How to Pay a 30 Year Mortgage in 10 Years

A mortgage is often the largest loan an individual will take out over the course of their lives, and due to this, the interest costs over time can be staggering. One sure way to reduce these costs is by paying off a mortgage early. This reduces total interest costs substantially by reducing the term of the mortgage and therefore the length of time interest needs to be paid. While there are a few options available to pay your mortgage off early, the first question that needs to be answered is whether paying off a mortgage early is financially sound or not. Contrary to popular opinion, paying off a mortgage early is not always the best choice.^{[1]XResearch source}

Part 1

Part 1 of 3:

Deciding If Paying Off A Mortgage Early Is Right For You

1
Understanding the opportunity cost of capital. Whether paying a mortgage off early is right for you and, if not, what you should be paying off (or into) depends on a very simple concept known as the "opportunity cost of capital."
- Quite simply, the opportunity cost of capital is an idea that states that when you use your money for something, there is something else you are not using your money for. The thing you are not using your money for is seen as a cost. For example, if you choose to take $1000 in savings and place it in a checking account that pays 0.25% annual interest, you are missing out on the opportunity to invest that same money in a money market fund that may pay 1% annual interest, or in the stock market (which has historically returned about 8% annually).^{[2]XResearch source}
- Therefore, if you choose to place your money in cash, there needs to be a significant advantage to doing so, enough to offset the "cost" of not investing in something with higher returns. This may be to pay off impending bills, for example, or to establish an emergency cash reserve with funds you can access instantly.
- The main idea is you should put your money wherever you can get the biggest possible return.
2
Examine your other sources of debt. With the opportunity cost of capital in mind, what is the "cost" of paying off your mortgage early? It can be quite difficult to pay a mortgage off early if you have other sources of high-interest debt. If your increased mortgage payments make it difficult to pay other high-interest debt, you may find yourself in more debt over time.^{[3]XResearch source}
- Currently, mortgages are some of the cheapest debt available due to the fact that mortgages are secured by your home, which reduces risk to the lender. Chances are therefore good that any other debt you have is more costly on an interest-rate basis than your mortgage is.
- If you have any credit card debt, line of credit debt, auto loans, or student loans, paying those off first should be a priority. Why? Because those sources of debt often cost between 7 - 20% annually, compared to 3-5% for a mortgage. Therefore, the return on paying those other sources of debt off first is much higher.
- For example, if you have a mortgage with a 5% interest rate, and a credit card with a 20% interest rate, applying $500 extra to your mortgage would save you $25 in interest, versus $100 by applying the same payment to your credit card. That is $75 more that is "earned" by paying your credit card off first.
3
Assess your emergency savings. The opportunity cost of paying your mortgage off faster can also be substantial if you do not have a sufficient nest egg of emergency savings. By applying extra payments to your mortgage, you are depriving yourself of cash needed to survive a job-loss or other sort of emergency if you have no previous savings.^{[4]XResearch source}
- You will not have the option of un-doing a paid off mortgage, so it is important to have savings that are liquid (easily accessible), instead of having it tied up in your home. Having a fully paid for home is of little use if you lose your source of income or an emergency arises and you need cash immediately.
- Experts recommend having 3-6 months worth of income in cash available.
4
Ensure any employer-matched 401(k) plans are maximized first. If your employer matches your 401(k) contributions, ensure you are taking full advantage. If your employer contributes 50% of every dollar you contribute that is a guaranteed 50% return on investment. The actual return is likely even higher considering these plans are often invested in stocks and bonds.^{[5]XResearch source}
- This goes back to opportunity cost. Adding an additional $500 per month to your 5% interest mortgage would save you the 5% in interest on the paid amount each year, but the opportunity cost would be the missed return of over 50% you would get from investing the same amount into your employer-matched 401(k).
5
Examine your investment options. Before increasing payments to your mortgage, examine any alternative investment options. As mentioned earlier, the key is to choose whatever option offers a higher return. Therefore, it would be unwise to add money to a mortgage to save 5% per year (for example), if you can invest your money in an index fund and earn 8%.^{[6]XResearch source}
- Investing involves considerable risk, and therefore high returns are deeply uncertain and are dependent not only on market conditions, but on your skill and knowledge as an investor. Paying off a mortgage, however, offers a certain return.
- Therefore, if you are risk-averse and prefer a certain small return over an uncertain larger return, paying off your mortgage first may be wiser. This is especially true if you do not feel confident in your investing knowledge or ability.^{[7]XResearch source}
However, interest rates may be higher and there are additional costs involved with remortgaging. Refinancing to gain a lower interest rate usually makes sense if rate is 1.5% - 2% lower than your current rate.
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Part 2

