- 4 Simple Ways to Pay Off Your Mortgage Early
- 1. Switch to a biweekly payment
- 2. Make extra principal payments
- 3. Refinance into a shorter-term loan
- 4. Put your windfalls into your mortgage
- Should you pay off your mortgage early?
- Secrets to Paying Off Your Mortgage in 10 Years | Interest.com
- Start a side hustle
- Devote all your extra windfalls to your mortgage
- Make an extra payment each month
- Refinance to a 10-year term
- Your mortgage is your only major debt
- You are actively preparing for retirement
- You already have a liquid emergency fund
- You have other high-interest debt
- Your employment situation is unstable
- You have access to other high-yield investment accounts
- Paid off your mortgage early? Here’s what to do next
- How To Pay Off Your Mortgage Early: 5 Simple Ways
- Can You Pay Off a Mortgage Early?
- Should I Pay Off My Mortgage?
- 3 Key Questions to Ask
- How to Pay Off Your Mortgage Faster
- 1. Create Room in Your Budget
- 2. Schedule Extra Payments
- 3. Refinance to a Shorter Term Length
- 5. Pay Biweekly
- What Happens When You Pay Off Your Mortgage?
- 5 Ways To Pay Off A Loan Early
- 1. Make bi-weekly payments
- 2. Round up your monthly payments
- 3. Make one extra payment each year
- 4. Refinance
- 5. Boost your income and put all extra money toward the loan
- 5 Ways To Pay off Your Mortgage Early | Pros & Cons
- Why pay off your mortgage early?
- Five ways to pay off your mortgage early
- 1. Refinance to a shorter term
- 4. Recast your mortgage instead of refinancing
- 5. Reduce your balance with a lump-sum payment
- Questions to ask before paying off yourmortgage early
- Should you pay off your mortgage early or refinance?
- Recap of ways to pay off your mortgage faster
- 6 Ways To Pay Off Your Mortgage Early
- Should I pay off my mortgage early?
- 2) Put windfalls into your mortgage
- 3) Refinance your mortgage as a shorter-term loan
- 5) Review offset mortgages
- 6) Upfront payment
- Could paying off my mortgage early be right for me?
4 Simple Ways to Pay Off Your Mortgage Early
The idea of paying off your mortgage in full can be pretty daunting. After all, we're talking about hundreds of thousands of dollars of debt.
Paying that much money off today would ly be impossible (unless you've won the lottery or had a rich uncle die). And, it's not you can just swipe your credit card and be done with it.
However, it's actually quite easy to shave years or even decades off the payment schedule, increasing your equity and saving you plenty of money in interest payments.
1. Switch to a biweekly payment
Instead of making one monthly payment toward your mortgage loan, you can make a half-sized payment every two weeks resulting in extra payments during the year. In other words, if your usual mortgage payment is $1000 a month, you would instead pay $500 every other week.
These extra payments will have nearly the same impact on your budget as paying one monthly payment, but because there are 52 weeks in a year, a biweekly payment schedule will result in 13 full-sized payments a year instead of the normal 12.
You'll be making an entire extra payment every year without having to scrounge around for the extra money.
To look at some real-life numbers, if you have a 30-year $200,000 mortgage at an interest rate of 5%, making biweekly instead of monthly payments would save you $34,328 in interest, save you from extra mortgage payments, and allow you to pay off the mortgage balance almost five years early.
Image source: Getty images.
2. Make extra principal payments
When you send in your monthly payment, most mortgage lenders will allow you to make an extra payment and mark it “principal only,” meaning that this payment will go to paying down the principal rather than both the principal and interest on the loan.
Paying down even a little bit of extra principal early on in the loan can save you quite a lot in interest charges, not to mention getting you the loan several years ahead of schedule. So consider sending just a little extra to the loan holder every month as an extra principal payment.
For example, if you have an odd payment amount such as $1046 per month, you can round it up to $1100 and dedicate the extra bit as a payment on the principal.
Even if it's only paying an extra $50 or so a month, the principal payments will add up faster than you'd believe, speeding up the mortgage payoff process
3. Refinance into a shorter-term loan
Got a 30-year mortgage? Refinancing it as a 15-year loan will blast you through that mortgage a whole lot faster, and will probably get you a better interest rate as well — shorter loan terms are typically paired with lower interest rates.
And thanks to the shorter time frame, you'll pay a lot less money in interest — so the payments on a 15-year loan are not double the payments of a 30-year loan; they're significantly less. Pull up a mortgage payoff calculator and play around with the numbers to see how much you'd have to pay to do a 15-year refinance.
And if the monthly mortgage payment for such a loan would be more money than you can afford, consider a 20-year loan instead.
