The 30-year mortgage has become something of the default option for middle class Americans buying a home. The result can be an affordable monthly budget, but in the background lurks the reality that homeowners are paying tens of thousands of dollars of interest over the life of the loan by paying the minimum each month and delaying payoff.
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The fact is that many Americans never even consider paying off their mortgage early. But there are some surprisingly simple and effective methods that can save you thousands of dollars of interest and shave off many months, or even years, of future payments.
1. Opt for a 15-year mortgage. Renowned financial advisors like Dave Ramsay advocate the 15-year over the 30-year mortgage. A 15-year mortgage will result in dramatic savings on interest payments over the course of your loan, have a lower interest rate than a 30-year loan, and cut your payoff timeframe in half compared to the 30-year. Budgeting for a 15-year mortgage up front is therefore one of the best ways to start off on the right foot. If you cannot afford a 15-year, or you already hold a 30-year mortgage, you can always look to refinance when circumstances allow.
2. Put extra money each month toward your principal. The basic concept here is analogous to running a marathon. Small changes to a marathon runner’s pace compound over the course of the race and have a big impact in the runner’s overall time. Similarly, a few extra hundred dollars each month can shave months or years off of a 30-year mortgage. The great thing about this option is that you can gradually build toward higher and higher monthly payments in a way that fits your budget. In an ideal scenario, as your earning power increases over the course of your career, you would increase your monthly mortgage payments.
3. Make bi-weekly payments. The simple act of making bi-weekly payments—by paying half of your monthly payment once every two weeks—results in making 13 months worth of payments per calendar year. By doing this, you can shave years off your mortgage loan and thereby dramatically reduce the interest you will pay during your loan term.
4. Make an extra mortgage payment a few times per year. If you can afford it, making an extra mortgage payment two or three times each year is another way to shave time, and future interest payments, off your loan.
5. Monetize your asset. Would you consider subletting a bedroom temporarily? Can you occasionally post your home on sites like Airbnb? If your circumstances allow, consider monetizing your home—which, after all, is an asset—to help pay off your mortgage.