How to Pay Off Your Mortgage Early
Getting approved for a home loan is a great responsibility. Once they close, many homeowners will read online and in the news about how paying their mortgage off early can save thousands of dollars in interest.
While that may be true, most of us don’t have a secret stack of extra cash lying around. This how-to guide will walk you through steps you can take to pay off your mortgage earlier than planned. You’ll discover ways to slash the time it takes to pay off your mortgage using several strategies. With the right tools and some smart money moves, almost anyone can achieve this step toward financial independence.
Benefits of Paying Your Mortgage off Early
There are many benefits to paying a mortgage off early.
- You’ll pay much less money in interest if you pay the mortgage off early, helping you avoid costs that would normally be accrued over a long-term loan.
- Paying off your mortgage early frees up more cash to do things like go on vacation, save for retirement, or make home improvements. You can save tens of thousands of dollars annually just by not having to make your monthly payment anymore.
- An early payoff means you own the home outright, and you won’t need to worry about mortgage foreclosure. If you’re ever laid off or worried about finances in the future, you’ll at least know that you don’t have to worry about losing your home as long as you pay any property taxes.
- Living in a home that’s completely paid off gives you peace of mind. You’ll have an asset that’ll be much easier to transfer to another family member if you choose to do so later down the road.
- Many lenders offer no prepayment penalties, which means you won’t be responsible for paying a certain percentage of interest if you decide to pay the mortgage off early. Verify with your lender to confirm whether they charge prepayment penalty fees.
- You don’t have to recast or refinance your loan to pay your mortgage early. Even small additional payments of $50 to $100 per month can shave a few years off the life of the loan over time.
Setting Yourself Up for Success
The first step to paying off your mortgage early is making the right financial decisions while you’re shopping.
Consult with your lender
A successful home purchase starts with an in-depth conversation with your team, including your lender. Your mortgage lender will help you understand the requirements for your loan application, assist with paperwork and your loan options, and can even help educate you on any parts of the process you’re unfamiliar with. Use your lender as a key source of information so you fully understand what you’re agreeing to.
Think critically about renting vs. buying
In the U.S., we are often socialized to believe that homeownership is the pinnacle of financial independence. Before you dive into a mortgage agreement, it’s a good idea to check this assumption against your financial situation.
While renting provides flexibility and lower upfront costs, it typically means that the monthly payments go toward someone else's mortgage. On the other hand, buying a home allows you to build equity and potentially benefit from property appreciation over time. That said, it also comes with upfront costs such as down payments, closing costs, and ongoing expenses like property taxes and maintenance.
Deciding whether it's smarter for you to rent or buy a home requires careful consideration of various factors. Here are some key steps to help you make an informed decision:
- Assess your financial situation: Evaluate your current income, savings, and expenses. Determine if you have enough funds for a down payment, closing costs, and ongoing homeownership expenses like property taxes, insurance, maintenance, and repairs. Compare these costs with the rental prices in your desired area.
- Consider your long-term plans: Consider your future goals and how they align with homeownership. Do you plan to stay in the area for a significant period? Are you ready to take on the responsibilities of maintaining a property? Consider the stability of your job, potential changes in family size, and your overall lifestyle preferences. Renting offers more flexibility, while buying a home provides stability.
- Evaluate the local housing market: Research the real estate market in your desired area, as some cities are better for renters while others are better for buyers. Look at property values, rental prices, and market trends. Consider the potential for property appreciation in the future, as well as the availability and affordability of homes for sale or rent.
- Calculate the costs and benefits: Compare the costs of renting and buying over the long term. Include factors such as mortgage payments (including interest), property taxes, insurance, maintenance, repairs, and potential rental increases. Consider potential tax benefits associated with homeownership, such as mortgage interest deductions. Be sure to weigh the financial benefits of renting as well. If you have a down payment, how would that money perform if you invest in stocks instead of real estate?
- Consider intangible factors: While financial aspects are crucial, don't overlook intangible factors. Consider the emotional value of owning a home, the sense of community, and the freedom to personalize your living space. Evaluate the lifestyle benefits of renting, such as minimal responsibilities and flexibility.