4. Put your windfalls into your mortgage
Many taxpayers get a tax refund every year. If you use most, or all, of that money as an extra payment on your mortgage, you can make serious progress in getting your house paid off. Other potential windfalls include a bonus from work, a successful garage sale, or a gift from a relative.
And if you get a raise, consider putting all the extra income into your mortgage. For example, let's say your monthly take-home pay was $4,000 and your 3% raise means that you're now getting $4,120 per month.
Put the extra $120 into your mortgage every month and you won't even miss the money, since you're not used to having it.
Should you pay off your mortgage early?
I have a 30-year mortgage, but I'm not trying to pay it off early. Why not? Because the interest rate on my mortgage is 3.
25%, and I can get a better financial payoff by putting all my extra money into investments instead.
If you're in a similar situation, by all means direct your extra cash into retirement accounts or other investments and let the mortgage run out on its own.
You may also have other long-term financial goals, such as paying off credit card debt or financing an emergency fund or savings account. These financial issues should definitely have a higher priority than paying down your mortgage. Once you've dealt with them, especially paying off debt, you can go back to getting rid of your house payment.
And, un other forms of debt, if you itemize deductions you can deduct the interest you pay on your mortgage from your income taxes — so you'll get at least part of your money back from the federal government. That's not enough of a reason by itself to make stretching out your mortgage fiscally wise, but combined with other factors it can be a nice extra benefit to help you reach your financial goals.
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Secrets to Paying Off Your Mortgage in 10 Years | Interest.com
Editorial Policy Disclosure
If your only major debt is your mortgage and you’re looking toward retirement — or you’re just ready to cut down on your overall monthly expenses — now may be the right time to work on eliminating your monthly house payment for good.
If you’re looking to eliminate debt and improve your financial situation, paying off your home loan may seem a natural place to start. If your original loan term and amortization schedule still has you making payments for another 20+ years or so, though, you may be wondering if an early payoff is even possible.
Paying off your mortgage in 10 years does take some focused effort, but with the right strategies and tools in place, you can make a big impact on your remaining principal and perhaps even pay off your home in a decade or less. So, dig up the mortgage payoff calculator and use these high-impact tips for paying off your home loan in 10 years.
Start a side hustle
The average side hustle brings in $1,122 per month and only takes, on average, an additional 12 hours per week of your time. Devoting this extra amount each month to your mortgage can make a huge dent in what you owe.
You’ll need to use a loan calculator to crunch the numbers on your loan, but for someone starting a $200,000 mortgage for 30 years at 5% interest, paying an extra $1,122 each month can cut over 20 years off the repayment schedule.
If you’re able to devote more or have a partner who can also pick up a side hustle, you may be able to pay your home loan off in half the time — or 10 years flat.
Devote all your extra windfalls to your mortgage
If you’re serious about paying off your mortgage in 10 years, plan to devote any extra cash windfalls towards your mortgage.
Add up your yearly tax refund, annual employee bonus, gifts, inheritance or lottery winnings, and you can ly accrue a substantial sum each year.
With a 30-year mortgage at $200,000, making an extra $12,000 payment once a year will leave you just two months shy of meeting your 10-year payoff goal.
Make an extra payment each month
For a traditional repayment plan, paying twice as much each month will cut repayment time in half. But with the influence of compound interest, making an additional monthly payment works even more in your favor.
For example, if you are five years into a 30-year mortgage for $300,000 at 3.5% interest, your monthly payments would be $1,347.13.
Paying that amount extra each month starting today, you’d have your mortgage paid off in 9 years and 10 months.
Refinance to a 10-year term
Mortgage companies typically quote 30-year mortgages, but many lenders will issue a 10-year mortgage when asked.
Refinancing to 10 years will take the guesswork an early payoff plan and provide a schedule for exactly how much you’ll need to pay each month to eliminate your mortgage by the close of the decade.
As a bonus, interest rates on 10-year loans are often lower than those on 30-year loans, so you’ll ly pay less on interest each month for the loan.
Your mortgage is your only major debt
If you’ve cleared up all your other debts, such as car notes, student loans and credit card debt, it might be time to start paying down your mortgage. Once you are debt-free, you can work toward making other investments and wealth-building goals.
You are actively preparing for retirement
In retirement, your income will ly be lower than it is while you are working, so it’s best to plan early. If you plan to retire in the next 15 years, it may be a good idea to eliminate your mortgage payment while you are still working so that you only have to worry about regular household expenses, insurance and taxes.
You already have a liquid emergency fund
Once you start devoting a significant portion of your income toward paying down your mortgage, one unexpected emergency can completely derail your plans if you aren’t prepared. If you have already accumulated cash savings to cover 3- to 6-months worth of expenses, you’ll be in a good position to start an aggressive pay-down plan on your home.