Part 2 of 3:

Doubling Your Monthly Payment

1
Determine exactly how doubling your mortgage payment will affect your payoff. As a general rule, doubling your current monthly payment, will pay off your 30-year fixed rate loan in less than 10 years. For example, a $100,000 mortgage with a 6% rate requires a payment of $599.55 for 30 years. If you double the payment, the loan is paid off in 109 months or nine years and one month.^{[8]XResearch source} You can find mortgage calculators on the internet to help you see how increasing your payment will affect your particular mortgage.^{[9]XResearch source}^{[10]XResearch source}
- Be aware that many lenders charge a pre-payment penalty of between one to six months worth of interest payments to pay a mortgage off early.
- Review your mortgage or deed of trust to see if a pre-payment penalty will be assessed.
- If one applies, you can expect a pre-payment penalty of between one to six months worth of interest payments.^{[11]XResearch source}
2
Determine how much funding you have available to increase your payment. While doubling your mortgage payment can effectively reduce the term of a 30 year mortgage to 10-years, it needs to be financially feasible. To do this, it is necessary to examine your current financial situation to generate a picture of your finances. Begin by opening an Excel spreadsheet or a blank piece of paper.
- Create a column that lists all of your monthly earnings, with a sum at the bottom. Make sure you include any and all income, and ensure that you subtract any deductions like taxes, insurance, or 401(k) contributions.
- Create a second column that tallies your fixed expenses. These are expenses that cannot be altered over the course of a month and would typically include things like your current mortgage payment, utilities, food, and any other debt repayments.
- Subtract the sum of column two from the sum of column one. This will provide a sense of how much cash you can theoretically adjust to accommodate a bigger mortgage payment.
- Consider using budgeting software to assist in this task. Good programs include Mint, Quicken, or Budget Plus. Microsoft Excel also has some free budget templates.
3
Subtract your increased mortgage payment from the remaining amount. For example, assume after subtracting your fixed expenses from your income, you have $1000 left over. If your current mortgage payment is $300 per month, doubling it would mean you need to subtract $300 from the $1000 you have left over.
- The resulting amount -- $700 -- is the amount you must be able to pay for all your remaining discretionary expenses with, in order to afford your doubled mortgage payment.
4
Create a budget that allows you to live on the remaining funds. If you have $700 left over after including your increased mortgage payment, and all your fixed expenses, that $700 is the amount you must be able to live within.
- If you find your variable monthly expenses exceed this amount, you will need to find areas that you can reduce spending in. Common solutions include eating out less, downgrading phone or cable packages to more basic versions, walking more and driving less, and reducing small daily purchases that can accumulate into large sums every month (like coffee purchases).
- There is an abundance of budgeting tips and tricks available online^{[12]XResearch source}
If doubling your payment fits within your budget, follow your plan and send in double the payment every month. Or, if you prefer, you can send in the same payment twice per month. This is called biweekly mortgage payments. You can work with your lender to set these up or you can just send in the extra payment each month.^{[13]XResearch source}
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Part 3

Part 3 of 3:

Refinancing Your Mortgage

1
Understand refinancing. Refinancing can be an attractive alternative or supplement to doubling your monthly payments. Refinancing involves replacing your old loan with a new loan that has different terms. These terms can include a lower interest rate or a shorter-term. ^{[14]XResearch source}
- Refinancing can enable you to potentially shorten your loan without needing to dramatically increase your payments if you are refinancing to a much lower interest rate.
- For a 30-year fixed-rate mortgage on a $100,000 home, refinancing from 9% to 5.5% cuts the term in half to 15 years, with only a slight change in the monthly payment from $804.62 to $817.08.^{[15]XResearch source}
- In order for this to work, lower interest rates must be available. Check with your lender to confirm. If they are not, refinancing will shorten your term, but likely increase your payment.
- Often, shorter-term loans have lower interest rates, so even if your overall monthly payment is higher, you will save enormously on interest over time due to a lower rate and shorter term.
You can find mortgage calculators online to help you determine what your payment would be on a 10-year mortgage.^{[16]XResearch source} You could also contact your lender who could help you figure out what your new payment would be. A good rule of thumb is that your payment will almost double when you convert a 30-year mortgage to a 10-year mortgage.^{[17]XResearch source}
3
Take a look at your financial situation to see if you can afford a higher mortgage payment and the refinancing related fees. Payments will be significantly higher in your new 10-year mortgage.^{[18]XResearch source} Carefully consider your financial situation and whether it makes sense for you to convert to a 10-year mortgage. It is never wise to sacrifice savings to pay off your mortgage as you may need them for emergencies.^{[19]XResearch source} Also, there are refinancing fees that need to be considered.
- Many lenders charge a pre-payment penalty of between one to six months of interest payments for early payoff. Review your existing mortgage to see if a pre-payment penalty will apply.^{[20]XResearch source}
- Fees for a refinancing closing may include costs for closing, appraisal, title search and title insurance, survey, loan origination, and can run from 3-4% of the total refinanced amount.^{[21]XResearch source}, ^{[22]XResearch source}
- If the interest rate is not decreased by at least 1.5-2%, it may not be worth it to refinance your mortgage. You should still be able to make higher mortgage payments even if you don't refinance.
4
Gather the documents you need to apply for refinancing. You will have to prove your income and monthly debt obligations to your lender. If you are refinancing through the same lender, they may just check your credit, bank statements, or profit and loss statements. Other lenders may ask for more information. Depending on the lender, you may need to provide copies of some or all of these documents to your lender:
- pay stubs
- bank statements
- income tax returns
- credit card statements
- proof of other monthly debts (i.e. car loans)
- credit report and score (the lender may obtain this on its own)^{[23]XResearch source}
5
Apply to refinance your existing mortgage to a 10-year term, with your lender. Contact your lender to apply for refinancing. Most banks allow you to apply either in person at a branch, over the phone or online.^{[24]XResearch source} Submit your application in whatever manner is easiest for you. If you are heading to a branch, make sure to take all your documents with you. If you are applying over the phone you will likely fax your documents to your lender. An application fee of between $75 and $300 can be expected.^{[25]XResearch source}
- Always contact multiple lenders to compare rates. The more lenders you contact, the higher the probability of you obtaining a more favorable rate.
6
Close the deal. If the refinancing is approved, your lender will notify you. At this point, it is a good idea to ask a real estate attorney to assist you in closing the deal. The attorney can make sure the refinancing documentation is drafted properly. Make sure you receive copies of the new 10-year mortgage loan to keep in your personal files. Keep in mind there are fees associated with closings.
- Closing attorney fee. The fee for the closing attorney’s services can run between $500 and $1,000 or more.
- Title search and title insurance fee. In some cases, you may need to pay for a title search and title insurance to ensure that there are no liens on the property and you are the rightful owner. These fees will be based on either the purchase price or the amount refinanced. For most refinancing, there is no need for a title search if the owner is remaining the same, but a new insurance policy must be issued for the new refinanced loan.
- Appraisal fee. You may need to get your home appraised. If you have recently had an appraisal, the lender may not require it with refinancing. If you must pay for it, an appraisal can cost from $300 to $700. In some cases, however, you may only need a broker price opinion instead of a full appraisal. A broker or real estate agent will give their opinion to the lender as to what the house is worth.
- Loan origination fee. You may also incur a loan origination fee for the bank to process the loan and prepare the documents. This fee can run up to 1.5% or more of the loan principal. You should always read the good faith estimate given to you by the lender so that you understand what the fees are. You may be able to negotiate these fees with the lender. ^{[26]XResearch source}
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The information provided above constitutes general information related to the law. It does not constitute legal advice.
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