Paying off your mortgage early could be a great financial move if you use the right strategy. It can help you to build equity more quickly and also reduces the total amount of interest you’ll pay over the life of the loan.
But you’ll want to consider all the pros and cons before deciding to pay off your mortgage early, and make sure this will achieve the results you want. Below, we explore when paying off your mortgage is a good idea and break down the best ways to do it.
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4 ways to pay off your home loan early
1. Make extra payments
Extra payments applied to your principal balance will help pay off your mortgage faster.
Most mortgage companies will allow you to make additional payments using these methods:
- Bi-weekly payments – If you pay your mortgage every two weeks, rather than once a month, you’ll end up making 26 half-payments per year. That equates to 13 full payments — or one extra mortgage payment each year – meaning you’ll pay off your loan’s balance sooner. However, it’s important to make sure that your payments aren’t made later than your mortgage due date in order to avoid any late charges.
- Additional payments – Even if you can only make a few additional payments during the year, these amounts can add up to help reduce your principal balance over time. These principal payments will also shorten the overall term of the loan based on the amount you pay, which can make it a good way to work toward early mortgage payoff.
- Rounding up – Rounding up can be an easy way to pay extra toward your mortgage in smaller increments. For example, if your monthly payment is $1,150 and you round up to $1,200 that would be an extra $50 per month, which is an extra $600 per year toward the loan amount.
With each of these options, always confirm with your mortgage lender that your extra money is going to the principal instead of the interest. Paying interest early won’t reduce your balance or help you pay off the mortgage sooner.
2. Refinance your mortgage
Refinancing your mortgage to reduce your interest rate and loan term can help you pay off your mortgage early. For example, if you took out a $200,000 loan 10 years ago, and had an interest rate of 7%, then refinanced to 5% for another 15 years, you could save on interest and own your home that much sooner.
3. Recast your mortgage
A mortgage recast is when you pay a large lump-sum payment and then the lender recalculates a new amortization schedule for your loan based on the principal being reduced. When the principal is recast, the loan term and interest rate remain the same. With the overall loan amount reduced, though, your mortgage payments will be lower until the end of the loan term, which means you’ll have available cash to make extra payments toward your mortgage and pay it off more quickly. You’ll also save on total interest because you’re paying interest on a lower loan amount.
4. Make lump-sum payments toward your principal
If you get a bonus, tax refund, or inheritance during the year, you could apply that amount to your mortgage principal. By making a lump-sum payment, your monthly payment would remain the same but the reduced balance will shorten the length of the loan and reduce the total interest you pay.
Pros & cons of paying off your house early
Pros | Cons |
No monthly mortgage payment | Eliminates opportunity to take the federal mortgage tax deduction |
Save money by reducing total interest due | Cash becomes home equity, which is less liquid |
Enjoy the security of home ownership earlier | Less liquidity to take advantage of other investment opportunities |
Can you pay off your mortgage early?
Borrowers are generally allowed to pay off a mortgage early but could incur a prepayment penalty. Prepayment penalties typically apply if it’s within the first three years of the loan, and it’s a conventional, qualified mortgage that has a fixed rate. If it’s a government-backed loan, non-prime, or adjustable-rate mortgage it typically doesn’t have a prepayment penalty.
Should you pay off your mortgage early?
Deciding if you should pay off your mortgage early will depend on your financial situation and your future plans.
- When paying off your mortgage early might be worth it: Whether you’re in a good financial position, and have the additional money to make extra payments toward your mortgage loan, is a key consideration. For example, if you receive a windfall (such as an inheritance, a bonus, or a large tax return), you may want to apply that extra cash to your mortgage balance. Also, if you plan to retire soon and your income will decrease, then it could be beneficial to pay off your home early and reduce your future expenses.
- When making the minimum monthly payment may be better: Perhaps you have other high-interest debt (for example, credit card debt), or you don’t intend to stay in your home for a long period of time. Under such circ*mstances, it could be a better option to continue making the minimum monthly payments. This is especially true if you have a very low-interest rate for your current mortgage.
Ultimately, whether or not it’s a good idea to pay off your mortgage early will depend on the specifics of your personal finances.