You have other high-interest debt
Interest rates on credit card debt and car notes are often higher than your mortgage loan, so be sure to put any extra income toward getting that debt paid off as quickly as possible first.
Your employment situation is unstable
If you lose your job, you may be forced to stop your early payoff plans or, even worse, refinance your home loan and extend your payments to make ends meet, which can really set you back from reaching your financial goals.
You have access to other high-yield investment accounts
Your mortgage is ly costing you less than 5% interest each year.
If you take the same funds you would have used to pay extra on your mortgage and invest them in an account earning 10% interest or more, you’re still coming out ahead.
You might be in a much better financial position after 10 or 15 years by investing that money and continuing to pay your mortgage according to its original schedule.
Paid off your mortgage early? Here’s what to do next
Once your mortgage is eliminated, it’s important to take the proper steps to ensure the loan is closed out and all relevant parties are notified. You’ll also want to preserve your financial stability by preparing for payments that were previously handled through an escrow account, such as taxes or insurance. Those will become your responsibility once your mortgage has been paid off.
To finalize your payoff, you should:
- Get documentation from your mortgage lender proving your loan is paid in full.
- Verify the lien has been released on your property deed, and follow up with the county recorder’s office with your paid in full documentation if the lien is still on record after 90 days.
- Notify your property tax assessor that your loan is paid in full. Verify that they will send all future property tax bills to you directly rather than your mortgage company.
- Notify your homeowner’s insurance company that your loan is paid in full and that you will no longer be making payments via escrow. This is a great time to reevaluate your coverage levels and scale up or down if needed.
- Contact your mortgage company and request a refund for any amount remaining in your escrow account.
- Open an account to begin saving for upcoming property taxes and homeowner’s insurance. You can start with any escrow refund you may have received.
How To Pay Off Your Mortgage Early: 5 Simple Ways
Editorial Note: Forbes may earn a commission on sales made from partner links on this page, but that doesn't affect our editors' opinions or evaluations.
Your house is probably the most expensive purchase you’ll make in your lifetime. So it’s no wonder if you dream of the day that monthly mortgage payment is gone for good.
If you have the extra cash, should you go ahead and pay off the loan ahead of time? Maybe. Here’s what to consider before paying off your mortgage early.
Can You Pay Off a Mortgage Early?
Because mortgages tend to be large loans that last for a couple of decades or longer, paying off the loan early can save you tens of thousands of dollars in interest. Not to mention, it feels good not having a monthly mortgage payment to worry about.
When you send in your monthly check to your mortgage lender, the payment is split between principal and interest. Early on in the loan, a large portion of that payment is applied to interest.
As time goes on, more of the payment goes toward paying down the principal.
This is known as amortization, and it allows the lender to make back a larger portion of their money within the first several years of repayment.
The key to paying off your mortgage early is by applying extra payments to the principal.
Should I Pay Off My Mortgage?
Just because you can pay off your mortgage early doesn’t necessarily mean that you should. Of course, it would feel great to rid yourself of a huge financial burden a mortgage. But if you really want to know if it’s a good decision, you have to look at the math.
There are pros and cons to paying off your mortgage early. Whether the pros outweigh the cons will depend on your overall financial situation.
- Save money on interest: By reducing the length of time you spend making mortgage payments, you also cut down the amount of interest you pay over the life of the loan. Depending on the loan amount, interest rate and original term, paying the mortgage early can result in significant savings.
- Free up money for later in life: The typical mortgage lasts 15 to 30 years. That’s a long time to be saddled with loan payments. By paying off your mortgage early, you free up cash to spend on more exciting things when you’re a bit older, such as travel.
- Losing out on paying higher-interest debt: If you have credit card or student loan debt, funneling your extra cash toward paying off your mortgage early can actually cost you in the long run. That’s because these other types of debt ly have higher interest rates. You also should have an adequate emergency fund so that you can cover unexpected costs; otherwise you may be forced to accumulate high-interest debt.
- Missing out on higher returns from investing: If you have the opportunity to invest your money for returns that are significantly higher than your mortgage rate, you’d be better served doing that than missing out on compounding earnings to get rid of your mortgage faster. For example, if your mortgage rate is 3.5% and your portfolio earns an average of 6% per year, you’d lose money by using extra funds to pay off the loan early.
3 Key Questions to Ask
Before you decide to pay off your mortgage early, ask yourself these questions:
- Do I have an adequate emergency fund of at least six months’ worth of expenses?
- Am I on track to save enough for retirement and other major financial goals?
