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Pay off mortgage early: How to pay $70,000+ less on your loan

Knowing how to pay off your mortgage early can mean $70,000 over the life of your loan. Here are three systems you can use to shorten your loan term today.

Ramit Sethi

Paying off your mortgage early is a great example of a Big Win.

Not only would it take years off of your loan term, you also stand to save a TON of money in the long run.

How much money? For a $300K house, you can pay upwards to $70,000 less on your mortgage by paying it off early.

Not only that but you can benefit from it psychologically too. By paying off your mortgage early, you won’t have to worry about a huge chunk of your paycheck being accounted for already when you get it — allowing you to invest and spend on other things you love.

That’s why I want to show you good systems to help pay your mortgage off early …

… as well as show you why you might not WANT to pay off your mortgage early.

How to pay off mortgage early

Below are three ways you can pay off your mortgage early.

Not all of the methods below are going to work for everyone. The important thing is to understand the concepts I’m introducing to you so you know your options.

1. Pay bi-weekly

Buying a house can come with a LOT of financial pitfalls. One of the biggest is paying your mortgage longer than you actually need to. 

To avoid that, you can switch to a bi-weekly payment plan for your mortgage.

Here’s how this works: Rather than pay off your mortgage once a month, like most home borrowers do, you’re going to pay it biweekly instead.

By paying your mortgage bi-weekly, you’re actually taking several years off of your mortgage payments.

Let’s run a scenario using two banks:

  1. U.S. Big Bank. They offer typical monthly mortgages payments at 12 payments a year.
  2. First National Bank of Ramit (FNBR). FNBR allows you to make bi-weekly payments with 26 payments a year (52 / 2 = 26). 

Here’s what a $300,000 30-year fixed-rate mortgage at 6% APR looks like with each bank.

U.S. Big Bank: Each year you’ll make 12 monthly payments of $1,798.65. Over 30 years you’ll end up paying $347,514.57 in interest.

First National Bank of Ramit: With 26 payments of $899.38, you’ll be able to take off a few years from your mortgage AND save almost $71,000 in interest payments.

That’s like 18,000 lattes or one every day for the next 50 years.

Luckily for you, many banks offer bi-weekly plans just like FNBR. The best part? They automate their system so they can painlessly take money from your checking account each week.

Some of these banks might try to nickel-and-dime you with a $4 fee every month — but don’t worry. We have systems to help you negotiate out of those fees.

2. Refinance your mortgage

Refinancing is when you get an entirely new mortgage — with different terms.

It’s typically done for a number of reasons, including:

  • Lowering the loan term. By lowering the loan term (i.e., how long you’ll be paying off your mortgage), you’ll be able to pay off your mortgage faster. For example, if you refinanced from a 30-year fixed-rate mortgage to a 15-year fixed-rate mortgage. However, your monthly payment will likely increase.
  • Lowering the interest rate. When you attain a new loan, you’ll typically be able to attain lower interest rates on the loan as well.  

If you want to pay off your mortgage early, you’ll want to make sure that you’re lowering both your loan term AND interest rates.

For example, if you currently have a typical 30-year fixed-rate mortgage for $300,000 and your interest rate is 4.75%, this means you’ll end up paying $563,379 in all.

However, if you decided to refinance to a 15-year mortgage with a 4% interest rate after five years, your total mortgage could mean paying more than $70,000 less in interest payments.

Of course, refinancing comes with a lot of fees. Typically, this comes in the form of “closing costs” including insurance, appraisal costs, taxes, and credit fees.

Not only that, but if you aren’t able to get a lower interest rate, you’ll just wind up paying more money each month with no other real benefit to you.

So, if you choose this route, be sure to talk to your lender about your options. At the very least make sure you:

  1. Secure an interest rate at least 1% – 2% lower than your previous interest rate.
  2. Will be able to sustain the closing costs.

3. Pay more towards each payment

You don’t have to refinance in order to lower your loan term. In fact, you can stick with your current mortgage and just pay more money each month towards your debt.

Doing so can effectively lower the total amount of interest paid for your loan.

Imagine you have a $200,000 30-year fixed-rate mortgage at 4.5% interest. The total cost of your mortgage is going to wind up being $527,220, with you paying the minimum $1,520.06 a month.

However, if you pay an extra $200 towards your mortgage each month, your total payment is going to wind up being $487,779.96 — while also cutting down your loan term by more than six years.

How the heck are you going to pay it down each month?

A few suggestions:

  1. Create a Conscious Spending Plan (this is how my friend spends over $21,000 a year on going out)
  2. Tap into Hidden Income
  3. Earn more money

You can learn more about creating a Conscious Spending Plan here.

Now I want to show you areas where you can get more money — and build skills for your Rich Life.

Tapping into Hidden Income

These are savings you can get from negotiating your everyday bills.

In fact, you can save hundreds of dollars a month on bills for things like your car insurance, cell phone plan, gym membership, cable, and credit card bill through simple 5-minute negotiations.

And there are three things you need to do:

  1. Call the company.
  2. Tell them, “I’m a great customer, and I’d hate to have to leave because of a simple money issue.”
  3. Ask, “What can you do for me to lower my rates?”

Of course, you’re going to want to adjust this formula for whatever company you’re calling. Check out my video on negotiating your bills for more on this topic.

Earn more money

Imagine having an extra $1,000 / month (or more) that you could put toward your bills.

The best part: It’s far easier to earn $1,000 than to slash $1,000 from your budget.

Just a few examples of ways to earn more money:

Whatever you choose, the rewards can be huge and make a significant dent in your mortgage.

Should you pay your mortgage off early?

I wrote about this in my book a while back, but investments will outperform prepaying your mortgage the overwhelming majority of the time.

The S&P 500’s average annual return over the past 90 years is about 10%. The average mortgage interest rate is typically somewhere between 4% and 5%. This means you’ll likely be making twice as much as your mortgage takes away in interest if you invest in the S&P 500 over the same period of the time.  

So if you’re younger (less than 50 years old) with retirement in the far future, you’re going to want to be aggressive with your investments. That means not prepaying your mortgage and just investing the money.

However, if you’re older (more than 50 years old), you’re going to want to save as much as possible for your retirement. That means making sure you’re not paying as much in interest rates and lessening your loan term.

TL;DR

If you want to pay off your mortgage early, you can double up on payments each month, refinance your mortgage, or prepay your loan.

But paying off your mortgage early might not be the most optimal way of using your money. It all depends on whether you plan on staying in your house for the long haul or if you’re probably going to sell it eventually. If the latter, just invest the money for more gains.

Do you know your actual earning potential?

Get started with the Earning Potential quiz. Get a custom report based on your unique strengths, and discover how to start making extra money — in as little as an hour.

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2 Comments

 
  1. Jake

    One clear advantage of paying off mortgage early vs investing is that investing returns are by their very nature uncertain (especially stocks). Paying off mortgage early is a "sure" return.

  2. John

    I just don't know that it makes sense to ever pay off a mortgage from a tax perspective. For most people, the mortgage interest deduction is going to be their biggest tax advantage. Even if you decide to invest instead, as Ramit suggests, you will pay capital gains taxes on any investments and you can't exactly live in your brokerage. And those on-time monthly payments are building credit history.

    Of course, he also left out the added benefit of eliminating PMI by paying off early…

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