Owning a home free and clear of a mortgage may seem like a quaint idea from a former era. But being mortgage-free, especially by retirement, is a good goal to achieve as a way of obtaining financial freedom. Paying off what is often a six-figure loan is daunting at first, but can be done through one or all of a combination of methods.
Pay Extra Toward The Principal
Monthly mortgage payments are a combination of repaying principal (the amount borrowed) and interest. In the early years of the loan, most of the monthly payment goes toward interest. Making an extra payment toward the principal portion of the payment at regular intervals early in the loan will erase many months of payments in advance. It is important to run off an amortization schedule for the loan to see how much to pay. One method is to double the principal portion of the payment. Doing this every month will cut the time to repay the loan in half. For example, doubling the principal payment on a 30-year mortgage will cut the loan to 15 years. A 15-year mortgage will be paid off in 7 years. Since much of the monthly payment early in the loan goes toward interest, even small sums applied toward the principal can take years off of a loan.
Bi-Monthly Payments
Since there are 52 weeks in the year, paying half of your monthly payment every two weeks means you'll make 26 payments. This amounts to making an extra month's payment each year. Doing this will shave 12 years off a 30-year loan. Some lending institutions charge a fee for this service. Like paying extra toward the principal, this is an action home-owners can do on their own without paying any additional fees.
Mortgage Arbitrage
A third action to retire a mortgage early and give homeowners some liquidity is to take extra money meant for the mortgage and invest it in a separate account to pay off the mortgage in a lump sum in the future. Money for this purpose should not be in a savings account because the interest is too low. Likewise, this money should not be invested in the stock market because of market risk. One way to practice a sort of arbitrage is to invest in a GNMA mutual fund. This fund holds mortgages, is backed by the U.S. Government and pays a competitive interest rate. There is a slight risk the share price will fluctuate slightly over time but historically, these funds have provided returns of just slightly under the going mortgage rate.
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