- Do I have little-to-no high-interest debt, including credit cards?
If you can answer yes to all three, paying your mortgage off early may be a good financial move. Just keep in mind that some lenders charge a prepayment penalty; if yours does, be sure to factor in that cost, too.
How to Pay Off Your Mortgage Faster
Here are the five best ways to pay off your mortgage faster, with the numbers to prove it.
1. Create Room in Your Budget
One of the most effective ways to pay off your mortgage faster is to pay more than the monthly amount due. That might seem obvious, but you might not realize just how far a little extra money can go.
For example, say you took out a 30-year fixed-rate mortgage of $250,000 at 5% annual percentage rate (APR) and have 25 years left on the loan. That would mean you owe $1,342.05 per month. Now imagine that you tack on just $20 extra to each payment. You’d shorten the repayment period by eight months and save $5,722 in interest. Use a mortgage calculator to help you do the math.
For an extra $20 per month, you’d simply need to cut out one fancy coffee a week or a couple of takeout lunches. Obviously, putting even more money toward extra payments will result in even more savings.
Just keep in mind that you don’t want to go overboard here and sacrifice other financial goals to pay down your mortgage faster. Mortgages are some of the cheapest loans out there, so be sure you’re paying off other higher-interest debt and investing before you start cutting back in other areas of your budget.
2. Schedule Extra Payments
Maybe you aren’t able to come up with the extra cash to make additional payments each month (or don’t want to). That’s OK—a couple of well-timed extra payments throughout the year can be even more effective.
Perhaps you receive an annual bonus from work or tax return each April. If you were to take $1,200 per year and apply it to that same mortgage example above, you’d cut your loan down by over three years and save over $25,000 in interest.
If you do decide to make extra payments toward your mortgage, be sure to check with your lender that the extra funds will be credited toward the loan principal. If you don’t specify how you want these payments applied, the lender will ly use them to prepay interest owed on your mortgage instead.
3. Refinance to a Shorter Term Length
It’s common for mortgage borrowers to opt for a longer repayment term in order to keep monthly payments low—typically 30 years. However, as time goes on, your income may increase or lifestyle may change to free up more cash flow.
If that’s the case, you may be able to refinance your loan to a shorter term. Since the repayment period gets crunched into a shorter time period, the monthly payments will ly increase. However, this is an effective way to pay off your mortgage much earlier and save a ton of money on interest, especially if you also qualify for a lower interest rate.
Take a look at this comparison between a $250,000 loan with a 30-year fixed-rate term versus a 15-year fixed-rate term:
As you can see, it’s possible to save $84,655 in interest and pay off your mortgage in half the time by refinancing from a 30-year to a 15-year term.
One thing to consider before refinancing, however, are mortgage closing costs, which typically total 2% to 3% of the loan amount. You’ll want to make sure that closing costs don’t negate the interest savings, otherwise it may not be worth it.
You’re probably familiar with refinancing, but you may not have heard about mortgage recasting. When recasting, you make one large lump-sum payment toward your principal balance. Usually, at least $5,000 is required to recast. The lender then reamortizes the loan to reflect the new balance.
Recasting a loan accomplishes a few things. For one, your monthly payment will decline. You’ll also save money on interest over the life of the loan. And if you apply those savings toward larger monthly payments, you’ll also pay off the mortgage early.
There is usually a fee required to recast a loan, though it’s typically just a few hundred dollars. Also keep in mind that not all loan types can be recast, including Federal Housing Administration (FHA) and U.S. Department of Veterans Affairs (VA) mortgages.
5. Pay Biweekly
One way to pay off your mortgage early that doesn’t require coming up with any extra payments is to split your monthly payment into two smaller payments and paying biweekly.
Here’s how it works: Most mortgages require a monthly payment, or 12 payments per year. If you switch to bimonthly payments, you end up making 26 payments per year—in effect, one extra payment. This not only quickens the pace of your loan payoff, but also saves you money on interest over the life of the loan.
Wondering how effective this strategy really is? Consider this: On a $250,000 30-year fixed-rate mortgage at 3.5%, you’ll pay off your mortgage four years early and save more than $20,000 in interest.
Not all lenders allow biweekly payments, though many do. If you want to switch to this payment method, contact your lender and double-check that they don’t charge a fee to do so.
What Happens When You Pay Off Your Mortgage?
Let’s imagine that you did pay off your mortgage early (a hypothetical congratulations to you!). What are the final steps for officially ridding yourself of the loan?
You’ll receive several mortgage release documents that show your loan is paid off and the bank doesn’t have a lien on your house. That will ly include a statement that shows your mortgage is paid in full, as well as a canceled promissory note.
