Lately I’ve been reading a lot about the different ways people put extra payments towards their mortgage principal in order to pay it off faster and cheaper. You can save literally tens of thousands of dollars in interest payments over the life of the loan by doing this. Check this calculator here. In my case, if I pay $50/month more on my rental property payment, I would pay it off in just under 26 years as opposed to the original 30 years and save myself more than $25k in interest payments. This calculation assumes I started adding to my payment from the beginning of the loan. Imagine if I added $100/month extra, or even more!
There are a few very common ways of doing this:
- paying an extra amount in addition to your regular payment every month
- adding lump-sum payments to the principal balance
- setting up a bi-weekly payment plan
Option #1 is the easiest and most effective to implement in my opinion. You already have your mortgage payment automated (right?) so adding a little extra every month is is to “set and forget”. Option #2 could work well as long as you are able to manage your money well enough to consistently pay down your mortgage principal. If you choose this route, have a plan so you will know when you will pay a lump sum to this debt. This could when you reach a certain threshold in your savings account or you work overtime or receive “unplanned” funds some other way. Option #3 is becoming popular as well but some banks require you to use their service to implement this approach. For this you basically pay your mortgage every 2 weeks which adds an additional “monthly” payment over the course of the year. This works because it is biweekly, not bimonthly, meaning you make 26 payments which are half your normal mortgage payment (effectively 13 monthly payments) as opposed to 12 normal monthly payments.
Too Much Too Soon
Now I would love to start paying off any of my two mortgage or two home equity balances faster than planned. Unfortunately, I have credit card debt to handle first before considering where my extra money will go. This got me thinking of some long term questions since I do not really have a plan in place for my debt after paying off my credit cards.
- When will I be free of non-secured (credit card) debt?
- If I pay it off as I have planned, what will I do with the extra money?
- Invest in retirement?
- Pay off secured (housing) debt?
- Some form of both?
- Purchase another apartment to rent?
With that being said I now consider paying off my credit card debt my medium term debt (~3 years) and I’ve begun to think about my long term goals (>5 years) for after that. I’ll discuss my “master plan” in my next article.
{ 4 comments… read them below or add one }
If your house blows down god forbid, then what? I highly recommend you pay extra money to your principal ONLY with money you will never miss.
Financial Samurai
@Financial Samurai – Yes, you should have insurance on your property in case of a disaster but I don’t see the point of your comment. The idea is to pay off your mortgage as soon as possible in order to save interest payments on the loan. Using your way of thinking, I could ask the question why should I ever pay off my mortgage?
I’ve always wondered about getting a 15-year mortgage vs just prepaying a 30-year mortgage. Prepaying gives you the flexibility to pay more when you can afford more, but I wonder if most people have the discipline to do that consistently?
With interest rates as low as they are right now if you can lock in a fixed rate of ~5% then couple that with the deduction for mortgage interest (if you itemize) then if you are in a medium to high tax bracket then you will most likely have better places to invest your money that can make more than your interest charges for your home net of tax. (i.e. if your mortgage interest is costing you 4.5% after tax and you can make 6% somewhere else investing then it makes much more sense to invest the money at 6% rather than put that money towards decreasing the 4.5%)