How To Pay Off Your Mortgage Early

Deciding to pay 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 it 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 you commit to an early payoff. 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 instead of once a month, you’ll make 26 half-payments per year. That equates to 13 full payments, or one extra mortgage payment each year. As a result, you’ll pay off your loan’s balance sooner. Make each payment by your mortgage due date, though, to avoid any late charges.
• Additional payments: You may only be able to make a few additional payments during the year. Even so, 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. That can make this approach a good way to work toward early mortgage payoff.
• Rounding up: This can be an easy way to pay extra toward your mortgage in smaller increments. For example, if your monthly payment is $1,150, you could 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 option, always confirm with your mortgage lender that extra money goes to principal instead of 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, say you took out a $200,000 loan 10 years ago at an interest rate of 7%. Now you refinance 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 toward the principal. The lender then recalculates a new amortization schedule for your loan based on the reduced principal. When the lender recasts the principal, the loan term and interest rate remain the same. With a smaller loan amount, though, your mortgage payments will be lower until the end of the loan term. So 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. With 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

Can you pay off your mortgage early?

Borrowers can generally pay off a mortgage early but could incur a prepayment penalty. Federal rules allow one only in the first three years of the loan. The loan must also be a conventional, fixed-rate qualified mortgage that isn’t a higher-priced mortgage loan. If it’s a government-backed loan or an adjustable-rate mortgage, it can’t have a prepayment penalty. Neither can a loan that isn’t a qualified mortgage.

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 an early payoff might be worth it: A key consideration is your financial position. That includes whether you have the additional money to make extra payments toward your mortgage loan. For example, you might 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, you may plan to retire soon and expect your income to decrease. It could then 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, such as credit card debt. Or you might not intend to stay in your home for a long period of time. Under such circumstances, 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, the specifics of your personal finances will decide whether it’s a good idea to pay off your mortgage early.

How to pay off your mortgage early FAQ

What happens if I pay off an extra $100 a month on my mortgage?

If you pay an extra $100 per month on the principal, you’ll pay off your mortgage sooner. For example, take a 30-year, $300,000 loan with a 4.125% interest rate. The extra $100 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?

You can pay off a 30-year mortgage in 10 years if you can pay almost double in mortgage payments. For instance, a 30-year, $300,000 mortgage with a 5% interest rate would have a payment of $1,610 per month. Making a monthly payment of $3,182 instead 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 for an early payoff 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. You’ll enjoy the peace of mind of a paid-off home that much earlier, too.

Extra payments per year and your payoff date

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, at a 5% rate, four additional mortgage payments per year would reduce a 30-year loan to about 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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