It’s also common for the lender to notify the city or county recorder that you are the official, outright owner of the property. In some cases, however, you may have to take care of this yourself.
If there are any funds left in your escrow account, your lender will send that money back to you, and you’ll be on your own when it comes to handling property tax and homeowners insurance payments going forward.
5 Ways To Pay Off A Loan Early
If you're most Americans, you owe money toward a large loan. Whether that means carrying thousands of dollars in credit card debt, having a hefty mortgage in your name or making car loan payments each month, loan debt is part of your life.
This means you're looking at hundreds of dollars in interest payments over the life of the loan(s).
There's also the mental load of knowing you owe perhaps tens of thousands of dollars and that you'll be paying back the loan for years to come.
It can all get kind of depressing-but it doesn't have to be that way.
Did you know there are simple, but brilliant, tricks you can employ to lighten the load? With a carefully applied technique, you can pay off your mortgage, auto loan, credit card debt and any other debt you're carrying quicker than you thought possible. These tricks won't hurt your finances in any dramatic way, but they can make a big difference to the total interest you'll pay over the life of the loan and help you become debt-free faster.
You can free up more of your money each month, use your hard-earned cash for the things you want instead of forking it over in interest and live completely debt-free sooner than you'd dreamed. It's all possible!
A note of caution before we explore these tricks: Check with your lender before employing any approach, as some loan types have penalties for making extra or early payments.
1. Make bi-weekly payments
Instead of making monthly payments toward your loan, submit half-payments every two weeks.
The benefits to this approach are two-fold:
- Your payments will be applied more often, so less interest can accrue.
- You'll make 26 half-payments each year, which translates into an extra full payment on the year, thereby shortening the life of the loan by several months or even years. If you choose this method with a 30-year mortgage, you can shorten it to 26 years!
2. Round up your monthly payments
Round up your monthly payments to the nearest $50 for an effortless way to shorten your loan. For example, if your auto loan costs you $220 each month, bring that number up to $250. The difference is too small to make a tangible dent in your budget, but large enough to knock a few months off the life of your loan and save you a significant amount in interest.
For a potentially even bigger impact, consider bumping up your payments to the nearest $100.
3. Make one extra payment each year
If the thought of bi-weekly payments seems daunting but you the idea of making an additional payment each year, you can accomplish the same goal by committing to just one extra payment a year.
This way, you'll only feel the squeeze once a year and you'll still shorten the life of your loan by several months, or even years.
Use a work bonus, tax refund, or another windfall to make that once-a-year payment.
Another easy way to make that extra payment is to spread it out throughout the year. Divide your monthly payment by 12 and then add that cost to your monthly payments all year long. You'll be making a full extra payment over the course of the year while hardly feeling the pinch.
One of the best ways to pay off your loan early is to refinance. If interest rates have dropped since you took out your loan or your credit has improved dramatically, this can be a smart choice for you. Contact Horizon to ask about refinancing. We can help even if your loan is currently with us.
It's important to note that refinancing makes the most sense if it can help you pay down the loan sooner.
You can accomplish this by shortening the life of the loan, an option you may be able to afford easily with your lower interest rate.
Another means to the same goal is keeping the life of your loan unchanged and with your lower monthly payments, employing one of the methods mentioned above to shorten the overall life of your loan.
5. Boost your income and put all extra money toward the loan
A great way to cut the life of your loan is to work on earning more money with the intention of making extra payments on your loan.
Consider selling stuff on Amazon or eBay, cutting your impulse purchases and putting saved money toward your loan, or taking on a side hustle on weekends or holidays for extra cash.
Even a job that nets you an extra $200 a month can make a big difference in your loan.
Triumph over your loans by using one or more of these tricks to make them shorter and pay less interest. You deserve to keep more of your money!
5 Ways To Pay off Your Mortgage Early | Pros & Cons
Many homeowners with 30-year mortgages feel they’llnever be without the burden of debt.
Fortunately, there are several good waysto pay off your mortgage faster and save big on interest payments.
Even better, not all methods require spending a lot of extra money.
But consider your options carefully. If you have extra cash to spend on your mortgage, it may generate more value elsewhere.
Here’s what you should know.
See if you qualify for a shorter loan term (Mar 25th, 2021)
In this article (Skip to…)
Why pay off your mortgage early?
Few people keep a 30-year loan for its full term. In fact, homeowners stay put just 13 years on average — and their loans might have an even shorter lifespan if they refinance at some point.
Homeowners who plan to sell their home orrefinance soon usually aren’t concerned about paying off their mortgage early.
But what about homeowners who stayput for the long haul? Those 30 years of interest payments can start to feel a burden, especially compared to the payments on today’s lower-interest-rateloans.
