Paying down your mortgage wisely

From time to time, someone asks me about either paying off their mortgage entirely or paying down their mortgage in the smartest possible way. Does it make sense to pay off your mortgage? Does it make sense to pay down your mortgage? In my experience, the answer to both of these questions is actually more of a personal preference than one of actual dollars and cents.

Should you pay off your mortgage early?

Before you can determine the smartest way to pay down your mortgage, you must first answer the question of whether you want to pay off your mortgage early. Here are six simple questions to consider:

• Does your employer match any retirement funds you save?
• Do you have any debt other than your mortgage?
• Do you have at least 24 months of living expenses in liquid assets?
• Do you currently owe more on your mortgage than your home is worth?
• Does the amount of your mortgage bother you?
• Do you think you could get a better return on your money if you invested it in other things?

If you have considered the pros and cons of paying off your mortgage early and have decided that it is a goal, then it is time to start evaluating different payment strategies. Some of the more common options include:

• Bi-weekly mortgage payments
• Making extra principal payments

Bi-weekly mortgage payments

Bi-weekly payment programs are often offered by your lender, and in the event that your lender doesn't offer a bi-weekly payment program, there are third-party services available.

Bi-weekly payments are popular because many people get paid "every two weeks," and the bi-weekly mortgage payment schedule coordinates with their payday schedule. There isn't really a secret to the bi-weekly program; it is simply structured so that you essentially end up making one extra payment per year — and you might be surprised at how much that can cut off your mortgage.
For example, here is a simple example graph (built using Zillow's bi-weekly mortgage calculator) of how much a bi-weekly payment can save if you have a $200,000 30-year fixed mortgage:

Making extra principal payments

Making an extra principal payment will also cut your principal balance on your mortgage — and the rule to remember here is "faster is better."

As in: the faster you make a principal payment on your mortgage, the better it will be.
People often ask, "should I wait until the end of the year to make one big extra payment, or should I make them monthly?"

If we apply the "faster is better" rule, then you should make your extra principal payments monthly.
What if you inherited a lump sum of money, want to pay down your mortgage early and are trying to decide whether to pay a lump sum toward the principal in January or wait until December?

Apply the "faster is better" rule — and the answer is clear.
"Faster is better" when making extra principal payments because the monthly interest expense on a mortgage is calculated on the loan balance, so the sooner you can get a lower loan balance, the lower your monthly interest expenses will be.

Should you pay off your mortgage early? Mostly that is a personal choice. But in the event that you have decided you want to pay off or pay down your mortgage, remember: Faster is better

Justin McHood markets himself as "America's Mortgage Commentator" and lives in the Phoenix area. You can find Justin on Facebook, Twitter and LinkedIn. He is happy to answer any mortgage-related questions you may have.

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