Always buy what you can afford
Buying a home that you can’t afford can lead you to become “house poor,” where you don’t have much money left over for essentials and entertainment. Before you start the homebuying process, make sure the monthly payments are well within your budget. Remember to account for taxes, homeowner’s insurance, monthly utilities, and unexpected repairs. Here are some tips to help you buy a home you can afford:
- Look at your monthly income after taxes and insurance, then subtract monthly costs like food, clothing, and utilities to get a better idea of how much you have left.
- Account for how much money you’ll need for the down payment and closing costs on a home.
- Look up the tax rates where you want to live and decide how they will affect your mortgage payment. Remember that taxes will go up over time, especially if you live in a growing area.
- Use an online affordability calculator to help determine how much home you can afford based on your income and intended location.
Increase your down payment if you can
Some loan programs only require a small down payment, while others may require no down payment. Even if you find a great lender and terms, paying more money upfront will reduce the remaining balance that you need to borrow.
Not only will a higher down payment get you better loan terms, but you could also avoid having to pay PMI, which means a lower total monthly payment. The more cash you put down on a home upfront, the less you’ll need to finance.
The key to maintaining good credit and peace of mind is to make sure you’re paying your mortgage payment in full on time every month. Setting up an automatic withdrawal plan can be particularly helpful for busy homeowners or those who may accidentally forget to make a manual payment. If your mortgage servicer is near you, you can make the payment in person whenever your payment is due.
Today, it’s more convenient than ever to make payments, whether you choose to do so online through your online account, over the phone, or via auto-withdrawal. Add your payment date to your calendar and set an automatic reminder on your computer or smartphone so you always remember when it’s time to make a payment.
Some mortgage companies will send you a monthly reminder to ensure you’re paying on time. Take advantage of these features if they’re available to you. Automatic withdrawals are the easiest and most effective ways to avoid being late or missing a payment. Some lenders allow you to change the due date to one that best suits you. If this helps you to make timely payments, then it’s recommended that you change the date to suit your preferred payment schedule.
Paying Off Your Mortgage Faster
First, let’s go over some steps you can take to help pay off your home loan early, including smart money and personal finance tips.
Refinance your mortgage
Refinancing is typically helpful if interest rates are lower now than when you first bought your home. This means that you’re paying more interest over the life of the loan than you need to. Refinancing can help you take advantage of lower rates or change the terms of the loan altogether. If you refinance, not only can you save on interest costs, but you can take those savings and put it toward your principal balance every month instead. The more you pay toward the principal, the sooner your mortgage will be paid off.
Refinancing your loan is similar to the process you went through when you originally purchased. Today’s mortgage experience in the digital age is likely much smoother than what a buyer would have experienced even 10 years ago.
Recast your mortgage
Maybe you’ve recently inherited a large sum of money, and you want to use it to pay down some of your mortgage balance. This is called recasting, which allows you to pay off the principal in a lump sum while also helping you to make lower monthly payments moving forward.
It’s important to note that with recasting, your interest rate and loan terms won’t change. However, if your lender allows recasting, they will amortize the balance, which results in a lower monthly payment. Use the extra money to invest back into your home equity while keeping more of your monthly take-home income.
Make extra mortgage payments
The most obvious way to pay off your mortgage faster is to do just that – pay more money than you owe. That said, many struggle to figure out exactly how much extra they should pay each month. Is it enough to pay just $10 extra?
You can generally consider paying your mortgage off as an “any little bit helps” situation. The extra dollars you pay today will save you on every interest payment moving forward. Just be sure that any extra mortgage payments you make go toward the loan's principal, not principal and interest.
Use your “extra paycheck” for your mortgage
For homeowners who are paid on a traditional biweekly pay schedule, you’re aware that two months of the year will include 3 paychecks, not 2. This is a great opportunity to pay off the extra principal on your home loan. Consider putting that whole paycheck towards your principal or even just a few hundred dollars.
Set a “1 extra payment” goal
Another way to think about putting a little extra toward your mortgage is by setting the goal of making one additional payment per year. If your monthly payment is normally $1,500, you’ll pay $18,000 over the course of the year. Instead, add one more payment to that full-year total, and divide by 12 again. In our example, paying $1,625 per month instead of $1,500 will produce a full additional mortgage payment made over the course of the year.
