Owning your home free and clear is a dream for many homeowners. Paying off your mortgage early can lead to peace of mind, financial freedom, and significant savings on interest. But what’s the best way to tackle this goal?
This blog covers five effective strategies to help you pay off your mortgage early, along with advice on when you might want to stick to your current plan. We’ll also weigh the pros and cons to help you decide if this approach fits your financial situation.
Refinancing
Refinancing your mortgage is one of the most popular strategies to pay it off early. By refinancing, you may secure a lower interest rate or switch to a shorter loan term, such as moving from a 30-year mortgage to a 15-year mortgage.
Why refinance?
- Save on interest: Lower interest rates can save you tens of thousands of dollars over the life of your loan.
- Accelerated payoff: A shorter loan term often comes with higher monthly payments but allows you to pay off your mortgage faster.
Example:
If you currently have a $200,000 mortgage at a 5% interest rate with 25 years remaining, refinancing to a 15-year mortgage at 3.5% could save you approximately $70,000 in interest and shave years off your loan.
Pro Tip:
Before refinancing, consider the closing costs involved. These can range from 2% to 5% of your loan amount and will cut into your savings if you don’t plan to stay in your home for long.
Increasing Your Monthly Payment
One of the simplest ways to pay off your mortgage early is to increase your monthly payment. Even a small increase can significantly reduce the principal and interest over time.
How it works:
- Round up your payments—for example, if your monthly payment is $1,150, consider paying $1,200.
- Commit to adding an extra $100, $200, or whatever amount fits your budget.
Example:
Adding just $100 a month to your $1,200 mortgage payment on a 30-year loan with a 4% interest rate could save you over $28,000 in interest and shorten the loan by 5 years.
Pro Tip:
Double-check with your lender that the extra amount is applied to the principal—not future payments.
Making Biweekly Payments
Biweekly payments are another effective way to shave years off your mortgage. This strategy involves making half a mortgage payment every two weeks instead of one full payment once per month.
Why does this work?
There are 52 weeks in a year, which means you’ll make 26 half-payments (equal to 13 full payments) instead of the usual 12 payments annually.
Example:
On a $250,000 mortgage with a 4% interest rate, switching to biweekly payments could save you over $15,000 in interest and pay off your loan 4 years earlier.
Pro Tip:
Some lenders offer biweekly payment plans, while others may require you to set this up manually. Confirm with your lender if any fees apply.
Making Extra Principal Payments
If you’ve come into some extra cash—like a work bonus, tax refund, or inheritance—you can use that money to make a lump-sum principal payment. Even small, one-time payments can make a big difference.
Why this works:
Paying off the principal reduces the overall balance, which decreases the amount of interest charged over the life of the loan.
Example:
On the same $250,000 mortgage with a 4% interest rate, applying an extra $5,000 toward the principal in year 5 could save you nearly $10,000 in interest and reduce your loan term by several months.
Pro Tip:
If your budget allows, consider making extra principal payments regularly, such as annually or quarterly.
Recasting Your Mortgage
Mortgage recasting is a less-known option but can be highly effective for those with savings. It involves making a large, one-time principal payment and then having your lender recalculate (or “recast”) your monthly payment based on the reduced balance.
Unlike refinancing, recasting typically does not change your interest rate or loan term.
Benefits of recasting:
- Lower monthly payments without the need for refinancing.
- Minimal fees compared to refinancing (usually a few hundred dollars).
Example:
If you pay a $20,000 lump sum toward your $300,000 mortgage, your lender may reduce your monthly payments proportionately, freeing up extra cash for other financial goals.
Pro Tip:
Recasting isn’t available with all lenders or loan types, so check with your mortgage provider before deciding.
When You Shouldn’t Pay Off Your Mortgage Early
While paying off your mortgage early can be a smart financial move, it’s not always the best decision for everyone. Here are a few situations where it may be better to stick with your current mortgage schedule:
- High-interest debt like credit cards or personal loans should take priority.
- Investing opportunities with higher returns than your mortgage interest rate may be a better use of extra cash.
- If you lack an emergency fund, focus on building 3 to 6 months’ worth of expenses in savings.
Paying Off Your Mortgage Early: Pros and Cons
Pros:
- Save on interest: The less time you spend paying off your mortgage, the less you pay in interest.
- Financial freedom: Eliminating your mortgage means more disposable income for savings, travel, or retirement.
- Peace of mind: Owning your home outright can provide a sense of security and accomplishment.
Cons:
- Reduced liquidity: Tying up extra cash in your mortgage could limit funds available for emergencies or investments.
- Lost tax benefits (if applicable): Mortgage interest deductions may no longer apply if you pay off your loan early.
Take Control of Your Mortgage Today!
Paying off your mortgage early doesn’t have to feel overwhelming. With strategies like refinancing, increasing payments, or making biweekly contributions, you can save thousands of dollars and years of payments.
Just remember, it’s essential to strike a balance between paying off your mortgage and meeting other financial goals. Looking for more personalized advice? Speak with a financial expert to create a plan that aligns with your unique situation!