Pay off mortgage early to save money

An early mortgage payoff can net substantial interest

An early mortgage payoff can net substantial interest savings compared to making scheduled payments for 15 or 30 years. (Credit: iStock)

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Paying off your mortgage might sound like an ambitious plan, especially if you have recently refinanced into a 30-year term. But it's still smart for homeowners to give some serious thought as to how they'll pay off their home loan; if not in 2012, then sometime.

An early mortgage payoff can net substantial interest savings compared to making scheduled payments for 15 or 30 years.

Paying more quickly reduces your housing cost, freeing up that money, says Ronit Rogoszinski, a wealth adviser at Arch Financial Group in Garden City, N.Y. You'll still be responsible for property taxes, homeowners insurance, and home maintenance and repairs.

Some might argue for allocating more cash to investments instead of eliminating low-cost debt, says Alfred McIntosh, principal of McIntosh Capital Advisors. But he encourages homeowners near retirement age to be mortgage-free.

To pay off your mortgage early:

- Add an extra amount, say $50 to $500, to each monthly payment, Rogoszinski says. Don't sacrifice necessities, such as sustenance or medical care.

Some homeowners add enough to their monthly payment to make one extra payment each year. McIntosh explains the math: Divide one payment by 12 or multiply one payment by 10 percent, and add that to the amount each month. Make sure the extra money is applied to principal, not interest or your escrow account.

One way to make that extra payment less painful is to make payments every two weeks instead of every month. The result is 26 half-payments instead of 12 full payments. McIntosh says biweekly payments can knock approximately six years off a 30-year term.

A gift of money, an inheritance, a bonus or an income tax refund creates another chance to put extra money toward your mortgage. This strategy works best if you don't have other, more costly debt.

"You really want to pay off the most expensive debt you have as fast as possible," Rogoszinski says.

Examples of higher-cost debt include most private student loans, auto loans, department store cards and revolving credit cards.

One approach is to invest the lump sum for a return that's higher than your mortgage rate, then use the principal, plus appreciation, dividends and interest to pay off the mortgage when you retire, McIntosh suggests.

Refinancing can help you pay off your mortgage sooner, the idea being that a lower payment frees up money that can be applied to additional principal payments.

To maximize the benefit of refinancing, shorten the term of your loan. For example, if you've paid off 10 years of a 30-year term, refinance with a 15-year mortgage instead of a new 30-year loan.

Selling your house might seem like a dramatic way to get rid of a mortgage, but it's certainly effective, leaving you free to buy a more affordable home for cash or become a renter without any housing debt.

Whether downsizing makes sense is largely a matter of your needs and personal lifestyle, yet Rogoszinski suggests it's "definitely something to consider." However, don't try to time the housing market by selling high and buying low. That's a strategy more appropriate for professional real estate investors.

Homeowners who don't have spare cash on hand might be tempted to tap a retirement account to pay off a mortgage. This idea has gained purchase in recent months, as legislation pending in Congress would waive the early withdrawal penalty if money removed from a retirement account were used to pay a home loan.

McIntosh advises caution.

"My instinct is not to look at that very favorably, particularly because of how little retirement savings Americans have already," he says.

One exception: If you're in danger of foreclosure due to a temporary financial setback, a retirement account might be a resource of last resort.

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