How to pay down your mortgage

Learn how to tackle the mortgage beast with these 'best practices.'

By MSN Real Estate partner Dec 30, 2013 12:46PM

Man working on a form with a calculator (© Pascal Broze/Getty Images)By Michael Corbett, Trulia

 

The clear advantages of paying off your mortgage as quickly as possible have changed quite a bit in the past few years. The rules have changed with the advent of historically low interest rates and the urgency to pay off your mortgage has somewhat diminished as interest rates have plummeted to these historical lows. It is not the black-and-white decision it once was when interest rates hovered between 6 percent and 9 percent, and even the 11 percent to 13 percent we saw a couple of decades ago.

 

I am a big proponent of paying down that ugly mortgage beast as soon as is practical. However, each individual's circumstances are different, and you need to evaluate your financial circumstances first. There is a pecking order of financial priorities you need to address.

 

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In order of importance here are the places you need to put your financial attention first: 

  • Take the cards off the table: Pay off credit cards with any high interest rates — especially today, as there is now a huge discrepancy between credit cards interest rates of 13 percent to 23 percent and a 4 percent mortgage interest rate.
  • In case of emergency: You need to build an emergency fund. I recommend one year of living expenses. Yes, today's job market is improving; however, if you suddenly find yourself facing a layoff, you need to be prepared to sustain one year of living expenses.
  • Build up for retirement: Are you able to make the maximum yearly contributions to your retirement accounts? 401(k), IRA or an equivalent? Ask you accountant what the maximum allowable is for you and go for it.
  • Get the kids to school: Ah yes, the kids, their schools and their college funds. Depending on how many children you have, how old they are and what type of college enrollment expectation they have, you need to be making adequate contributions to those 529 plans or other college savings accounts.
  • You may live a long time: My mom is 97 years old, and my aunt just turned 100. So I am keenly aware that my money could run out before my health runs down. Another priority investment you need to be making each year is toward long-term health-care insurance. It is not as costly when you start it in your 30s or 40s. But if you didn't get around to it till your 50s it will take a hit out of you budget each month.

 

Once you have paid out and paid off all of the above, you are ready to begin to slay the mortgage dragon with the remaining funds you have available.

 

Next consideration is age. You should make efforts to pay off that mortgage by the time you plan to retire. There is something freeing about the release of that last mortgage payment when you switch to a fixed income. Plus, chances are you will not need the mortgage interest deduction.

One important note that many people don't realize is that when you are into years 20 through 30 of your mortgage payment, you are paying little actual interest compared to what you paid in the early years. The banks have cunningly structured mortgages so that they get a large portion of their money early on via interest sooner than later over the 30 years.

 

But how fast and how much should I pay down?

Make that decision by counting backwards. If you want to retire and be mortgage free by age 65, then calculate how much extra you will have to pay monthly or yearly to pay it off by that date. There are numerous calculators online that will help you do this.

 

For example: You bought your home at age 45 with a 30-year loan at 5 percent. You are now 55 years old, and you still owe $300,000 but plan to retire at 65. You are going to need to up your current payment of approximately $1,650 a month to approximately $2,650 a month till age 65. Not only will you get your mortgage paid off 10 years sooner, but you also will have saved almost $78,000 in interest.

What are the best methods to pay down your mortgage?

  • Pay an extra bump: On Jan. 1 or Dec. 31, write an extra mortgage payment check to the bank. Send it in as additional principal, and the bank will credit your account. After a few of these payments, you will really begin to see the portion of your monthly mortgage payment that is interest begin to shrink and the portion of your payment that goes to principle begin to grow.  
  • Go monthly: Add an extra one-twelfth of your mortgage payment to each monthly payment. Or if you can afford it, add even more extra every month.  
  • Back-time it: Decide what year you want your mortgage paid off. Then determine, via a mortgage calculator, the extra amount of principle you to kick in monthly.  
  • Stash the cash: Before you go out and treat yourself to that new suit or to the spa retreat weekend, deliver your tax refund or your annual bonus directly to your mortgage principal. 
  • Don't pay the bank even more: Banks love to send out that notice telling you how much money you will save by allowing them to make twice monthly payments for half your mortgage amount rather than the one monthly payment. They will graciously offer to do this for you with a onetime set up fee and then a small monthly processing fee. Do you think the banks offer this because they love you? Nope, it's because they make money on this. Pay extra on your own, via any of the methods described above. The bank is getting enough of your money already.

