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How to pay off your mortgage early

This article was reported by Sally Herigstad for

There are many ways to retire a home loan in advance, but not all of them may work for you. Here’s how to find the one that best suits your needs.

Paying off the mortgage early is in. Refinancing to take money out of our homes is out. In this foreclosure crisis, more people are seeking the security and psychological benefits that come with owning a home free and clear.

If you want to pay off your mortgage early, you’ll find plenty of experts recommending ways to do it. All strategies work, but you’ll find some methods of paying off your mortgage are safer, faster and less painful than others. (Check today’s lowest mortgage rates at MSN Money.)

Compare these ways to pay off your mortgage early, from the simplest to the most complex:

Just pay more

If you want to see magic, start playing with mortgage calculators and see how paying a little more on your principal here and there can shorten the length of your loan. If you pay a little more principal, you get a bonus. The lower your principal gets, the more every payment from then on is applied to the principal, as less goes to cover interest expense.

If nothing else, round your payments up, recommends Tracy Piercy, a certified financial planner and the CEO of She says when people have a payment for $644, they think of it as $650. Why not just pay $650, then? An extra $6 a month on a $200,000, 30-year loan can save you four payments at the end of the mortgage.

When you pay extra, make sure the extra is applied to the principal balance, not just set aside for the next payment. And before you make extra payments, read your contract and make sure you won’t have to payprepayment penalties.

Refinance with a shorter-term mortgage

You can refinance into a mortgage for 10, 15 or 20 years, but 15-year mortgages are the most common. Your payments will be higher on a 15-year loan, but perhaps not as high as you think.

One advantage of a 15-year loan is that you’re committed to the higher payment. There’s no dithering about whether you can afford to pay extra month.

With a 30-year, $100,000 loan at 5%, your principal and interest payments are $537. At the same rate, but on a 15-year payoff schedule, your principal and interest payments are $791. That’s $254 more a month.

To get the effect of a shorter-term mortgage without the risk, take out a 30-year loan but make payments as if you had a 10- or 15-year loan. “You just make increased payments. You’re in control, not the bank,” Piercy says.

Switch to biweekly payments

Biweekly payments take advantage of the fact that most months are longer than four weeks. If you pay half your regular mortgage payment every other week instead of making one full payment a month, you’ll have made 26 half-payments, or the equivalent of 13 monthly payments, at year’s end.

Check if your bank will set up a biweekly payment plan. Some banks do it free; others charge. Ask the bank to credit extra payments toward the principal so you save more on interest expense. Some banks set aside extra payments until the end of the year.

You shouldn’t have to pay an outside company to set it up for you. “I hate the idea of having to pay a third party for something the consumer(s) can do on their own,” says Cathy Pareto, a certified financial planner in Coral Gables, Fla. “Why pay the extra fees if you can avoid them and still accomplish the same goal?”

Use money merge accounts (the Australian method)

In Australia, mortgages are generally set up like home equity lines of credit, or HELOCs. They double as checking accounts, thus the term “money merge.” When you get paid, you deposit your check into the account, and as you spend money you take it back out again. You hope to put more money in every month than you take out.

With a mortgage using the Australian method, interest is calculated daily instead of monthly, and because the money spends as much time as possible in the account before you take it back out to pay bills, you save on interest expense.

But Dr. Don, a columnist, writes, “I just don’t think the typical homeowner benefits from this type of mortgage loan.” Typical homeowners don’t see enough reduction of their interest expense to make this method worth it for them, he warns.

Some money merge programs require you to buy software that costs thousands of dollars. However, there’s no magic formula for shifting your money around. “You don’t need software to do that,” Piercy says.

The biggest downside to the money merge plan is that it requires discipline. “You wouldn’t do it unless you understood cash management,” Piercy says.

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