Some homeowners are eager to get out of their mortgage early, with reasons ranging from eliminating the psychological pressure of debt to slashing interest payments. For retirees, paying off a home loan early can help increase cash flow. This is especially beneficial when transitioning to a fixed income.
Whatever your motivation, paying down your mortgage ahead of time reduces the amount of interest you’d pay on the loan. This can be a substantial savings. Here are some early payoff strategies to help you achieve that goal.
4 ways to pay off your mortgage early
1. Make extra payments
There are two ways you can make extra mortgage payments to accelerate the payoff process:
- Biweekly mortgage payments
- Extra monthly payment
The first way is to split your monthly mortgage payment in half and make biweekly payments instead. By doing this, you’ll end up making the equivalent of 13 months of mortgage payments in one year, 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 it accepts biweekly payments; some might not. In this case, it’s up to you to set aside those biweekly 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 lender allowing for a monthly payment split.
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.
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. 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 the lender understands 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 cancel out those costs.
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. You can use Bankrate’s calculator to compare payments and total interest between 30-year and 15-year terms.
3. Recast your mortgage
Mortgage recasting is different than refinancing because you keep your existing loan, pay a lump sum toward the principal and your lender then adjusts 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 their mortgage.
Since VA and FHA loans can’t be recast, lump-sum payments might be the next best thing for borrowers with these types of loans. Also, you’ll save yourself the lender’s fee for recasting.
With some mortgage servicers, you must specify when extra money is to be put toward the principal. Check with your servicer if you are unsure how lump-sum payments will be applied.
Can you pay off your mortgage early?
In most cases, you can pay your mortgage off early without penalty — but there are a few things to keep in mind before you do.
First, reach out to your loan servicer to find out if your mortgage has a prepayment penalty. If it does, you’ll have to pay an additional fee if you pay your loan off ahead of schedule. This can affect whether paying your mortgage off early is financially viable for you.
Second, make sure there aren’t any restrictions on how and when you can make additional payments. Some loans have terms that encourage you to follow the payment schedule, and it’s important to ensure that whatever extra payment you make goes to the principal and not interest.
Should you pay off your mortgage early?
Whether you should pay your mortgage off early depends on many factors, including the interest rate of your current loan and your personal risk tolerance.
Start by considering the opportunity cost. If you repay your mortgage ahead of schedule, you’re putting money into the mortgage when you could have used those funds for other financial priorities. You’ll save on interest, of course, but if you invested the extra payments elsewhere instead of putting them toward your mortgage, you might find you’d have earned a higher return.
On the other hand, if you know you’re likely to spend that extra money if you don’t put it toward your mortgage, making additional payments can be a good idea. The peace of mind that you get from owning your home mortgage-free can also be worthwhile, and is important to consider.
Also, think about how much cash you have available for emergencies. You don’t want to tie all of your money up in your home and have no way to access it quickly if you encounter a crisis.
Ultimately, with mortgage rates so low, it’s generally better in the long run to hold a mortgage with a low rate now and to invest your extra cash. Still, you can check Bankrate’s mortgage payoff calculator to see how much you can save by settling your mortgage early if you’re set on doing so.