Four ways to pay off your mortgage early and calculate the savings

It’s simple to pay off a mortgage earlier. But should you? That’s a complicated question.

For many people, their mortgage carries an interest rate that’s lower than they could average in retirement or investment accounts. And that means the “extra” money you could throw at a mortgage might actually earn you a lot more elsewhere.

With a low mortgage interest rate, homeowners are “so much better off putting that money in a Roth IRA,” says Jill Gianola, CFP professional, author of “The Young Couple’s Guide to Growing Rich Together.”

Other financial pros agree. And if you have extra money and an employer that offers matching retirement contributions, that option might give you a higher return for your money than paying off a low-rate mortgage, says Eric Tyson, author of “Personal Finance for Dummies.”

Then there’s the college aid factor. If you’re applying for need-based aid for your kids, that home equity could count against you with some colleges, he says, because some institutions view equity as money in the bank.

If, after those caveats, you want to pay off your mortgage early, here are four ways to make it happen.

• Pay an extra 1/12th every month

Divide your monthly principal and interest by 12 and add that amount to your monthly payment.

End result: 13 payments a year.

Before you make anything beyond the regular payment, phone your mortgage servicer and find out exactly what you need to do so that your extra payments will be correctly applied to your loan, says Joel Doelger, director of community relations and housing counseling for Credit Counseling of Arkansas.

Let them know you want to pay “more aggressively,” and ask the best ways to do that, he advises.

Some servicers may require a note with the extra money or directions on the notation line of the check.

In any event, if you’re putting extra money toward your loan, always check the next statement to make sure it’s been properly applied, Doelger says.

• Refinance with a shorter-term mortgage

Want to make sure your mortgage is paid in 15 years? Refinance to a 15-year mortgage.

15-year mortgages often carry interest rates a quarter of a percentage point to three-quarters of a percentage point lower than their 30-year counterparts, Tyson says.

But this option is not quick or free. You must qualify for a new mortgage — which means paperwork, a credit check, and, likely, a home appraisal. Plus closing costs.

And even with a lower interest rate, that quicker payoff means higher monthly payments. And this method is a lot less flexible. If you decide that you don’t have the extra money one month to put toward the mortgage, you’re locked in anyway.

Unless the new interest rate is lower than the old rate, there’s no point in refinancing, says Doelger.

Without a lower rate, you’ll get all the same benefits (and none of the extra costs) by just increasing your payment a sufficient amount, he says.

• Make an extra mortgage payment every year

12 months, 13 payments. There are a couple of ways to pull off this tactic. You can save up throughout the year and make an extra payment. Or, for those who get paid biweekly, harness part or all of those “extra” or “third” checks.

The equivalent of 13 payments a year will slice years from a new 30-year mortgage, Tyson says.

• Throwing ‘found’ money at the mortgage

Get a bonus? A tax refund? An unexpected windfall? However it ends up in your hands, you can funnel some or all of your newfound money toward your mortgage.

The upside: You’re paying extra only when you’re flush. And those additional payments toward the principal will cut the total interest on your loan.

The downside: It’s irregular, so it’s hard to predict the mortgage payoff date. If you throw too much at the mortgage, you won’t have money for other needs.