Paying Off Mortgage Early: 6 Ways And The Benefits

Paying off your mortgage early can have many financial benefits, saving you thousands of dollars. There are many ways to achieve this goal; the right method depends on your current situation. Remember, too, that an early pay off isn’t always right for everyone.

How To Pay Off A Mortgage Early

If you’ve decided it’s worth paying off your mortgage early, here are six easy ways to reach your goal.

1. Make Biweekly Payments

Biweekly payments, which equate to one extra monthly payment each year, can shorten your mortgage term by a few years.

When you make biweekly payments, you make half of your mortgage payment every 2 weeks versus one full monthly payment. Because there are 52 weeks in a year, this equals 26 half payments or 13 full monthly payments instead of 12.

The extra money you pay goes directly to your principal, decreasing the amount you owe and potentially shortening your term.

For example, if you buy a $300,000 house with a 20% down payment, you’d borrow $240,000. If your interest rate is 6.8%, and you make biweekly payments of $782 instead of monthly payments of $1,565, you’d shave 74 months off your loan and save $77,670 in interest.

2. Refinance Your Mortgage

Refinancing your mortgage can help you pay your mortgage off early, especially if you can take a shorter loan term. For example, if you borrowed a 30-year mortgage and have 25 years left but can afford a 15-year payment, you may consider refinancing into a 15-year term.

Most borrowers can secure a lower interest rate on a 15-year term, automatically saving you money on the loan. However, when you refinance a mortgage into a 15-year term, the loan is amortized to cover a larger principal amount each month since there's less time to pay the loan in full. This means you'll pay less interest over the life of the loan, too.

If a 15-year loan payment isn’t affordable, consider other terms. Many lenders offer loan terms in increments of 5 years.

3. Reevaluate Your Budget

Sometimes, paying your mortgage off early simply requires you to reevaluate your budget. Proper budgeting can help free up money so you can make extra payments. When you evaluate your budget, determine where you overspend and could cut back. This may be entertainment, eating out, shopping or subscriptions.

You can then create a budget that decreases spending in unnecessary areas and applies the funds toward extra payments to pay your mortgage early.

4. Round Up Your Payments

Simply rounding up your monthly payments can help when learning how to pay off your mortgage early. This step doesn’t require you to refinance or take any other steps. You simply round up your payment to the nearest hundred.

Using the example above, with the regular principal and interest payment of $1,565, you would round up to $1,600 (an extra $35 per month). If you consistently rounded up each month, this would shave $25,836 in interest off the total loan.

If you can’t afford the full extra payment to hit an even hundred, you can choose any increment you can afford. Even $5 extra can knock money off the total interest you pay on your loan.

5. Make Payments Toward The Principal

If you make extra payments without refinancing or biweekly payments, ensure the extra payments go toward the principal. Many lenders have a spot on the payment coupon or online payment page to apply extra money toward the principal.

If you don’t see a place to note why you’re making an extra payment, contact your lender to determine their process to make extra payments toward the loan’s principal. If you don’t tell your lender why you’re making the extra payments, they may not get properly applied.

6. Make an Extra Payment Annually

If you don’t want the pressure of extra payments monthly or don’t have the extra money, you may consider making an extra annual payment. This is a good idea when you get an annual work bonus or regularly receive tax refunds.

You can apply your lump sum bonus to your mortgage and reap the benefits of saving money on interest and shaving time off your mortgage term. You can do this regularly if you always receive a lump sum bonus or as you receive it. Either way, you’ll shorten your loan term and save money.

Drawbacks Of Paying Off Mortgage Early

Like any big financial decision, paying off your mortgage early has downsides. Here’s what to consider.

• Lose a potential tax deduction: Your mortgage interest may provide a decent tax deduction if you itemize your deductions. However, you lose that deduction when you pay your mortgage in full.
• May miss out on other investment opportunities: Investing extra money into your home has the opportunity cost of other investment opportunities. If you miss out on an investment with a high return, you may lose out on compound earnings opportunities.
• Reduces your savings: If you invest all your free money in your house and don’t have adequate savings, you could experience financial strain if an emergency occurs.

Is It Worth Paying Off A Mortgage Early?

Paying off a mortgage early can save you thousands of dollars, but it’s not for everyone. Even if you make enough money, if you don’t have adequate savings for retirement, emergencies and other financial goals, you may want to focus there first and then pay extra money toward your mortgage.

It may also not be worth it if you have other high-interest debt. Wait until you’ve paid off all debts, then focus on your mortgage. This ensures you get the greatest return on your investment and don’t spend unnecessary funds on interest.

FAQs About Paying Off Your Mortgage Early

Is it a good idea to pay off my mortgage early?

It can be a good idea to pay your mortgage off early if you’ve satisfied all other financial goals and debts. However, if you are in consumer debt or don’t have savings, consider waiting until you’ve satisfied those financial needs.

How does early payoff work?

When you pay your mortgage off early, you pay extra money toward the loan’s principal (the amount you borrowed). This decreases the total interest you owe and helps you own the home lien-free faster.

How do I pay off a 30-year mortgage faster?

You can pay off a 30-year mortgage faster simply by making a small extra payment toward the principal monthly, using biweekly payments or paying an extra lump sum payment annually. You can also consider refinancing your 30-year term into a 15-year term if you can afford the higher payments. This may further decrease your interest since 15-year loans usually have lower interest rates.

What is the best way to pay off a mortgage early?

The best way to pay off a mortgage early depends on your situation. If you have limited extra funds, rounding up your payment to the nearest $100 may be your best bet, whereas homeowners who get regular annual bonuses may consider a one-time lump sum payment each year. People with extra free money may make biweekly payments to shave many years off the loan term. The key is to look at your big financial picture and determine which works best for you.

The Bottom Line

There are many ways to pay your mortgage off early, each with its own advantages and disadvantages. Before making any major decisions, such as refinancing, evaluate your budget and determine the most affordable option to reach your financial goals without causing financial strain in other areas.

Focus on accumulating savings and paying off other high-interest debt first, and then choose the best way to pay your mortgage off early.