PAY OFF MORTGAGE EARLY: When & How To Pay Off Mortgage Early

pay off mortgage early

You want to be one of the roughly 40% of American homeowners who own their home outright. Could you imagine? When the bank does not own your home and you walk onto your property, the grass feels different beneath your feet—that is freedom.
But, like other homeowners, you’re currently dragged around by that ball and chain known as a mortgage.
We’ll show you how to pay off your mortgage early, allowing you to join the ranks of debt-free homeowners. Let’s get started.

What Does “Pay Off Your Mortgage Early” Mean?

Many homeowners wish they could skip ahead to the point where they own their homes outright and no longer have to worry about monthly mortgage payments. As a result, for some people, the concept of paying off their mortgage early may be worth considering. This will allow you to pay less interest during the length of your loan while also allowing you to become the complete owner of the home sooner than intended.

There are a few different ways to go about paying early. The simplest method is to simply make additional payments in addition to your regular monthly payments. You can submit 13 checks per year instead of 12 if your lender does not charge you additional costs (or the online equivalent of this). You may also choose to increase your monthly payment. By increasing your monthly payments, you will pay off the loan sooner than expected.

Is It Possible To Pay Off Your Mortgage Early?

In most circumstances, you can pay off your mortgage early without penalty – but there are a few things to consider first.

First, contact your loan servicer to determine whether your mortgage has a prepayment penalty. If it does, you’ll have to pay an extra cost if you pay off your loan early. This can have an impact on whether paying off your mortgage early is financially feasible for you.

Second, be certain that there are no limitations on how and when you can make further payments. Some loans have provisions that encourage you to stick to the payment schedule, and it’s critical that any extra payments you make go to the principal rather than the interest.

When Should You Pay Off Your Mortgage Early?

Paying off your mortgage early might relieve financial stress and allow you to focus on other financial objectives. You might think about it if:

  1. In other areas, you are financially secure: If you’ve maxed up your retirement contributions, have a sizable emergency fund, and have paid off other bills, paying down your mortgage may be the next obvious step.
  2. You have a strategy in place for the extra cash in your budget: It’s a good idea to establish a plan for what you’ll do with the additional money when you no longer have a monthly mortgage payment. This can help you avoid wasting money on needless items. For example, you could elect to invest the excess money.
  3. You want to feel better about yourself: Some homeowners pay down their mortgages because they no longer want the burden of a high monthly payment hanging over their heads. This is especially beneficial if you are preparing to retire or live on a fixed income.
  4. You don’t mind having fewer liquid assets: When you pay off your mortgage, you own the entire house, which increases your net worth. However, if you ever need to access your equity, you must either sell your property or take out a home equity loan. Both steps take time and have additional expenditures.

Ways To Pay Off Your Mortgage Early

If you’ve decided that paying off your mortgage early is the best option for you, there are several options. You don’t have to pour your whole savings account towards paying off the debt. Consider the following strategies for paying off your mortgage early:

#1. Refinance your home mortgage

When you use a mortgage refinance to shorten the duration of a loan, you can cut years off your payment time while paying less interest.

Here’s how much you could save by refinancing a $200,000 30-year mortgage into a 15-year fixed loan with a lower mortgage interest rate:

30-year (at 3.30% interest rate)15-year (at 2.77% interest rate)
Monthly principal-and- interest payment$700$1,087
Total interest cost$92,447$35,731
Savings$56,716

Despite a higher monthly payment, a shorter term would save you more than $56,700 over the life of the loan, providing you pay the minimum every month.

Because refinancing isn’t free, consider the charges and whether you want to refinance to an adjustable-rate mortgage or a fixed-rate loan.

#2. Make payments every two weeks.

A standard mortgage requires a monthly payment for the duration of the loan. Some mortgage lenders and services allow you to switch to biweekly payments, which can speed up your repayment by taking advantage of how mortgage interest is calculated and paid.

It’s important to understand that interest on most mortgages accumulates gradually over time. When you make a monthly payment, the interest is deducted first, and any additional payments reduce the principal debt.

When you pay biweekly, interest does not accumulate as quickly, allowing you to pay off the mortgage faster. It also results in an extra payment each year because there are 26 biweekly installments instead of 12 monthly ones.

Here’s an example utilizing the same $200,000, 30-year fixed mortgage at 3.3 percent APR shown previously.

Regular paymentsBi-weekly payments
Monthly principal-and- interest payment$700$350
Total interest cost$92,447$78,885
Savings$13,562

With this early payoff approach, the debt may be paid off three years sooner, saving more than $13,500.

#3. Make extra payments on a regular basis.

Regular paymentsExtra $400 once a year
Payment amount$700$400
Total mortgage cost$92,447$84,954
Savings$7,493

With an extra $400 each year, nearly $7,500 in interest charges are saved on a $200,000 mortgage, and it will be paid off two years sooner.

#4. Refinance your mortgage.

Recasting is a method of refreshing your mortgage without undergoing a full refinance. When you recast your mortgage, you make a big, one-time payment toward your loan, and the lender establishes a new amortization plan for the payments on your loan.

The new payment schedule has a smaller monthly payment, but the huge lump sum you sent in reduces the amount of interest accrued each month. This is not very frequent, but it is a viable choice for some borrowers. Check with your lender to see whether it is a possibility for your loan.

#5. Make one-time payments against your mortgage principal.

In the preceding example, we considered what would happen if you paid $400 more toward your mortgage each year. However, extra payments do not have to be made on a regular basis.

Any month you have extra income to put toward your loan, you can make an extra principal payment to assist pay off your mortgage early and save on interest payments along the way.

