It Takes 13.5 Years To Break Even On Your Mortgage. You Can Do It Faster

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There are several ways to pay down your mortgage quicker.

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If you buy a house now, it can take up to 13.5 years to make a profit on your purchase, according to new data from Zillow. “The combination of rising home prices and high mortgage rates is leading to a longer period between purchase and sale before a profit can be made,” says Nicole Bachaud, senior economist at Zillow. And she tells us that the high upfront costs of a home purchase might also be driving buyers to opt for a lower down payment — which extends the time it takes for buyers to make a profit on their home.

According to Bachaud, these are estimates on how percentages (and maintenance costs) can affects the profit timeline:

· A 3% down payment would require 13 years and six months to make a profit

· A 5% down payment would require 13 years and three months to make a profit

· A 10% down payment would require 12 years and seven months to make a profit

· A 20% down payment would require 11 years and three months to make a profit

However, it’s possible to break even much sooner.

Make Bi-Weekly Payments

One way to pay off your mortgage faster is by making bi-weekly payments. Brandon Snow, executive director of mortgage strategy at Ally Home, points to a recent TikTok video that went viral explaining a “mortgage payoff hack” for homeowners.

“According to the video, if you set up bi-weekly mortgage payments instead of monthly payments, you will save about 5 years off the top of your loan on average,” Snow tells us.

According to Matt Vernon, head of consumer lending at Bank of America, “Making bi-monthly payments on your mortgage can expedite payoff, potentially saving on interest and shortening the loan term.” If you make half of your monthly payment every two weeks, he tells us that you’ll end up making one extra payment each year. “Over time, this extra payment can significantly reduce the total interest paid and shorten the loan term.”

However, the actual impact may depend on other factors, like your interest rate. “If you have a higher interest rate, the savings from making bi-monthly payments will likely be more significant,” Vernon explains. “Also, if your mortgage has a fixed interest rate, the impact is more predictable compared to variable-rate mortgages.”

Bi-weekly payments can reduce interest and shorten the loan term.

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So, how does this strategy play out in real-world dollar amounts? Snow gave me two different scenarios using a $332,800 mortgage (based on Federal Reserve home price estimates for the second quarter of 2023), assuming a 20% down payment.

“At a 3.5% interest rate over a 30-year mortgage term, a homeowner’s monthly payment stands at $1,494 in principal and interest (escrow not included),” Snow says. “So, if the homebuyer shifts to an accelerated bi-weekly payment plan, they would pay off their mortgage in 26.2 years at $747 per payment — saving them approximately $30K in interest over the life of the loan.”

However, since current interest rates are higher, here’s another scenario:

“With a 7% interest rate over a 30-year mortgage term, a homeowner’s monthly payment stands at $2,214 in principal and interest (escrow not included),” Snow explains. And by shifting to an accelerated bi-weekly payment plan, he says the homeowner would pay off their mortgage in 23.7 years at $1,107 per payment — saving them approximately $115k in interest over the life of the loan.

When Bi-Weekly May Not Be The Best Strategy

But whether this is a good strategy or not depends on several factors. For example, if your mortgage rate is less than your savings account rate (and Snow says this is the situation for many people who purchased their home before 2022), you may want to maintain the usual monthly mortgage payment schedule. “With a bi-weekly payment schedule, you end up making a couple of extra payments a year, but consider investing the funds that would go towards these additional payments in a high-yield savings account,” he advises.

On the other hand, if your mortgage rate is higher than your savings account rate, Snow admits that making bi-monthly mortgage payments can help to pay down the principal faster and accrue less in interest payments. “However, not all lenders offer this option, and some may charge fees to get the new payment schedule set up, so be sure to research your lender’s policies before switching your payment schedule,” he says.

Vernon agrees that you need to know your bank’s policy and whether it will impose prepayment penalties. “It’s important to check with your mortgage lender to ensure they accept partial payments, and to confirm how they apply them.” Also, before changing your payment schedule, he recommends that you consider your overall financial situation and determine if this new payment strategy aligns with your goals and budget.

Other Ways To Pay Down Your Mortgage Quicker

In lieu of making bi-weekly mortgage payments, Melissa Cohn, regional vice president at William Raveis Mortgage, tells us that you can simply make one extra payment each year, since it will have the same effect.

“With any mortgage, if you make payments that are larger than the required payment, the additional amount will go to reducing principal,” she explains. “As the principal amount is reduced, each future monthly payment further accelerates the amortization of the principal amount.” And this creates a snowball effect that allows you to pay off the home a few years earlier.

If you tend not to have money in your bank account that can be used for this purpose (37% of Americans can’t cover a $400 emergency expense, according to the Feds), it may be easier to use your income tax check when you receive it.

Rounding up payments is another way to pay down your mortgage faster. For example, if your monthly payment is $2,500, consider paying $2,700.

“Also, explore refinancing options, allocate bonuses to your mortgage, and automate payments while reviewing and trimming expenses to redirect savings toward repayment,” Vernon says. However, he reiterates the importance of checking with your lender to understand terms and potential penalties before implementing new mortgage payment strategies.

One Homeowner’s Strategy

I also spoke with Stephanie Mickelson, a freelance writer in Eau Claire, Wisconsin. She and her husband bought their first home in June, 2023, after saving and planning for about 10 years. Their goal is to pay off the house within 5 years. Mickelson recommends having the largest down payment possible. “We put down 30% on our home, which greatly reduced our monthly payments,” she says. “So instead of making larger payments on a big loan, we were able to get a smaller mortgage, which allows us to pay more on the principal.”

To save for the down payment — and pay the home off as quickly as possible — Mickelson’s husband went from working part-time to full-time to management. And since Michelson is a stay-at-home mom, she writes early in the morning before the kids get up. “I pick up as many jobs and clients as possible, and my husband has been focused on earning more as well.”

Don’t dip into your emergency fund.

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They’re also making extra payments to pay down the mortgage. However, Mickelson says that money is not coming from savings. “When we got out of debt in 2015, we set aside a six-month emergency fund, and we don’t touch it unless there’s an emergency we can’t cover from our normal budget.” The family also has another savings account for home maintenance, unexpected expenses, etc. “This means we can put as much as possible towards the loan without putting ourselves at risk financially,” she explains.

Mickelson also avoided a common first-time home buyer mistake. “When we were deciding whether or not to take out a mortgage, I sat down and looked at the actual interest we’d pay over the course of a 15-year mortgage,” she says. If the mortgage is paid off in 15 years, it will include approximately $111,000 in interest. “Our plan is to pay it off in under 5 years, and in that scenario, we’ll be paying just under $40,000 in interest, and saving $71,000.”

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