Tuesday, January 12, 2010

Paying off Mortgage Early?

My husband passed along an interesting article to me about paying your 30 year mortgage in 15 years. We're considering doing something similar to this, but it does require a refinance, and due to current house values we're not sure if that's something we're able to do at this time.
I do find the concept very intriguing. Although your house payments clearly go up, in the end you pay a lot less interest.
I think instead of trying to refinance at this time, there are some other options the article suggests that we're looking into.
  • Bi-weekly payments: Essentially you end up paying 13 months instead of 12 for each year. However, there is often a fee associated with this, so depending on terms it may not be the best option.
  • Send an additional payment equal to next month's principal. This way you can accelerate paying down the principal.

The article lays out good pros and cons for each approach. Has anyone tried any of these methods or have other suggestions?


  1. You don't have to refi or pay the biweekly fee - just send more money when you pay your monthly bill. Be sure to indicate you want it applied to principal, many banks will otherwise consider it a prepayment of the next month's payment. Refi only if the drop in interest rates is worth the closing costs and lack of flexibility.

    I've had this debate before. There are other pros and cons. Pro: easy way to save, reduces debt, guaranteed to get a good return. Cons: Reduces your tax deduction, the return from paying down the mortgage may be less than the return you could get in your 401k, you can't get the money out if you need it. This last one is big - paying down your mortgage won't help you if you lose your job (unless you get it all the way paid off). If you put the money in the bank you can use it to bridge an unemployed period. But with a separate 6-month reserve you may not need that.

    Personally, I have a 15-year mortgage but put extra money into retirement savings. If I had a higher mortgage rate, I'd pay it down instead.

  2. Thanks Dave! This is great food for thought!