ASK KIM
Pay off Your Mortgage and Save
by Kimberly Lankford

I'm about to get a raise of $500 per month and I'd like to use the extra money to help pay down my mortgage. I just bought a house this year, borrowing $200,000 at 6% for a 30-year fixed mortgage. If I add $500 per month to my payments, how much quicker will I pay off my house?

Adding that much to your monthly payment could cut your payment time in half and save you thousands of dollars in interest.

According to my calculations, if you're paying a 30-year $200,000 mortgage at 6%, your monthly principal and interest payments are somewhere around $1,200 per month (this doesn't include money you have going to an escrow account for property taxes and insurance).

If you add the $500 -- bringing your monthly payment to $1,699 -- you'll pay off your house in just under 15 years. You'd also save more than $128,000 in interest, paying just $103,249 instead of $231,676.

Run your numbers through our How Advantageous Are Extra Payments? calculator for more accurate figures.

If you can afford to regularly make these extra payments, consider refinancing to a 15-year mortgage. You may be able to save even more.

The national average for 15-year mortgages is now 4.73% -- which can cut down on your total interest costs significantly. If you refinance to this lower rate you could pay off your house in 15 years, and your monthly payment would climb by only $354. And you'd only pay $79,648 in interest over the life of the loan.

That leaves you with about $150 you could save or invest for other purposes, or you could plow the extra savings into back into the new mortgage for an even faster payoff.

If you refinance and still pay the whole $500 extra towards your mortgage, you'll pay off your house in a little over 13 years and cut your total interest costs by another $10,000.

Run your numbers through our Which Is Better: 15- or 30-Year Loan Term? calculator to see how much you could save by switching to the shorter-term loan.

But keep in mind that refinancing is only worthwhile if you plan to live in the house long enough to recoup the refinancing costs. See if refinancing makes sense for you.

Also keep in mind that if you refinance to a 15-year mortgage, you would be locked into those new payments. You would give up the flexibility to use your extra money for other expenses or for emergencies, and you couldn't reduce the payments if you lost your job.

If it doesn't look like you'll always be able to afford the extra monthly payments, then it's better just to add the extra money to your 30-year loan when you can, which still puts you ahead but gives you the option to use the money for other expenses in months when cash is tight.

Paying off your house early can help your financial situation, especially if you're nearing retirement age. But make sure the rest of your finances are in order before you devote any extra money to increase your mortgage payments, especially if you have a low interest rate. First pay off high-interest credit-card debts, save three to six months of living expenses in a liquid emergency fund, and max out your 401(k), especially if you have an employer match.