Four unusual ways to pay down your mortgage

Sometimes, saving on your home loan means taking an odd path to get there.

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You've no doubt heard that strategies like refinancing can save you money on your mortgage. But going a traditional route - like refinancing - isn't the only way you can save. Sometimes, taking a relatively unbeaten path to mortgage savings is also smart.

"It would be foolish not to do things that would save you money," says Brownie Stanisch, a senior loan consultant at Prospect Mortgage in Sherman Oaks, Calif. "You should look at any options you have in this economy, whether they are short or long term. All solutions might not work with everybody, but look at the options and see if they fit."

So if you're interested in saving money on your mortgage, check out these four unusual tips we've collected.

Unusual Tip #1 - Make a 13th Payment

With the year being 2013, you might want to consider this number a great reminder of how you can do your mortgage an unusual financial favor: make a 13th payment this year - and every calendar year moving forward.

According to Stanisch, this unusual action can work as a long-term solution to improving your mortgage terms. "Depending on the loan amount, it could knock off six or more years from your loan term," she says.

And from a dollar-and-cents standpoint, making a 13th payment makes a load of financial sense. Stanisch says one additional payment per year can do things such as increase the equity in your home, shorten the amount of time you need to make payments, and cut your interest payments over the life of the loan.

Stanisch adds that making any extra payments on your home loan "makes sense if somebody has extra money to put that much toward their mortgage."

Unusual Tip # 2 - Round Up Monthly Payments

If making that extra payment just doesn't seem possible given your tight budget, consider this unusual way to save: round your mortgage payments up to the closest hundredth - and put it toward your principal.

"Anything you pay toward the principal is value," Stanisch says. "If the payment is $1,908, you round up to $2,000. Every $92 of payments you make could save you on years of interest."

And Stanisch says that whether you round up a little or a lot, the amount will make a noticeable difference over the course of the loan.

Let's look at an example from the Federal Reserve Board (FRB), which spells out the value of adding to your monthly payment:

If you have a 30-year loan with a 6 percent interest rate and $1,199 monthly payment, you could reduce the term by three years by adding $50 to your principal payment each month. And how much would you save in interest costs? More than $27,000 during the life of the loan, the FRB says.

Unusual Tip #3 - Refinance to Make Higher Monthly Payments

Magicians who perform the trick of sawing a lady in half are almost a sure-fire bet to wow an audience. The same might be said of homeowners who make the unusual decision to cut their loan terms in half - because the end results can have a financial wow factor. How? By cutting your loan term in half, you can save big on interest over the life of the loan (we'll show you just how much in an example below).

But on the downside, refinancing your home to reduce the length of your loan will increase your monthly payments. So is this really a smart move? Stanisch says yes. "If you can afford it, going from a 30 to 15-year mortgage is fantastic," she says.

[Think refinancing to a shorter term might be for you? Click to compare rates from lenders now.]

So let's see what the numbers tell us. Looking at the primary mortgage market survey, a weekly update of mortgage interest rates on the Freddie Mac website, the average rate for a 30-year fixed-rate home loan was 3.63 percent - compared to 2.79 percent for a 15-year mortgage on the week of March 14, 2013.

Using these rates as examples, we calculate the savings:

  30-Year FRM 15-Year FRM
Loan Amount: $100,000 $100,000
Interest Rate: 3.63 percent 2.79 percent
Monthly Payment: $456.33 $680.53
Total Interest Paid: $164,279.80 $122,494.80

As you can see, although the monthly payment might be higher, if you paid your mortgage off in 15 years instead of 30, you would save over $41,000 in interest over the life of the loan.

Unusual Tip #4 - Get an Adjustable-Rate Mortgage (ARM)

Are you a homeowner who thinks that switching from a fixed-rate mortgage (FRM) to an adjustable-rate mortgage (ARM) might truly cost you an arm and a leg because of fluctuating interest rates? Stanisch suggests thinking again.

"Adjustable rates are kind of non-traditional, but they could lower your payments and save you money now," Stanisch says.

ARMs work this way, according to the FRB: After a period in which the interest rate remains fixed - lasting anywhere from one month to five years typically - the loan's interest rate changes in relation to an index. And as you can imagine, once the rate begins to fluctuate, it can get risky since you don't know exactly what the payment will be each month.

And while fluctuating rates can definitely be risky, the initial interest rate for an ARM starts out lower than that of an FRM. And if interest rates continue to remain steady after that fixed initial period, the ARM could be less expensive in the long run. However, if interest rates are on the rise after the initial fixed-period, then your payments may be in trouble.

So, the best thing to do is to evaluate your finances and determine whether or not you're willing to take the risk with an ARM.

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