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One of the downsides of listening to Sirius XM radio is that you start to hear the same commercials over and over and over again. It’s one of the reasons why I thought to do more research into stock loss companies [3]. After listening to numerous ads from companies like 9 Year Mortgage (pay off your mortgage in 9 years!), I thought I’d do an analysis of all the various mortgage prepayment strategies.

There is only one way to pay off your mortgage faster – pay more money and pay more often. Outside of paying more and paying more often, there isn’t much else you can do besides refinance so your interest rate is lower. The only services that are legitimate are the ones that help you manage the payments and keep you on track, but those usually are more expensive than they are worth.

For our examples, we’ll use Bankrate’s mortgage calculator [4] and it’s default values to help calculate the savings of these different strategies. The default values are:

• Mortgage – \$165,000 for 30 years fixed at 7% interest
• Payoff Date – April 23, 2042
• Monthly Payment – \$1097.75
• Total Interest – \$230,189.68

Make an Extra Payment

One of the simplest, albeit least effective, ways to prepay your mortgage is to simply make an extra payment at the end of the year. In our case, since our loan starts in mid-April, we’ll add the extra \$1097.75 payment every April. By making it every twelve months, you pay off your mortgage in April 2036 – exactly six years early. Your total interest paid is \$175,989.85, a savings of \$54,199.83. If you were to make the extra payment in December, rather than wait the twelve months, the payoff day changes to February 2036 and your total interest paid drops slightly to \$174,455.09.

Pay Extra Principal Each Month

Instead of making a \$1097.75 payment in principal at the end of the year, why not spread that out across the year? You can add \$91.48 to each payment and pay off the mortgage by January 2036, a little more than six years early. More significantly, the total interest paid drops from \$230,189.68 to \$173,855.83 – a savings of \$56,333.85.

Pay Every Two Weeks

A merge between the above two strategies is to pay every two weeks. With the two monthly half payments, you make 24 half-mortgage payments a year. There are, however, 52 weeks a year so this strategy has you paying 26 payments. It’s, effectively, an extra monthly payment spread out across the year and made more frequently than paying extra each month. According to this calculator by Bankrate [5], you would pay off the loan in December 2035 with total interest payments of \$171,531.91, a savings of \$58,657.77.

Recap

It’s not difficult to see that the more often you make payments, the more interest you will save. The deciding factor is whether the savings justifies the additional effort. Remember, these are savings across the entire loan term. Here’s how they all stack up in terms of savings:

• Doing Nothing – \$0
• Extra Payment – \$54,199.83
• Extra Principal – \$56,333.85
• Every Two Weeks – \$58,657.77

Making an extra payment or paying additional principal is likely going to be very easy with your lender. Setting up a system where you pay every two weeks will probably be trickier, though some lenders offer this (as do third parties). Let these savings differences be your guide in what makes sense for you.

Before You Prepay

Before you prepay anything, ask your lender what you need to do so they know that the extra funds should go towards principal. Many lenders will apply excess payments to the next payment, because it’s better for them, so find out what you need to write, say, or do in order to have the excess applied to your principal. If it doesn’t, then all this is for naught.

Also, it’s important to remember that making additional payments will not make future payments smaller. It will reduce the number of months remaining on your mortgage loan.

(Photo: wwworks [6])