 

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Tags: loans
 
60Comments
Jan 9, 2014 9:04AM
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Well I am screwed.  I am 57 years young .  I have a $221,000.00 mortgage that I make monthly payments of $2,375.00 which lately has been always late because, lets face it, times are hard, we have $55,000.00 outstanding credit card bills (don't lecture me, I know, just that we always had good intentions to pay it all in good time but something always came up, not vacations or pleasure stuff, but bills, bills, bills, car repairs, house repairs, etc.  ) I have a 9 year old daughter (my miracle she came as a big surprise at 47 years old, no fertilization treatments, just came into the world naturally people) who I care for and you know how much that is, my husband and I work full time jobs, my husband is an ironworker/rigger which entitles him to physically ruin his whole body everyday (he is 50 by the way) he has had two shoulder surgeries, 2 knee surgeries in each leg, and he still works like this.  Our house was appraised by a town appraiser (I know they are different from regular appraisers) at $221,000 or so.  So now, of course, the town is going to look to raise our taxes, I think.  I have an IRA Roth account of approx 190,000.00 give or take a few.  So do you think I am screwed or is there a solution to all this madness?  Help!
Jan 9, 2014 6:23AM
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I had a 15 year mortgage and used the amortization    from the bank against them.  in the first half of the note it is all most all interest  and little principal  BY LAW you must pay a p&I each month-so make 1 interest payment and add up as many P as you can. you will note you can make easily a year(12)  worth of payment the first month and hear the best part YOU DON'T MAKE PAYMENT ON THE INTEREST(12)-make the payments to the .01  on payment #13 you do this again-just be sure the banks put in in the front of the note. Banks loose you win-

I had a bank  tried to put  he P  back of the note- took them to court and won- this work real good  up to the middle of the note at witch it get harder- bottom line I paid my home off in under 8 years-this works on car payment also

Jan 9, 2014 3:39AM
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Why have a mortgage to begin with? I need no anchor around *my* neck. And I have no lease. Or credit cards. Or urchins to bleed me dry with tuition. All my extra cash goes into my two credit union savings accounts.
Jan 5, 2014 7:37PM
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I have a 10 year loan so will have my house payed off before I am 62.  Hope I was thinking right.
Jan 5, 2014 4:21PM
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99% of us own a home because we are going to be poor, elderly, and we will need someplace to live as we age and not have to pay on a mortgage.  The average family of four earns around 35,000/year.  CNBC caters to millionaires - not to us.  Don't do anything the money people tell you to do unless you are a millionaire.
Jan 5, 2014 4:16PM
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I have paid on my mortgage since 1988 and never had a single late or missed payment.  I had to go bankrupt do to illness but could keep my home.  I received a 25.00 additional bill this month.  No explanation.  Nothing letting me know if they are raising my mortgage the much per MONTH or year.  This law is ridiculous.  The mortgage companies were the ones loaning more than was safe from 2000, and not to me.  The lenders were the ones who lied and sold bad loans as good.  I should not have to pay extra on a mortgage I have been paying on for decades because I had the bad luck to get a serious illness.  It never once affected my ability to pay my mortgage. 
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Never pay extra on your mortgage unless you are writing the check to pay it off. If you do, your only giving the bank a free secured loan.

Bank the money you would have paid extra with and YOU keep the interest. And YOU have the money in case you have a life changing event. YOU will never get a HELOC to get money back if you need it due to job loss etc. without it costing YOU.

Paying your mortgage early means nothing until make the LAST payment...

Jan 5, 2014 6:41AM
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how about..how to afford obamacare? and what todo if you actually have to use it...and then find out what's wrong with you isn't covered...after you pay $500 a month and then have to pay $6000 before you find out whats wrong isn't covered...while saving $24000 so in case you have a life changing event you can still send the $500 so you don't goto jail because you don't have obamacare...and people bitch because some people go on welfare...who's the dummy...



