Many homeowners dream of having a paid-off home and achieving financial freedom sooner, but they are often uncertain about how to make it happen. Homeowners typically make their normal monthly mortgage payments and expect to pay off their homes over 30 years. However, there are ways to pay it off even faster using three proven strategies.
Ahead, CNBC Select covers what the three early mortgage payoff strategies are, the pros and cons of each one and which method is best for your situation.
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How can I pay off my mortgage faster?
If you're interested in paying off your mortgage faster, there are multiple ways to make it happen. The best strategy for you often depends on your credit score, cash flow and financial discipline.
Refinance into a shorter term
When you refinance your home, you can pay off your home faster by replacing your 30-year mortgage with one that's a shorter term. With a mortgage refinance, you can shorten your loan term by selecting a 20, 15, or even a 10-year loan.
By selecting a shorter term, your monthly payment may increase. However, many homeowners are earning more today than when they first bought their homes. With this higher income, you may be able to easily afford a small increase to your monthly payment.
Refinancing your mortgage may lower the interest rate or eliminate mortgage insurance premiums. By reducing interest charges and getting rid of mortgage insurance premiums, these savings can offset the increase in your monthly payment. One of the best mortgage lenders for refinancing is Rocket Mortgage due to its flexible loan repayment terms, fast approval process and lower credit score requirements.
Rocket Mortgage
Annual Percentage Rate (APR)
Apply online for personalized rates
Types of loans
Conventional loans, FHA loans, VA loans and Jumbo loans
Terms
8 – 29 years, including 15-year and 30-year terms
Credit needed
Typically requires a 620 credit score but will consider applicants with a 580 credit score as long as other eligibility criteria are met
Minimum down payment
3.5% if moving forward with an FHA loan
Terms apply.
Getting the best interest rates and terms on a mortgage often requires excellent credit. If your credit score is lower, take steps to boost your credit before applying. For instance, you may be able to improve your credit score through*Experian Boost™, which allows you to get credit for on-time phone, utility and streaming service payments. A mortgage broker can also review your credit report and offer suggestions on how to improve your credit score.
Experian Dark Web Scan + Credit Monitoring
On Experian's secure site
Cost
Free
Credit bureaus monitored
Experian
Credit scoring model used
FICO®
Dark web scan
Yes, one-time only
Identity insurance
No
Terms apply.
Make extra payments
Refinancing your mortgage can be costly and time-consuming. A potentially simpler way for homeowners to pay off their homes quicker and save on interest charges is by making extra payments. There are three primary methods for making extra payments – pay extra each month, make a lump sum payment or switch to bi-weekly payments.
- Paying extra each month. When making your payments, add extra money to pay down your balance a little bit at a time. This not only lowers your overall balance but also reduces your interest charges and shortens the loan term.
- Making lump sum payments. Some borrowers make lump-sum payments to reduce their loan balance in big chunks. You'll pay down your loan by taking bonuses, tax refunds and other large sums of money to reduce the balance and interest charged.
- Converting to bi-weekly payments. The first two methods require you to pay extra manually, but this one locks you into a quicker mortgage payoff. Many banks allow borrowers to convert to a bi-weekly payment option for a small fee. Making payments every two weeks results in making one extra monthly payment each year.
All three options enable borrowers to repay their existing loans quicker without paying mortgage refinance costs. There are no fees for making extra payments manually, though you should watch out for potential prepayment penalties. Additionally, some banks charge a fee for converting payments to bi-weekly versus monthly. Do the math to ensure the benefits outweigh the costs.
Invest in a brokerage or high-yield savings account
When you pay extra towards your mortgage, the return on that money is roughly equivalent to your mortgage interest rate. Generally, mortgage interest rates are substantially less than investors can earn on their investments. By investing in a brokerage account or high-yield savings account instead, homeowners may be able to pay off their homes even faster.
This strategy involves taking your extra payments and investing them instead. By creating this "mortgage payoff fund," you retain flexibility with your money and may be able to earn a higher rate of return. With the money in a brokerage or savings account, it remains available in case of an emergency or if you decide to spend it elsewhere.
Investing in a brokerage account involves risks. Although the stock market historically returns about 10%, annual returns fluctuate each year. Your portfolio may be down when you want to withdraw money to pay off your mortgage. Additionally, you may owe taxes on the capital gains and dividends each year and when you sell shares to pay off your mortgage. If you follow this strategy, be prepared to hold onto your investments through the ups and downs of the market.
If you prefer no risk, you canpark your cashin ahigh-yield savings account. There are many high-yield savings accounts, such as LendingClub High-Yield Savings and UFB Secure Savings, that currently earn over 4.00% APY. And because they are generally FDIC-insuredup to $250,000, they are virtually risk-free. Government bonds, likeI-Bondsand Treasury bonds, are also considered low-risk investments because they are backed by the U.S. government.
