Some homeowners are eager to get out of mortgage debt early. The reasons range from the psychological pressure of being indebted to slashing interest payments.
For retirees, paying off your home loan early can help you increase your cash flow. This is especially beneficial when you transition into a fixed income.
For some folks, getting rid of debt is a stress relief, more than a financial strategy. These homeowners might not like the emotional and mental impact of owing money.
And, finally, by paying down your mortgage ahead of time you will reduce the amount of total interest you pay on your loan. This can be a substantial savings. The bigger the loan and the more time you pay on it, the more interest you’ll owe. You can check Bankrate’s Mortgage Payoff Calculator to see how much you can save by settling your mortgage early.
Whatever your reason, we have strategies that can help you achieve your goal.
4 methods to pay off your mortgage early
Paying off debt early is a feasible goal if you have a budget, extra cash and an early-payoff plan of action. Here are four ways homeowners can get rid of mortgage debt and own their house outright.
1. Make extra payments
There are two ways you can make extra payments that will speed the paying-off process. The first way is to split your monthly mortgage payment in half and make bi-weekly payments instead. By doing this, you’ll end up making the equivalent of 13 months of mortgage payments instead of 12. This tactic might be easy for some homeowners because it’s barely noticeable in the monthly budget.
You’ll want to speak with your lender about whether they accept bi-weekly payments, some might not. In this case, it’s up to you to set aside those bi-weekly payments, but you’ll make them in one shot each month. The benefit of that extra annual payment is still there, but without the convenience of the bank allowing monthly payment splitting.
The second approach is to pay more each month to chip away at the principal faster, which can save you tens of thousands of dollars over the life of your loan. For instance, let’s say your 30-year mortgage is $250,000 and your interest rate is 4 percent. If you make an additional $100 monthly payment to the principal balance of your loan, you’ll shave off four years and $27,957 from your mortgage.
This can be a better tactic than refinancing as it doesn’t lock you into a payment. So, if for some reason, you can’t add more to your monthly mortgage payment you won’t be penalized.
If you go this route make sure to check with your lender that the payments will be applied in the correct way to reduce the principal, not prepay the interest. You’ll also want to make sure they understand the extra payment is not for the next month’s mortgage payment.
2. Refinance your mortgage
Refinancing your mortgage to pay it off early only makes sense if you can get a lower interest rate. Keep in mind, there are fees associated with refinancing so you want to make sure the savings cancels out the cost of refinancing.
Refinancing into a shorter-term loan, such as going from a 30-year mortgage to a 15-year mortgage, can also help bring down your interest rate while putting you on the path to early payoff. Use Bankrate’s mortgage calculator to compare payments and total interest between 30-year and 15-year terms here.
3. Recast your mortgage
Mortgage recasting is different than refinancing because you get to keep your existing loan, you just pay a lump sum toward the principal and the bank will adjust your amortization schedule to reflect the new balance. This will result in a shorter loan term.
One major benefit to recasting is that the fees are significantly lower than refinancing. Usually, mortgage recasting fees are just a few hundred dollars. Plus, if you have a low interest rate, you get to keep it. On the flip side, if you have a high interest rate, refinancing might be a better option.
4. Make lump sum payments toward your principal
An alternative to recasting is to make lump-sum payments to your principal when you can. Homeowners who get large bonuses or those who inherit money or sell valuable items, might choose to use the extra cash to pay down the principal. Since VA and FHA loans can’t be recast, lump-sum payments might be the next best thing. Also, you’ll save yourself the bank fee for recasting.
With some mortgage servicers, you must specify when extra money is to be put toward principal. Check with your servicer if you are unsure how additional payments will be applied.