Jan 4, 2014 7:28PM
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Gee , all of this is such sage advice. Unfortunately all of the wonderful financial advice that is on msn everyday is just like all of the car commercials that act like everyone in the world has money and credit. All of this advice is based on the assumption that every body makes enough money to set aside 24000 for a years worth living expenses (on the low side), and everyone makes enough to pay extra mortgage payments every month. Well, guess what..... EVERYONE DOES NOT! How about articles on how to merely get by in todays world. How about articles on how to fix your credit and still pay your rent , groceries and a car payment while raising two teenagers on a combined monthly income of less than 48000 a year? How about articles on how to work full time, feed your kids, not worry about that chest pain because you cant make your health care deductible, and figure out how to get to work on different shifts by sharing a car because you cant afford to fix  the other one. HOW ABOUT SOME REAL EFFIN ADVICE THAT DOESNT MAKE UNREALISTIC ASSUMPTIONS THAT WE ALL HAVE EXTRA MONEY TO SAVE OR INVEST IN STOCK OPTIONS??
Jan 4, 2014 5:02PM
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one of the easiest ways to shave 7 years off a 30 yr mortgage is to make one extra payment a year with part of your tax refund.
Jan 4, 2014 5:01PM
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You can stretch it out as long as you want. Where you going to be 20 plus yrs from now. Inflation will devalue the dollar over time and 20 yrs from now. the dollar could be half the value it is today. You'd be paying 50 cents for a dollar. You're buying  the house in todays dollars. Don't you expect to be making more money 10 yrs from now. Today, two weeks pay covers mort and int, but with pay increases 10 yrs from now, 6 or 7 days pay could cover same exp. 10 day's pay vs 6 or 7 day's pay
Jan 4, 2014 4:33PM
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In other words, only rich people will be  able to pay off their mortgages.  I live month to month.  I don't have any money for my child to go to college.  I don't have any money to put aside for an emergency.  I also don't carry any credit card debt past the monthly due date.  We live within our means, but there is nothing extra.  
Jan 4, 2014 4:21PM
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We tried setting up bi-weekly payments that would add up to just a little over our monthly mortgage payment but the bank wouldn't take it saying we'd have to make our regular monthly payment and then anything beyond that would be applied to principle only. What a joke. Any suggestions??

I've seen the calculations on how much you can save over the course of the loan doing this but if the bank won't let us, what can we do??
Jan 4, 2014 3:52PM
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 Oh come on msn we all know how democrats pay off a house..................Welfare government job or theft. Now back to the lowest labor participation rate since 1978 massive debt fraud and abuse you drooling morons.
Jan 4, 2014 11:41AM
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If one can refinance at a lower interest rate say like from 7% down to 3% and one originally had a 30 year note and been paying say 15 years. Take the new loan out again for 30 years. The monthly payments will be almost half of what they were with the original loan. When things get hard again the smaller monthly payment will be easier to make and one can always pay down the principal as fast as your finances will allow. This is like rent control.

 

Remember the financial planners and banks want as much money as they can squeeze out of you. They would like nothing better than to take your home, collect from the mortgage insurance you have been paying for them sell the home again or put it into a hedge fund that will fix it up and rent it out to some one else and leave you on the curb.

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I have found that the easiest & simplest way to pay down your mortgages  is to add whatever amount is comfortable to you on the monthly payment, mark it "towards principle". With this method your mortgage

will get paid off yr's. early & save you mucho interest.   Simple & effective .   H>Flax                               

Jan 4, 2014 10:10AM
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The author is an idiot that  apparently doesn't understand basic math and instead, tries to rely on sensationalism with words like, "Cunningly structured" to get the audience's attention. Gimme a break.
Jan 4, 2014 9:34AM
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"The banks have cunningly structured mortgages so that they get a large portion of their money early on via interest sooner than later over the 30 years"  How does the author of this article propose the banks or any other lender structure the loan?  You pay interest on the outstanding principal balance. As that balance is reduced the interest is reduced. Banks did not design the method of paying back a loan to screw the consumer. It simple math. Who writes these articles?
Jan 4, 2014 7:01AM
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I recently paid off my Wells Fargo Mortgage early, but I wanted to share what a pain they made it for me. I went to the Wells Fargo branch bank near me to get the payoff amount, then I got the cashier's check for the exact amount, which was deposited with the teller as if it was a normal transaction at the teller.


A few days later, I checked my account - it said I still owed about $144, so I figured the original payoff amount was slightly in error, no big deal. But the next day, it said the payment was reversed, and I still owed WFMC for the original amount.


I went back to the local branch, and they put on the phone with someone from WFMC. Instead of admitting to their mistake, she told me I should I should have never deposited the payoff amount at a branch bank.


That is ridiculous, Wells Fargo Bank and WFMC are connected, and they all have computers!


And to add to this, she said it would take 5 business days to correct.


I doubt that I would ever recommend WFMC to anybody. It would have been easier to just pay the amount off online by transferring funds form my Wells  Fargo bank account to WFMC in 2 or 3 passes.

Jan 4, 2014 5:42AM
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Nothing here that is a secret, no ground breaking information, earn more pay more.


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