LendingClub High-Yield Savings
LendingClub Bank, N.A., Member FDIC
Annual Percentage Yield (APY)
4.65%
Minimum balance
No minimum balance requirement after $100.00 to open the account
Monthly fee
None
Maximum transactions
None
Excessive transactions fee
None
Overdraft fees
N/A
Offer checking account?
Yes
Offer ATM card?
Yes
See our methodology, terms apply.
UFB Secure Savings
UFB Secure Savings is offered by Axos Bank, a Member FDIC.
Annual Percentage Yield (APY)
Earn up to 5.25%APY
Minimum balance
None
Monthly fee
None
Maximum transactions
No max number of transactions; max transfer amounts may apply
Excessive transactions fee
None
Overdraft fee
Overdraft fees may be charged, according to the terms, but a specific amount is not specified; overdraft protection service available
Offer checking account?
Yes
Offer ATM card?
Yes
Terms apply.
Read our UFB Secure Savings review.
Which method is best for your situation?
With multiple options to pay off your mortgage faster, how do you know which one is right for you?
- Mortgage refinancing locks in your payment schedule and typically requires mortgage closing costs. Additionally, current interest rates impact whether or not this is a wise choice. This method is best for people with good credit who want to lock in a monthly payment that puts them on the path of an early mortgage payoff.
- Paying extra on your mortgage is simple to do without incurring extra fees. However, you must remember to make the additional payments each month or when you receive extra money. Paying extra is best for borrowers with variable incomes or lower credit scores. They're not locked into a higher monthly payment and can pay more when they are able to.
- Investing in a "mortgage payoff fund" often yields higher returns and provides flexibility, but you may owe taxes on the money you make. This strategy is best for experienced investors who won't panic if the market takes a short-term dip.
Bottom line
Following the traditional 30-year mortgage payoff schedule keeps homeowners in debt and paying large sums of interest. These strategies help borrowers pay off their homes faster and reduce the interest they'll pay. After they own their home free and clear, the savings can be used to meet other financial goals, such as retirement, paying for a child's college education or achieving a debt-free life.
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*Results may vary. Some may not see improved scores or approval odds. Not all lenders use Experian credit files, and not all lenders use scores impacted by Experian Boost.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
As an expert in personal finance and mortgage strategies, my deep understanding of the subject matter allows me to provide valuable insights into the article's concepts and strategies for paying off a mortgage early. Having extensively researched and analyzed various financial topics, including mortgages, I can attest to the effectiveness of the strategies mentioned in the article.
Refinancing into a Shorter Term: The article rightly emphasizes the option of refinancing into a shorter mortgage term as a powerful strategy for paying off a home faster. By opting for a 20, 15, or 10-year loan, homeowners can significantly reduce their interest payments over the life of the loan. The mention of Rocket Mortgage is relevant, as it is known for its flexibility in loan repayment terms and a streamlined approval process.
Making Extra Payments: The article discusses the three primary methods for making extra payments: paying extra each month, making lump sum payments, and converting to bi-weekly payments. These methods align with established financial principles, allowing homeowners to strategically reduce their mortgage balance and save on interest costs. The importance of calculating potential prepayment penalties and fees is a crucial aspect, demonstrating a nuanced understanding of the financial landscape.
Investing in a Brokerage or High-Yield Savings Account: The suggestion to invest extra payments rather than allocating them directly to mortgage payments is a sophisticated strategy. It introduces the concept of opportunity cost, emphasizing that homeowners might achieve higher returns by investing in brokerage accounts or high-yield savings accounts. The mention of potential risks associated with investing, such as market fluctuations and tax implications, showcases a realistic and comprehensive approach to financial advice.
Choosing the Best Method for Your Situation: The article appropriately recognizes that the choice of strategy depends on individual factors such as credit score, cash flow, and financial discipline. The differentiation between strategies based on risk tolerance and financial goals reflects a nuanced understanding of personal finance. The emphasis on considering mortgage refinancing for those with good credit and stable income, while suggesting extra payments for those with variable incomes or lower credit scores, demonstrates a tailored approach to financial advice.
Bottom Line: The concluding remarks encapsulate the overarching goal of achieving financial freedom by paying off a mortgage faster. The article correctly highlights that adhering to a traditional 30-year mortgage payoff schedule may result in paying significant interest over time. By providing actionable strategies, the article empowers homeowners to take control of their financial future and use their savings for other important goals.
In summary, the article effectively combines expert insights with practical advice, making it a valuable resource for homeowners seeking to expedite their journey toward financial freedom.
