Painless ways to pay down your mortgage

Paying down your mortgage doesn’t have to induce financial stress. Find out why.

By Terence Loose May 2, 2014 7:17 PM

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Unless you lease a Lamborghini, the mortgage on your home is likely the biggest debt you have. So wouldn’t it be nice to pay down that debt a little faster? Of course, but I can’t afford to, you say.

Well, don’t dismiss the idea so fast. There are many stress-free ways to pay down your mortgage faster than planned. It’s also a way to reduce financial stress in the future, especially during your golden years, says David Bakke, an editor for MoneyCrashers.com, a personal finance website.

“Paying off your mortgage early is a great way to make financial management easier during retirement, especially since most people will be on a fixed income during those years,” he says.

Here are four painless ways you could pay down your mortgage early.

If You Can Lower Your Interest Rate by 1.5 Percentage Points, Do it

Lowering your mortgage interest rate is an easy and stress-free way to pay down your mortgage, even if it’s a minor rate decrease.

Consider a report by Freddie Mac, one of the nation’s largest mortgage holders. It found that borrowers who refinanced their mortgage during the fourth quarter of 2013 lowered their interest rate by an average of 1.5 percent. According to their calculations, on a $200,000 mortgage that’s a savings of $3,000 – in the first 12 months alone. And those savings keep building every month.

In fact, when you look at the life of a 30-year mortgage, things get really impressive. Here’s an example that illustrates the savings from an interest rate dropping 1.5 percent on a $300,000 30-year fixed-rate mortgage. This example uses the average 30-year fixed interest rate of 4.4 percent, as of March 27, 2014 according to Freddie Mac.

Original Mortgage Refinanced Mortgage

Interest Rate 5.9 percent 4.4 percent

Monthly Payments $1,779 $1,502

Total Interest Paid Over Life of Loan $340,587 $240,822

By lowering the interest rate just 1.5 percentage points, this homeowner saved over $130,000 in interest over the life of their home loan. In addition, they’ll feel the savings every month with lower payments. That’s money they can put toward vacations, kids’ college funds – or paying down their mortgage even further (see the next example to see how that works).

[Ready to refinance? Click to compare interest rates from lenders now.]

Convert a Daily or Weekly Luxury into an Extra Payment Habit

There’s probably a small thing you could cut out of your life without much pain – whether it’s a latte, manicures, cigarettes, or dining out. As a result of your small sacrifice, you could reap the rewards in the form of paying down your mortgage.

For example, cutting out that daily $4 latte can save you $1,460 a year – which could be comparable to an extra mortgage payment per year.

Yes, put that money toward your mortgage, says Jim Duffy, a senior loan officer with Primary Residential Mortgage, Inc., and it could reap benefits bigger than any latte high. “Do that on a regular basis and it could really save a lot of money, in addition to paying off your home sooner, which makes for a more stress-free retirement,” says Duffy.

He says one thing is very important, however: Be sure to write “Principal Reduction” in the memo line of your check. Otherwise, your lender may not know where to apply it and may even assume that it’s meant for your next mortgage payment. As a result, it could just sit around unused until you specify where it should go.

Turn Underperforming Investments into Home Equity

We’ve all made bad calls before. Not feeding a parking meter that extra 25 cents and getting a $50 ticket instead. Going to the beach on a rainy day. Buying stocks that underperform.

But if you’ve done the latter, you don’t need to stick with investments that are not giving you the return you anticipated. Perhaps it’s time to pull the plug and apply that money to a place it can do some good – like your mortgage.

Many people have investments that are returning less, as a percentage, than their home mortgage interest rate is costing them, says Duffy. If that’s the case and you have no optimism that the investment will turn around soon, it might pay to put that money toward the principal on your mortgage.

Say you have an investment that is only returning 2 percent annually while your mortgage is at 5 percent. You’re essentially losing three percent per year. “Plus, your mortgage interest is tax deductable while you have to pay taxes on your earned interest [on investments],” says Duffy.

He hastens that before you make any major financial decisions, you should speak to your financial advisor.

[Are you ready to refinance your mortgage? Click to find the right lender now.]

Don’t Think Paying Down Your Mortgage is Important? Use a Mortgage Calculator

It takes a lot to get off the Starbuck’s habit, we know. So perhaps a little motivation is in order. That’s where an additional payment calculator can really come in handy.

They work like this: You fill in your mortgage amount, interest rate, and term. Then you input an extra amount that you can afford to pay along with the amount of months per year you plan to pay it. Then it calculates exactly how much money you’ll save in interest over the life of the loan and how many months or years early you’ll pay off your home by making the extra payments.

One of the great things about using these calculators, says Duffy, is that they’re flexible. Using your up-to-date outstanding balance, you can change and compare the additional payments as much as you like. You can even see how making an extra payment once, twice, or any amount of times per year will affect paying down your mortgage.

“Once people actually see how much they can save by paying just a little extra every month, it almost always motivates them to do it,” he says. And finding an additional payment calculator online is simple, and it’s easy to use.

Let’s plug in some numbers to see exactly how it can work. We’ll use a $300,000, 30-year mortgage at a fixed rate of 5 percent.

No Extra Payment $150 Extra per Month $300 Extra per Month

Years to Payoff     30   24 Years,  10 Months   21 Year, 4 Months

Total Interest Paid     $279,767   $224,164    $188,027

Total Interest Saved      $0 $   55,604    $91,741

Total Time Saved 0 5 Years, 2 Months 8 Years, 8 Months

You can see how adding extra money to your payment each month, whether it’s $150 or $300, can put a real dent in the time and interest on your mortgage. Check out a mortgage calculator to see how much extra you can swing each month and how it can painlessly help you pay down your mortgage.