A Unique Way to Pay Off a Mortgage Early

A question many individuals face is whether or not to pay off their mortgage early. There are advantages and disadvantages to both paths. A paid off home reduces overall expenses requiring less income to support the household. If a decision is made to not pay off the mortgage early, funds can be allocated to investments which may provide a better return. In the end, this is a very personal decision with no clear right or wrong approach.

Let’s assume you have decided to work towards paying off the mortgage early. There are common approaches like paying double the full mortgage payment or just adding a little extra towards the principal each month. An individual may also decide to apply a yearly bonus towards the principal amount or utilize a bi-weekly payment approach.

There is another method of paying off the mortgage early that many may not be aware of. Do you remember that lengthy amortization schedule you received when closing on your home? It shows the number of payments and the amount of each payment. There is also a breakdown that shows the amount allocated to interest vs. principal each month. You will notice the amount of the payment being allocated to the principal balance goes up each month. So, the further you go down the amortization schedule, an increasing amount of the payment goes towards the principal balance.

The starting point with this unique approach is to pull out the amortization schedule. For illustration purposes, listed below is an example of a amortization schedule. This is for a $250,000 loan amortized over 30 years with a 3.5% interest rate. You will notice the $1,122.61 principal and interest monthly payment stays the same each month. So, when you pay the first payment, the ending mortgage balance reduces from $250,000 to $249,606.55. The first payment shows $729.17 was applied to interest and $393.45 was allocated to principal.

Payment NumberP&I Payment AmountInterestPrincipalBalance
1$1,122.61$729.17$393.45$249,606.55
2$1,122.61$728.02$394.59$249,211.96
3$1,122.61$726.87$395.74$248,816.22
4$1,122.61$725.71$396.90$248,419.32
Hypothetical $250,000 30 Year Mortgage Loan with a 3.5% Interest Rate

If you want to pay off your mortgage in half of the time, follow these steps …

  1. Pay the normal $1,122.61 mortgage payment for Payment Number 1
  2. Add to this first payment the principal amount for Payment Number 2 which is $394.59
  3. Take a highlighter and mark Payment Number 1 and Payment Number 2 as being paid
  4. The next month make your normal payment of $1,122.61 (Payment Number 3) plus the principal amount of Payment Number 4 which is $396.90
  5. Take a highlighter and mark Payment Number 3 and Payment Number 4 as being paid
  6. Follow this same approach each month by marking off two additional payments monthly

To recap, by paying the normal payment each month plus the principal for the following month a mortgage can be cut in half. This is just pure math and positions you to move further down the amortization schedule. One benefit of this approach is the required additional principal payment will go up each month. This allows you to start off with a lower amount in the beginning with the extra principal amount slowly going up over time as your income hopefully increases.

There is a good way to double-check to confirm the process is working as intended. On a regular basis, access your mortgage account online or by a call to the financial institution. You can then confirm the principal balance shown on the amortization schedule matches what is reflected with the mortgage provider. This is a good best practice to make sure the extra principal amount was applied correctly. An example of a possible error you may experience is the extra amount being applied to your escrow balance.

You can even be more aggressive by paying the normal payment and the principal amount for the next two payments each month. This can cut the time frame to pay off a 30 year mortgage down to 10 years. You are basically paying the equivalent of three payments each month. Technically, you are paying the required payment plus the principal amount only for the next two months.

What if you have already been paying on your mortgage and not starting off with the first payment? An easy solution is to find your amortization schedule or print one off with your loan terms. You can then check with your bank or credit union to determine where you are with the principal balance. Once this is established, go ahead and start the process at where you are on the amortization schedule. This will help accelerate the remaining payments.

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