#6. Make extra room in your home available for rent.

If you need to make additional payments but don’t know where to locate the funds, consider putting your house to work.

Here are some ideas of what you could do:

  • Renting out a spare bedroom
  • Creating an Airbnb out of an auxiliary dwelling unit (ADU)
  • Renting out storage space in your garage
  • Renting a parking space
  • Renting out your pool or lawn for an event

#7. Apply any unexpected windfalls to your mortgage.

You may also receive unexpected income during the year that you can apply to your mortgage. Any amount can help you save money on interest and shorten the time it takes to pay off your debt.

Windfalls may be generated by:

  • Refund of income taxes
  • Inheritance funds
  • Credit card cash-back incentives
  • Government-issued stimulus checks
  • Workplace bonuses

Avoiding Mistakes When Paying Off Your Mortgage Early

If you’re thinking of paying off your mortgage early, avoid these five major blunders.

Mistake #1: Failing to Consider All of Your Options

If you get any extra money, it can be quite tempting to use it toward paying off your mortgage early. However, getting out of debt a little earlier may not be the most profitable option. Let’s look at an example to demonstrate this.

Assume you’re thinking about making a $20,000 one-time payment on your mortgage principal. Your loan was originally for $200,000, you’re 20 years into a 30-year term, and your interest rate is 4%. Paying off $20,000 of the debt in one lump sum might save you $8,300 in interest and allow you to pay it off 2.5 years sooner.

That sounds fantastic, but explore another option. If you put same money in an index fund that tracks the S&P 500, which has an average annual return of 9.8 percent, you might make $30,900 in interest over the same ten years. Even a more modest estimate of your rate of return, say 4%, would result in $12,500 in interest.

Everyone’s financial position is different, and it’s possible that the idea of becoming debt-free is so important to you that it’s worth making a less-than-optimal use of your money. The main thing to remember is to weigh all of your options before deciding that paying off your mortgage sooner is the best option for you.

Mistake #2: Failing to Make Extra Loan Principal Payments

Adding $500 or $1,000 to your mortgage payment each month will not necessarily help you pay it off faster. Unless you specify that the extra money should be allocated to your main balance, the lender may use it to pay interest for the next scheduled payment.

You can make a note of it on the memo line if you’re making additional checks for extra principal payments. Whether you pay your mortgage bill online, you should check with the lender to see if you can include a note detailing how additional payments should be spent.

Mistake #3: Failing to inquire about any prepayment penalties.

Mortgage lenders exist to make money, and one way they do so is by charging you interest on your loan. When you pay off your mortgage early, you essentially cost the lender money. As a result, some lenders try to compensate for lost revenues by charging a prepayment penalty.

Prepayment penalties can be a percentage of the loan amount or the equivalent of a set number of monthly interest payments. If you pay off your house loan early, those costs might soon pile up. A 3% prepayment penalty on a $250,000 mortgage, for example, would cost you $7,500.

In the process of attempting to save money by paying off your mortgage early, you may actually lose money if you are required to pay a significant penalty.

Mistake #4: Leaving Yourself in Debt

Throwing every additional dime you have at your mortgage is an aggressive debt-reduction strategy. It may also backfire. If you don’t have anything set aside for emergencies, for example, you can find yourself in a bind if you fall sick and are unable to work for a few months. In that instance, you may have to utilize your credit card to pay your bills or take out another loan.

If you don’t have an emergency fund, putting some of your additional mortgage payments into a rainy day fund may be your best bet. You may be able to focus on paying down your mortgage debt once you have three to six months’ worth of expenses saved.

Mistake #5: Extending the Term of Your Loan When Refinancing

Refinancing can save you money in a variety of ways since it allows you to switch to a shorter or longer loan term, depending on your needs. So, if you’re ten years into a 30-year mortgage, you could refinance to a 10-year term and save ten years. On the other hand, you might choose another 30-year term to reduce your monthly payments.

However, loans with shorter periods typically have lower interest rates, allowing you to save money on interest while also achieving complete ownership much sooner. However, in other situations, refinancing may cost you more in the long run, especially if you intend to prolong your loan term. Before you refinance, it’s a good idea to check the figures to see if having a longer mortgage term makes sense.

Don’t forget about closing costs. You may end up paying extra if your lender agrees to let you roll those fees into your loan. After all, you’ll now be responsible for interest on a larger loan.

Conclusion

Whether you should pay off your mortgage early is ultimately determined by how much money you have available, what your options are, and other personal variables.

Before you go too aggressive about paying down your mortgage, make sure you’re saving enough for retirement and other goals. Owning a property completely can make reaching retirement much easier, but you must also save money for retirement.

Finally, paying off your mortgage early is a wise way to increase your net worth while saving money. However, before you start paying down your mortgage ahead of schedule, be sure you have all of your financial ducks in a row.

Pay Off Mortgage Early FAQs

Is it smart to pay off your house early?

Paying off your mortgage early is an excellent method to free up monthly cashflow and pay less interest. However, you will lose your mortgage interest tax benefit, and you will most likely earn more by investing instead. Consider how you would spend the extra money each month before making your selection.

What does Dave Ramsey say about paying off your mortgage?

Ramsey is opposed to debt of any type and believes that you should pay off your mortgage as quickly as possible. In fact, he advises clients to take out a 15-year mortgage that is no more than 14 percent of their take-home pay.

Why you shouldn't pay off your house early?

Paying off your mortgage early means you’re effectively wasting money that could have been invested elsewhere for the remainder of the mortgage’s life — potentially up to 30 years.

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