You may find yourself wonderinghow to pay your mortgage off faster so you can live debt-free and have fullownership of your home.
Here are five strategies you canuse to meet those goals.
Five ways to pay off your mortgage early
There are a number of ways to shorten your loan term and save a ton of money in interest on your mortgage.
1. Refinance to a shorter term
The 30-year home loan is mostpopular, but lenders offer shorter loan terms, too. A 15-year loan is acommon alternative, and many lenders also offer 10-, 20-, and 25-year loans.
Shorter repayment periods mean higher monthly payments, butless interest over the life of the loan.
Let’s compare a 20-year term to a30-year term.
Most 20-year mortgages carry lowerrates than 30-year mortgages. Typically, 20-year rates can beanywhere from one eighth (0.125%) to a quarter percent (0.25%) lower.
- Let’s say you’re financing a$250,000 loan on a 30-year term at 3.75%. Your principal and interest paymentswould be about $1,150 per month
- Using the same loan amount, but with a20-year term at 3.625%, your monthly payment would be $1,450
- You’d pay a few hundred more per month, butyou would be mortgage-free a decade sooner
The best part? The savings in interest onthat 20-year mortgage would be over $65,000 if you kept the loan untilit was paid off.
Another benefit of refinancing toa shorter term is that you don’t have to start over with 30 more years.
For many homeowners who are wellinto their original mortgage term, starting over with another 30 years’ worth of interest mightnot make sense.
But with a 15-year refinance, you could lock in a low interest rate and a shorter loan term to pay off your mortgage faster. Just note: the shorter your mortgage term, the higher your monthly mortgage payments will be.
Verify your refinance eligibility (Mar 25th, 2021)
Another way to pay off your home loan faster is to simply payextra when you’re able.
Most mortgage loans issued after Jan. 10, 2014, do not chargeprepayment penalties.
This means you can pay extra money toward yourmortgage balance each month — or make a larger, lump sum payment on yourprincipal each year — without facing a penalty for paying off your loan early.
Many homeowners make extra payments on their loan’s principal when they get an income tax refund. Extra principal payments can have a big impact.
Here’s an example.
- Let’s say you took out a home loanfor $300,000 on a 30-year term and rate of 4%
- That’s a principal and interest payment of$1,370
- 360 payments of $1,370 per month meansyou’ll have paid $492,500 over the life of the loan —that’s $192,500 in interest payments over 30 years
Using the same numbers for theloan amount and interest rate:
- If you make extra principalpayments of $250 per month, you’d shave seven years and four months off yourterm
- And, you’d save more than $59,000 total ininterest payments
There are benefits aside from interest savings, too.
Paying off your mortgage early lets you use the money youwould have paid each month for other purposes, investing.
Let’s continue with the example above. Instead of paying$1,370 per month on the mortgage, you could put the same amount of money in aninvestment account.
With a 5% rate of returnoverseven years and four months, your redirected mortgagepayments would equal $135,000. Not only did you save $59,000 in interest, butyou have an additional stash of cash after your original 30-year loan term.
Many homeowners choose to make oneextra payment per year to pay off their mortgage faster.
One of the easiest ways to make an extra payment each year isto pay half your mortgage payment every other week instead of paying the fullamount once a month. This is known as “bi-weekly payments.”
When you make bi-weekly instead of monthly payments, you end up adding one extra payment each year.
However, you can’t simply start making a payment every two weeks. Your loan servicer could be confused about getting irregular, partial payments. Talk to your loan servicer first to arrange this plan.
You could also simply make a 13th payment at the end of theyear. But this method requires coming up with a lump sum of cash. Somehomeowners to time their extra payment with their tax return or with ayearly bonus at work.
However you arrange it, making an extra payment each year isa great way to pay off a mortgage early.
As an example, if you took out amortgage for $200,000 on a 30-year term at 4.5%, your principal and interestpayment would be about $1,000 per month.
Paying one extra payment of $1,000per year would shave 4½ years off your 30-year term. That saves you over$28,500 in interest if you see the loan through to theend.
Paying down your mortgage balance quickly has otheradvantages, too.
For example, lowering your balance means you can stop payingprivate mortgage insurance (PMI) premiums sooner. Conventional loans let youcancel PMI when you’ve paid off 20% of the loan’s original balance.
4. Recast your mortgage instead of refinancing
Mortgage recasting is different from refinancing because you get to keep your existing loan.
You just pay a lump sum toward theprincipal, and the bank will adjust your payoff schedule to reflect the newbalance. This will result in a shorter loan term.
One major benefit to recasting isthat the fees are significantly lower than refinancing.
