3 Ways to Quickly Pay Off Your Mortgage

By Markets Fool.com

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Source: Flickr userTax Credits.

A mortgage payment is the biggest expense for many Americans, and those monthly payments could mean the difference between retiring sooner or retiring later. To avoid the risk that a mortgage will delay your retirement, we asked our Motley Fool experts for advice on how to pay off a mortgage quickly.

: True story: I took out a 30-year mortgage on a house and then refinanced after seven years. I should have had about 23 years of payments left on my loan, right? Well, when the numbers were crunched, I had only about 17 years left on it. By making a few extra payments each year, I'dsignificantlyshortened the life of my loan -- avoiding gobs of interest payments along the way.

Anonline calculatorcan help you determine how quickly you might be able to pay down your mortgage. Here's an example: Imagine that to buy a $200,000 home, you put 20% down, and you take out a 30-year loan for $160,000. If you pay on the original schedule, you'll pay $811 per month in principal and interest, for 30 years, paying a total of nearly $132,000 in interest. If you can send in an extra $300 per month, though, you'll pay just $71,000 in interest and you can shave close to a dozen years off the loan, too!

There's an important caveat to this whole strategy, though: Sometimes making extra payments isn't allowed! When you take on a mortgage, be sure to find out whether you'll be allowed to make prepayments, and if you want that feature, insist on a loan that permits it.

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This also raises another useful mortgage hint: If you're torn between a 30-year and a 15-year loan, you might consider getting the longer loan because it will have lower payments, but planning to make lots of extra payments. That way, you can essentially make it a shorter loan, but if you fall on hard times, you can always just make the minimum monthly payments.

: As Selena explained, the way to quickly pay off your mortgage is to make extra payments as long as your mortgage allows you to. For many people, that's easier said than done.

One strategy that can make this a reality for you is to use your tax refund to make one large extra mortgage payment a year. An estimated 75% of taxpayers will get a refund this year, and so far for the 2015 tax season the average tax refund is $3,586, a 10.5% increase over last year's tax season.

Let us use the same numbers as Selena's example and round the average tax refund up by $14 to $3,600. So instead of making extra payments each month we'll assume you get yourtax refundin April and put it toward your mortgage. Another way to look at this is you take the extra monthly payments in Selena's example and save them up till April.

Normal Payments

ExtraMonthly Payment

ExtraAnnual Payment

Monthly Payment

$811

$1,111

$811

Annual Extra Payment

0

0

$3,600

Total Interest Over Loan

$132,000

$71,000

$72,000

Loan paid off

30 years

18 years

18 years

Source: Author's calculations

Making one extra mortgage payment of $3,600 every year has roughly the same effect as making a $300 extra monthly payment: You can pay off your loan roughly 12 years early. In this example, making an extra annual payment rather than extra monthly payments ends up costing you about an extra $1,000 over the life of the mortgage, but that's still over $60,000 saved versus the not making extra payments.

Everyone's situation varies, and you can do the same calculations using amortgage calculatorand see how various payment strategies will affect your mortgage.

Jordan Wathen : Making a bigger monthly payment is an easy way to reduce the life of your mortgage loan. Making payments more frequently -- biweekly, instead of once per month -- also helps reduce the length of your mortgage.

Aside from the benefit of an additional mortgage payment (26 biweekly payments are equal to 13 mortgage payments per year), some banks and mortgage servicers apply biweekly payments to your balance as they are collected. The result is that your average balance is lower at any given time than it would be if you only made monthly payments.

Not all banks and servicers immediately apply partial payments to your loan balance. Some, unfortunately, have biweekly payment programs where the extra cash is simply held throughout the year for one big payment in December, providing nothing more than the benefit of making an extra payment at the end of the year. It'll take some investigating, certainly, but a quick phone call to your mortgage servicing company could reveal that breaking up your payments into biweekly chunks will add an extra payment each yearandreduce the impact of compounding interest each month. Over a period as long as 30 years, the difference adds up.

The article 3 Ways to Quickly Pay Off Your Mortgage originally appeared on Fool.com.

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