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How to pay off your mortgage early FAQ
What happens if I pay off an extra $100 a month on my mortgage?
By paying an extra $100 per month on the principal, your mortgage will be paid off sooner. For example, if you have a 30-year, $300,000 loan with a 4.125% interest rate, you would reduce your loan term by 3.5 years and save $30,036 in interest.
How can I pay off my 30-year mortgage in 10 years?
A 30-year mortgage can be paid off in 10 years if you can pay almost double in mortgage payments. For instance, if you have a 30-year, $300,000 mortgage with a 5% interest rate, its payment would be $1,610 per month. But making a monthly payment of $3,182 would pay off the loan in a shorter term, roughly 10 years. If you can afford higher monthly payments and qualify for a lower interest rate, you might also consider refinancing into a 10-year loan term.
Is it a good idea to pay off your mortgage early?
Your financial situation will determine if now is a good time to pay off your mortgage early or not. If you have higher-interest-rate debts and a low-rate mortgage, it may be better to pay off those higher debts first. However, if you can afford to make an extra monthly payment, you’ll pay less interest over the life of the loan — and enjoy the peace of mind of a paid-off home that much earlier.
What is the easiest way to pay off a mortgage early?
Accelerating your mortgage payments is usually the easiest way to pay off your mortgage early. For example, if you make four additional mortgage payments per year that would reduce your 30-year loan to 18 years.
What if I make two extra mortgage payments a year?
When you make two extra mortgage payments a year on a 30-year mortgage, your loan term will reduce by 8 years. This would save you $82,254 on a 30-year, $300,000 mortgage with a 5% interest rate.
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As a seasoned financial expert with a deep understanding of mortgage management and personal finance, I'd like to delve into the key concepts presented in the article about paying off your mortgage early.
First and foremost, paying off your mortgage ahead of schedule can be a prudent financial move when executed with the right strategy. This approach enables you to build equity faster and minimize the total interest paid over the life of the loan. Let's explore the recommended strategies outlined in the article:
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Make Extra Payments:
- Bi-weekly Payments: Paying your mortgage every two weeks results in an extra payment each year, expediting the loan payoff.
- Additional Payments: Even occasional extra payments contribute to reducing the principal balance and shortening the loan term.
- Rounding Up: Incrementally rounding up your monthly payments is a simple yet effective way to make extra contributions toward the principal.
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Refinance Your Mortgage:
- Lowering the interest rate and adjusting the loan term through refinancing can lead to substantial interest savings and an earlier mortgage payoff.
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Recast Your Mortgage:
- A mortgage recast involves making a lump-sum payment, prompting the lender to recalculate a new amortization schedule. This doesn't alter the interest rate or loan term but lowers monthly payments, allowing for additional payments towards the principal.
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Lump-Sum Payments:
- Windfalls like bonuses, tax refunds, or inheritances can be applied as lump-sum payments to the principal, accelerating the reduction of the loan balance.
The article also provides a comprehensive analysis of the pros and cons associated with paying off your mortgage early:
Pros:
- Elimination of Monthly Mortgage Payments.
- Savings through a Reduced Total Interest Due.
- Increased Home Equity and Early Ownership Security.
Cons:
- Loss of Federal Mortgage Tax Deduction.
- Reduced Liquidity due to Tied-Up Cash in Home Equity.
- Opportunity Cost of Foregoing Other Investment Opportunities.
The decision to pay off your mortgage early should be carefully evaluated based on your financial situation and future plans. Factors such as windfalls, impending retirement, and long-term financial goals play a crucial role in this decision-making process.
The article also addresses the question of whether borrowers can pay off their mortgages early. While borrowers are generally allowed to do so, prepayment penalties may apply, especially within the first three years of a conventional, fixed-rate loan.
In conclusion, the provided FAQ section answers common questions about paying off mortgages early, including the impact of extra payments on loan terms, strategies to expedite mortgage payoff, and considerations for individuals with different financial scenarios. It emphasizes that the decision to pay off a mortgage early depends on individual circ*mstances, such as existing debts, interest rates, and overall financial stability.
