The Only Real Ways to Pay Off a Mortgage Early

The day you move into your new house is always a happy one. Everything is great and you now have your own abode. The feeling just couldn't be better. Then, an inevitable thought crosses your mind. You have 30 years left to pay on your mortgage. Wow! Thirty long years of making monthly payments, now there's a reality check!

No one likes to be saddled with a long-term debt such as a 30-year mortgage. Because of this many ways have been thought up where people can pay off their mortgages well ahead of schedule.

These methods sometimes promise you'll be paid off in 7 years, some 10 years, 15 years and some incredibly promise you will pay off your mortgage 26 years ahead of schedule. I'm sorry, but now I must hit you with sobering thought number 2: there are only two ways to pay off your mortgage early!

By the end of this article you will find out what these two ways are, but first let's talk about some of the not so real ways.

Accelerator mortgage

With an accelerator mortgage, you pay every cent you make into a mortgage account and at the end of the month your mortgage payment is taken out of the account. Proponents of the accelerator mortgage say it works because this account you pay into pays interest and that compounding interest negates the interest you are paying on the mortgage.

However, when the agent sets up your accelerator account, he/she asks you how much you want to leave in your savings each month to be paid toward the mortgage. You will even be egged on. They will ask, "$250, $500, $1,000?" $1,000! Heck, if you paid that much toward your mortgage each month, you would pay off any mortgage way ahead of schedule!

If you were to say, "well, nothing. I don't have anything left after groceries and other expenses." They won't want to give you the mortgage because the compounding interest in this mortgage account means very, very little. The heart of the accelerator plan is you pay extra principal in the way of savings left in your account each month.

Biweekly, Bimonthly and Weekly Plans

With the biweekly plan you are led to believe making two payments a month, which together equal the same amount you have been, paying monthly, will take 7 years off the time it takes to pay off the mortgage.

In reality, with a biweekly plan you make 26 half payments or 13 monthly payments each year instead of 12 so, of course, you will pay off your mortgage a lot sooner. The backbone of this plan is you are led to believe you will not be paying more money each month, but the fact there is more than 4 weeks in a month is the real reason it works. Oh, and by the way, for getting fooled like this you get the pleasure of paying about $1,000 upfront in fees to convert to the biweekly plan!

There is no such thing as a bimonthly plan. It is just a Biweekly plan improperly titled. Weekly plans are the same as biweekly plans cut up into smaller payments, but the same arithmetic applies.

The only two ways

The conclusion is there are only two ways to pay off a mortgage ahead of time. One is to pay more principal each month. For instance, the payment on a 30-year mortgage for $200,000 at 6.25% is $1,231. However, if you pay an extra $270 each month, you will pay off the mortgage in full, 11 years ahead of schedule and you will save over $100,000!

The only other option you may be able to get that will help you pay your mortgage earlier is to get a lower interest rate and continue to make the same monthly payment. In the example above, if you were able to refinance at 5.50% but you continued to pay $1,231 monthly, you would have that mortgage paid in full in 25 years, instead of 30 years.

Still, paying $1,231 monthly is the same as making additional payments toward principal because the scheduled monthly payment for $200,000 at 5.50% is $1,135. So, here is the final conclusion; you can try to fool math, but it is just as futile as trying to fool Mother Nature. You can't do it! To get your mortgage paid ahead of time, you have to make principal payments ahead of time one way or another. That is all there is to it!