payment a sufficient amount, he says.
MAKE AN EXTRA MORTGAGE PAYMENT EVERY YEAR
Make 13 payments in 12 months. You can save up throughout the year and make an extra payment. Or, for those who get paid biweekly, harness part or all of those "extra" or "third" checks.
Let's say you got a 30-year mortgage for $200,000 at 4.5 percent, and you decided to add an extra 1/12th of a month's principal and interest to each monthly payment, starting the first month. Doing so pays off the mortgage four years and four months earlier, and saves more than $27,000 interest.
The numbers:
_ Minimum payments only
Monthly principal and interest, years 1-5: $1,013.37
Years and months to pay off loan: 30 years
Interest rate: 4.5 percent
Total interest: $164,813.42
_ Paying extra
Paying 1/12th extra principal and interest each month from the beginning: $1,345.45
Years and months to pay off loan: 25 years, 8 months
Total interest: $137,118.88
Your savings: $27,694.54
THROW 'FOUND' MONEY AT THE MORTGAGE
However it ends up in your hands, you can funnel some or all of your newfound money toward your mortgage.
Let's say you got a 30-year, fixed-rate mortgage for $200,000 at 4.5 percent. Then, five years later, you can make an extra $10,000 lump-sum payment. Doing so pays off the mortgage two years and four months earlier, and saves more than $19,000 interest.
Here's how that works out:
_ Minimum payments only
Monthly principal and interest, years 1-5: $1,013.37
Years and months to pay off loan: 30 years
Interest rate: 4.5 percent
Total interest: $164,813.42
_ Making a lump-sum payment
$10,000 lump-sum payment at 61st month: $1,013.37
Years and months to pay off loan: 27 years, 8 months
Total interest: $145,751.10
Your savings: $19,062.32
