How to Pay Off Your Mortgage Early
Whether you have a 15-year mortgage or a 30-year mortgage, your ultimate goal should be to clear the balance in full as soon as you can. It’s the biggest asset you’ll ever own, but it’s also the biggest debt, and over the life of the loan you could pay 50% to 100% more than the total value of the house.
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The quicker you repay your mortgage, the less it will cost you and the sooner you can own it outright. Once that happens you can start reaping the benefits.
The following tips and tricks can help with an early payoff and are suited to all types of mortgage. Just bear in mind that you may incur some prepayment penalties and should consult your lender/contract to see how much these penalties will cost you.
1. Pay Extra Money Each Month
Making extra mortgage payments every month is one of the fastest ways to clear the principal balance and pay off your mortgage in full. Every time you make a mortgage payment, some of the money will go towards the principal, which is the actual balance, and the rest will go to the interest, which is basically the mortgage lender’s charge.
When you pay the necessary interest and fees, all additional funds will go towards the principal, thus allowing you to clear the mortgage balance much sooner than you would by sticking with the minimum payment.
As an example, if you take out a $150,000 30-year mortgage with a 4% interest rate, you’ll pay $716,12 every month. In the first few months, nearly 70% will go towards the interest, with just $216 going towards the actual balance. By adding just $200 to your payments for the first few months, you’re effectively doubling the principal payments.
Over time, the allocation will change and in the final few years the roles will reverse, with most of your money going towards the principal, so if you want to half the length of the mortgage, you’ll need to increase your monthly payment. But even if you stick with just $200 every month, you’ll still make a huge impact.
In the example above, putting just $200 towards your $150,000 mortgage will take over 10 years off the loan term. Reduce this to a more manageable $100 and you’ll reduce the 30-year term by 6 years and 3 months. Increase it to $300 and your loan term will reduce by exactly 13 years.
Of course, getting this extra cash is easier said than done, but there are a few things you can do:
- Sell unused and unwanted items
- Reduce other debts to increase your cash flow
- Take on a side hustle
- Ask for a promotion or pay raise
- Ask for extra hours at work
2. Make Bi-Weekly Payments (and other tricks)
Sometimes, making an extra payment, clearing a debt and achieving your financial goals is as much about psychology as it is economics. For instance, the most generous savings accounts in the United States offer a return of just 2%, which means you’ll earn just $1,000 in interest on a $10,000 balance kept for 5 years.
However, the act of keeping that money aside, where it’s beyond the reach of temptation, can make that $1,000 gain feel like an $11,000 gain.
That’s why piggybanks work so well. When you pop the plug and cash the coins inside, it feels like you’ve just gained $10 or $20 bucks, even though all that money was already yours to begin with.
There are a few little psychological tricks that can help you clear your mortgage. One of these is to use an app like Acorn, which rounds-up every dollar that you spend and moves this into a bank account or savings account.
If, for example, you spend $2.50 on coffee every morning, $3.50 on a sandwich, and then $2.50 on a snack, you’ll spend an additional $1.50 more than you usually would (the price of a bag of chips or candy bar) and won’t feel the loss. Yet, every week you’ll have an extra $10.50 in your account and this adds up to $546 every year, money that you can put towards your monthly payment.
Another trick is to split your monthly mortgage payment in half and pay half every 2 weeks. On the surface, it may seem like a pointless endeavor, but here’s the kicker: there are 12 months in a year but 52 weeks. 12 x 4 is 48, not 52, because most months don’t have 28 days and over the course of a year those extra days add up.
By making half-payments every two weeks, you’re creating 13 full billing cycles instead of 12, which means you’re making one full extra payment every year.
3. Pay a Lump Sum
Any time you have a lump sum, consider putting it towards your mortgage as it could significantly reduce the loan term. If you have a conventional loan you can recast your mortgage, which is when you give your lender a lump sum, and in return, they adjust the amortization schedule to account for the reduced balance.
You can’t recast with an FHA loan and a VA loan, but you can still pay a large sum of money in exchange for a shorter-term and/or a reduced interest rate. Where you get this money is the hard part, but homeowners may find themselves in receipt of a windfall through the following means:
- Tax refund
- Dividends from stock market investments
- Life insurance
Refinance Your Mortgage
A mortgage refinance is designed to help you adjust your term or interest rate and can also be used to switch to or from a fixed-rate mortgage. If you refinance to a shorter-term you will pay more money each month, but you’ll also repay the balance much sooner, which is the ultimate goal. If you have a strong credit score, you can secure lower interest rates and save even more money.
Take a look at our mortgage calculator to determine if decreasing the loan term is right for you based on your current financial situation.
Bottom Line: Is a Mortgage Payoff Worth it?
Most homeowners will benefit from paying off their mortgage early. It saves them a lot of money over the term, increases their cash flow once the mortgage payments stop, and allows them to consider low-interest home equity loans and cash-out refinancing if they ever need access to quick cash.
However, it’s not always the best option, especially for anyone who has substantial debts to clear. If you have mounting credit card debts, student loans, personal loans, and other unsecured debts, then they need to take priority.
What you gain by paying off your mortgage sooner could be lost in interest payments made on credit cards and student loans; the options you gain by removing your home loan from the equation could be lost when you find yourself struggling to meet minimum payments elsewhere.
The good thing about mortgage debt is that it’s charged at a very low-interest rate. You pay a lot over the life of the loan, but only because the term is so long. In other words, you have plenty of time to work on that loan, to bring the interest down and to reduce the loan term.
For now, focus on the debts with the highest interest, including payday loans and credit cards, as these could cost you 50% or more of the entire debt balance in just 2 or 3 years.
Being debt-free is a great feeling, one that opens many new doors and greatly improves your cash flow and your net worth. However, when people use the word “debt” they typically refer to unsecured debts and rarely factor mortgages into the equation, because they are simply not as damaging, and unlike a payday loan, a mortgage will actually improve your net worth.
Focus on the most damaging debts first, get these out of the way, and then switch your priority to your mortgage.