Typically, mortgage recasting feesare just a few hundred dollars. Refinance closing costs, bycomparison, are usually a few thousand.
Plus, if you already have alow interest rate, you get to keep it when you recast your mortgage. If you havea higherinterest rate, refinancing might be a better option.
Check with your lender or servicer if you this option. Not all companies will allow a mortgage recast.
5. Reduce your balance with a lump-sum payment
An alternative to recasting is to makelump-sum payments to your principal when you can.
Have you inherited money, earned largebonuses orcommission checks, or sold another property? You could apply these proceeds to yourmortgage’s principal balance and be debt-free a lot sooner.
Since VA and FHA loans cannot be recast, lump-sum payments might be thenext best thing. Also, you’ll save yourself the bank fee for recasting.
With some mortgage servicers, youmust specify when extra money is to be put toward principal. Otherwise the extra money couldbe split between the interest and the principal as it is divided within aregular monthly mortgage payment.
Check with your servicer if you don’t know howadditional payments will be applied.
Check your mortgage options (Mar 25th, 2021)
Most financial experts encourage homeowners to puttheirextra money into retirement accounts instead of paying off mortgagesearly.
The reason? For almost a century, the stockmarket has earned a 10% average annual rate of return. That means homeownerscould potentially earn more by investing in the stock market than they’d save by paying downtheir mortgage balance.
Plus, some homeowners write off their mortgage interest payments as a tax deduction which means they could get some of that money back at tax time.
There are other potential drawbacksto consider before paying off your mortgage early:
- Using all your extra funds to paydown a mortgage may tie up too much of your net worth in your home,making it harder to access later. You’d need a cash-out refinance or a second mortgage ( ahome equity loan) to generate cash flow from your home investment
- You may miss out on higher returns from investments whose rates of return could exceed the amount ofinterest you’re paying on the mortgage. But keep in mind that stocks don’talways go up. You could avoid big losses by applying extra funds toward yourmortgage. A deposit toward your mortgage is a guaranteed return equal to yourcurrent interest rate
- If the real estate market dips when you’rethinking of selling, you may not receive as much as you had hoped
- Money you deposit into an IRAinstead of paying down your mortgage can grow tax-free. Focusing on building ahealthy retirement fund when you’re younger gives your savings more time togrow, plus you can deduct contributions to your traditional IRA up to the IRS’sannual limits
Finally, before paying extra on the mortgage, many personal finance experts recommend building an emergency fund in case you lose a job, get injured, or face other financial troubles. Without emergency funds in a savings account, you may have to use higher-interest credit cards to pay unexpected expenses.
Questions to ask before paying off yourmortgage early
Is paying off your mortgage earlythe best financial decision for you and your family? Itdepends on your unique situation and financialgoals.
Here are a few questions to helpguide your decision:
- How long do you plan to stay inyour home? If there’s a good chance you’ll sell the home within a coupleyears, the benefits of refinancing or paying down your mortgage will be lessly to pay off. Your dollars may be better invested elsewhere
- How much extra money do you haveto work with? Do you have enough flexibility to pay down the mortgage and work toward other financial goalssimultaneously? If so, you’ll have an easier decision
- What mortgage interest rate wouldyou qualify for? Today’s average mortgage rates are historically low —especially for 15-year loans. But your rate depends on your credit score,debt-to-income ratio, and other personal finances. If you can’t qualify for asignificantly lower rate, refinancing will make less sense
- Do you have an emergency fund? If your savings account couldn’tabsorb at least three months’ worth of living expenses, consider saving up anemergency fund before paying more on your mortgage
If your main objective is to bedebt-free as soon as possible, then look into one of the five strategies aboveto pay off your mortgage faster. You may have already paid off other personal debt student loans or credit cards; it could make sense to target your mortgage,too.
This can be especially appealingif you’re close to your mortgage finish-line and starting over with a refinancewouldn’t make sense.
Should you pay off your mortgage early or refinance?
Do you want to pay off yourmortgage faster because you’re worried about how much you’re spending oninterest?
If you’re simply concerned about your mortgage interest rate, consider refinancing to a lower rate — and maybe a shorter term — instead of making extra payments on your existing mortgage.
But if you already have a competitive interest rate and anideal loan term, you probably don’t need to refinance. You may be tempted topay less interest by paying off your mortgage faster.
As you make your decision, consider whether you could earnmore investing in securities than you’d save by paying down your mortgagebalance more quickly. Investing that money in a tax-preferred IRA could offermore financial peace of mind than owning your home outright sooner.
Any kind of investing can be risky. Check with a personalfinancial advisor before making any big moves if you’re not sure about therisks you’re taking.