Create an additional stream of income
If you don’t have extra money in your budget to pay towards your mortgage, consider finding an extra stream of income or shaving down your monthly spending. Since a little goes a long way when paying off your loan, even an extra $50 per month can have an impact. Here are some low-stress options:
- Transfer your cash savings to a high-interest savings account and put the monthly interest earned toward your loan principal
- Trade in used electronics for cash
- Switch insurance providers
- Cancel a subscription or streaming service you rarely use
- Spend a day on Amazon Mechanical Turk
Making Each Payment on Time
Whether you’re planning to pay your mortgage off early or not, these options can ensure you make timely payments every month.
Paying online is the fastest way to make your monthly payments. Start by registering for an online account. You can choose to go paperless, so you receive your monthly statement via email. If you’re planning to pay your mortgage online, make sure the lender has a secure connection and you use a strong password. The cons to using this method are that you could be a victim of identity theft if you’re not careful, so always change your password regularly and check your account every so often just to make sure it looks okay.
Opting for auto-withdrawal ensures that you never miss a payment and are never late. It’s an excellent way to avoid paying late charges and other fees. Most lenders allow you to choose the date you’d like the auto-withdrawal to leave your bank account and pay the mortgage.
While this option is excellent for people who accidentally forget to make a payment every month, it could cause an overdraft if you forget that the money is coming out of your account. Always have enough to cover your mortgage payment ahead of the auto-withdrawal date.
Credit card payment
Paying your mortgage by credit card can be helpful when you’re in a pinch, but it’s not recommended unless you plan to pay off the balance immediately. Some people prefer to use this method if their credit card offers rewards, like airline points or other incentives.
If you don’t have the money to pay your mortgage, it can be a good stopgap when things are tough financially. However, it’s not a very sustainable option. Some lenders charge an extra processing fee for credit card payments, so be sure to verify this with your lender.
If you’re out of town or in a hurry, paying your mortgage by phone can be extremely convenient. This method usually posts the payment to your account rather quickly. Paying by phone is helpful if you’re getting close to the due date and you need to pay before it passes.
Make sure you’re using a verified phone number and that it’s done via a secure connection. Always confirm if there’s a separate charge to pay via phone, and only use the phone number on your monthly statement. There should be an official phone number listed there or on your online statement.
If a local bank or credit union holds your mortgage, you may have the option to pay in person. Most banks and loan servicers take payments in person, but they must be in the form of a cashier’s check, certified check, or money order. Some money orders have a limit of around $1,000, so it’s crucial to confirm this beforehand if you want to pay this way. If you do pay your mortgage in person, always get a receipt or another form of confirmation. This option also ensures that your payment posts to the account quickly.
Managing Your Long-Term Finances
Here are some personal finance tips to help you stay organized with your money and expenses.
Review your monthly budget
It’s always a good idea to go over your monthly budget every so often to find out where you can save money and where you can cut spending. When you tweak and adjust your monthly budget, you’ll have more control over where your money goes and how to spend it wisely. Look for ways to save, like cutting subscription services or determining how to cut down on energy costs. Even something as small as packing a lunch instead of buying can help you save money in the long run.
Automate your savings
Dedicate a set amount of money that automatically goes into a separate savings account each month. Look for banks that offer the highest savings rate possible so your money grows every month. You may not even notice the money leaving your account when you automate your savings. Before you know it, you should have a stash put away in savings in the event of a financial emergency.
Manage your debt
Managing your debt is more than just making payments on time; it’s also learning how to reduce your debt while you avoid taking on new debt. Create a simple list or a spreadsheet to see your accounts, total balances, and monthly payments in one place. Then determine how you can best pay down the debt to have more cash flow. Once you pay off an account, use the money you’d normally spend there to put toward your mortgage payments.
If you’re wondering how to reduce years on your mortgage, remember these tips. With some diligence and planning, you can pay it off early so you have the cash to spend on other things like retirement, a new car, or a fun family vacation. It might take some planning and sacrifice to pay your mortgage early, but the benefits will be well worth it.