Pay Off the Mortgage Early and Painlessly

Paying down the mortgage quickly is an attractive option today as people are struggling to get out of debt. There are ways to do this that involve fancy calculations, extra fees to the mortgage company, and complicated formulas. The method I am going to describe is one I have been using for several years now and, once it is set up, requires no effort on your part beyond watching your mortgage shrink and seeing some interest accumulate in your money market account.

The first thing to do when setting up this mortgage payment process is to open a separate money market account, one that you will not use for anything other than paying the mortgage. Use an amount equivalent to 25% of your current monthly mortgage payment to open the account. It is important to use a money market checking account for this so you earn some interest on the money you are putting into it. There are some online options like ING Electric Checking or Capital One Money Market Checking. Look into these or check with your current bank to find an interest bearing checking account. The advantage to an ING or Capital One money market account is there is no minimum deposit requirement.

This works best if you get paid every other week, which means you get paid 26 times a year, not 24 or 12. If your pay cycle is different, you may have to do some calculating to make this process work, but I am going to go on the assumption that you are getting paid every other week. Check with your company to see if they allow direct deposit to more than one account. If they do, have them deposit an amount equal to 50% of your mortgage payment every payday into the new money market account. The balance of your paycheck can be deposited in your regular account. This does a couple of things: 1) it starts accumulating a balance in your money market account that is earning interest and 2) it takes the money for the mortgage out of your everyday spending account. Out of site - almost out of mind!

After two paydays, you should have the equivalent of one mortgage payment, plus 25% (from the initial deposit) in the money market account. For example, let's assume mortgage is $1,400 a month.The new account was started with $350 and after two paydays of $700 deposits, there will be $1,750 in the money market account. Now, you can set up an automatic payment from the money market account to your mortgage company for the amount of our mortgage PLUS at least an additional $100. Set this payment to come out of your account on the first day of the month, that way the money will earn interest through the last day of the previous month. In the example above, the mortgage payment would be $1,500, leaving $250 in the account to start the next month. There will be two months during the year where there will be three direct deposits, putting an extra $1,400 in the account. Leave that money there when it arrives, using it only to pay the extra $100 per month on the mortgage (and earn a little interest when it is not being used). When you do this, you actually pay an extra $100 a month toward the mortgage, but do not have to adjust the rest of your budget to do so!

Once this is all set up and working, all you need to do is watch the mortgage shrink and watch the interest grow in your money market account. You will be paying extra on your mortgage every month without taking extra money from anywhere else in your budget - it is already in the account, earning interest and waiting to be used. You can adjust the amounts you deposit and pay extra, depending on your personal budget, but this simple method will cut years off your mortgage and save you thousands of dollars in mortgage interest! Your mortgage company probably has a program where you can make extra payments, bi-monthly payments, etc., but they will typically charge a fee for setting up and maintaining a program like that. Why should you pay them even MORE money for the privilege of paying your loan off early? You can do this yourself and not only save money, but earn a little bit, too!