Verify your refinance eligibility (Mar 25th, 2021)
Recap of ways to pay off your mortgage faster
If you decide you want to pay off your mortgage early, ask your mortgage lender about:
- Refinancing to a shorter mortgage term
- Making extra principal payments
- Making one extra mortgage payment per year
- Recasting your mortgage
- Making a lump-sum payment
Whatever you choose, make sure you’ve weighed all your options to find the best use for your hard-earned cash.
Verify your new rate (Mar 25th, 2021)
6 Ways To Pay Off Your Mortgage Early
The prospect of fully paying off your mortgage can sometimes feel a lifetime away. And, whilst it’s important to be mindful of the potential pitfalls of early repayment, you could increase equity and save money in interest in the long run.
Should I pay off my mortgage early?
Paying off a mortgage early isn’t necessarily the best option for every homeowner. If you have other long-term financial goals, such as financing an emergency fund or savings account or paying off credit card debt, you may well consider prioritising these over paying down your mortgage.
For many people, the biggest factor in weighing up whether to pay off their mortgage early is if their mortgage has an early repayment charge (ERC). This usually constitutes a percentage of the remaining loan, and will generally stop being applicable once your mortgage’s introductory period has ended.
Let’s say your £200,000 mortgage is fixed for two years and has an ERC of 2%. That would mean you’d need to pay the bank £4,000 if you were to pay off your mortgage early. Longer fixed-rate periods often come with a higher ERC. The ERC will also apply if you remortgage to a different lender during the introductory deal period.
If you think paying off your mortgage is right in your situation, however, there are numerous ways to pay off your mortgage early. Today we examine six of them.
When you make your monthly repayment, your mortgage provider will generally allow you to make extra repayments. However, quite often they will have caps on how much extra you can pay into your mortgage, so check the details of your mortgage.
The extra money you pay reduces the capital debt of the loan. As interest is calculated on the outstanding balance you will end up paying less interest and clearing the mortgage quicker.
If you take out a new mortgage, and having the ability to repay extra capital is important to you, check the limitations around this before signing up.
2) Put windfalls into your mortgage
Some taxpayers receive an annual refund on their tax. If you put this tax rebate down on your mortgage, you might find you make significant progress in paying off your loan. Other windfalls could include a work bonus or even a cash gift. If you are promoted or given a raise, you might also leverage your newfound extra income to pay off your mortgage.
3) Refinance your mortgage as a shorter-term loan
If you have a 20-year mortgage, refinancing it as a 10-year loan will expedite your payoff, and perhaps lead to you attaining a more favourable interest rate in the process.
The lesser timeframe would mean that, whilst your monthly repayments would of course increase, you’d probably also pay less interest as you would be paying for less time.
A mortgage calculator can be invaluable in helping you see how much you’d need to pay.
It's useful to remember that if rates changed since you last reviewed your mortgage that changing terms won’t get you a better rate.
If you are on a fixed, tracker or discount mortgage, and do not review your mortgage before your introductory deal is over, your provider will move you onto its Standard Variable Rate (SVR). Generally SVR’s are much higher than the initial introductory deal, so your repayments are ly to rise.
Make sure you know when your deal ends, and make a note to look into your options from 6 months before that end. You can either take out a new deal with your existing provider or look at finding an alternative lender who may have some even better deals to consider.
When remortgaging, whilst another offer may look very attractive, if their headline rate is quite low. But remember to make sure you understand all the fee’s. Use a professional qualified mortgage advisor if you feel you need help understanding to navigate this process.
5) Review offset mortgages
You could also consider an offset mortgage, which links your savings account balance to your mortgage balance. Your lender will offset the value of your savings balance against your outstanding loan, with the principle of reducing the size of the balance you pay interest on.
If your mortgage was £200,000 and you had £10,000 savings. Instead of paying interest on a balance of £200,000 you pay it on £190,000. This can provide you with both lower interest paid, and term to clear the mortgage reduced.
6) Upfront payment
Low interest rates on a mortgage frequently come with high fees, which are often tacked on to the mortgage in order to avoid having to pay them upfront. This will increase your intended debt by the value of the fee. The larger the debt, the more interest you pay.
If, however, you are able to pay the fees in a lump sum when your term begins, you will not be increasing your debt, and pay less interest as the balance is kept lower. This supports your prospects of paying off your mortgage early.
Could paying off my mortgage early be right for me?
Paying your mortgage off early can save you a lot of money in interest over the term, but you need to be mindful of the potential pitfalls that can occur if you aren’t aware of your lender’s policies and the pros and cons of the process.
Comparison resources, including mortgage calculators, can help you understand what to consider before remortgaging, and could be just what you need to help you work out whether early repayment of your mortgage is right for you.