Paying Off Your Mortgage Early: When And How To Do It
There are a number of strategies you can follow to pay off your mortgage faster. By refinancing or making extra quarterly payments, you can shave months, or even years, off your pay-off date.
Edited byChris JenningsUpdated October 12, 2021
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When you take out a mortgage, you might feel uneasy at the thought of carrying debt and paying high interest costs over time. Paying off your mortgage early, however, could help you save money and rid yourself of some financial stress.
Before you make extra mortgage payments or zero out the debt entirely, you should consider whether its the best move for you. It may make sense in some circumstances, but not all.
Heres what you need to know about paying off your mortgage early:
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Pay Down Your Other Debts
A crucial rule of debt repayments is: clear the most expensive debts first, suggests Martin Lewis, founder of MoneySavingExpert.com. Do so and the interest doesnt build up as quickly, saving you cash and giving you more chance of clearing debts earlier.
As a rule of thumb, Clear high-interest credit cards and loans before overpaying your mortgage, as theyre usually more expensive.
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How To Make An Early Payoff Of Your Mortgage A Reality
I know all of these options sound great in theory.
The problem though is that you need more money in order to pay extra on your mortgage each month.
As it stands now, money is already tight.
What can you do to earn extra money and pay off your mortgage faster?
There are all sorts of ideas out there.
You can learn about many ways to earn more money either through side hustles or even how to make more money at work by reading through the posts in the build wealth section of this site.
Just by cutting a few monthly expenses and doing a little work on the side could easily bring in $250 extra each month.
It may seem like a small amount, but it makes a big difference in the long run.
If you combine some of the tricks to pay off your mortgage faster and can put this extra $250 you earn towards your mortgage each month, you could pay off your mortgage in 10 years.
This is what I use to get a quick look at our net worth and investments.
The reason I do this is for motivation.
- Read now:
There are times when you would rather buy something you want instead of putting the extra money towards your mortgage.
But then I log into my Personal Capital account, see the progress we made and how close we are getting to being mortgage free and it helps to get me excited again.
So I highly recommend doing this as well.
You can open your free account by clicking the link below.
Try Refinancing From Fha Loan To Conventional Loan
Federal Housing Administration loans help millions of Americans secure affordable homes. FHA loans are backed by the government to help consumers purchase houses with low down payments . Loan rates are also typically competitive at the beginning of the term.
Conventional home loans only require property mortgage insurance if the loan balance is above 80% of the home’s value. As the homeowner pays down their loan the insurance requirement is dropped. FHA loans charge an annual mortgage insurance premium which must be paid for the entire life of the loan. MIP is around 0.80 to 0.85 percent of the loan value. This premium cannot be canceled and must be paid yearly until the end of the mortgage.
Is There a Way to Eliminate PMI?
Yes. You can get rid of the PMI cost if you refinance from FHA to a conventional loan. To do so, you must raise your credit score to qualify for refinancing. At the very least, you should have a 620 credit score to obtain a conventional loan. But the higher your credit score, the more favorable rates you can get . This helps lower your current interest rate once you shift to a conventional loan. But again, if you shorten your term to 15 years, be ready for higher monthly payments.
To learn more about when to refinance, read our feature on top reasons for refinancing.
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Calculate The Extra Principal Payments
Calculate how much extra your payment must be to meet your goal. The general rule is that if you double your required payment, you will pay your 30-year fixed rate loan off in less than ten years. A $100,000 mortgage with a 6 percent interest rate requires a payment of $599.55 for 30 years. If you double the payment, the loan is paid off in 109 months, or nine years and one month.
Should I Pay Off My Mortgage Or Invest
Investing is one way to raise money for a lump-sum payment. For example, you can invest your money in a tax-free savings account . Then pay a lump sum once your investment grows. Compare rates on your potential investment and your mortgage. If investing offers a higher rate of return than your mortgage, put your money in an investment and watch it grow. If not, put a lump sum on your mortgage instead.
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So Should You Pay Off Your Mortgage Early
If you find yourself with a little extra cash at the end of the month, should you put it toward your mortgage loan? Theres no simple yes or no answer. There are both risks and benefits to paying off your loan early, and the right decision will be different for everyone. In this section, well look at a few instances in which it makes sense to pay off your mortgage early and when it doesnt.
How To Pay Off A 30
A few options exist as realistic ways to pay off a mortgage sooner than the 30-year term.
Options to pay off your mortgage faster include:
- Adding a set amount each month to the payment
- Making one extra monthly payment each year
- Changing the loan from 30 years to 15 years
- Making the loan a bi-weekly loan, meaning payments are made every two weeks instead of monthly.
There are advantages to each approach. The choice comes down to careful study and a decision based on your financial position and the benefits of paying off a mortgage early.
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Mistake #: Not Asking If Theres A Prepayment Penalty
Mortgage lenders are in business to make money and one of the ways they do that is by charging you interest on your loan. When you prepay your mortgage, youre essentially costing the lender money. Thats why some lenders try to make up for lost profits by charging a prepayment penalty.
Prepayment penalties can be equal to a percentage of a mortgage loan amount or the equivalent of a certain number of monthly interest payments. If youre paying off your home loan well in advance, those fees can add up quickly. For example, a 3% prepayment penalty on a $250,000 mortgage would cost you $7,500.
In the process of trying to save money by paying off your mortgage early, you could actually lose money if you have to pay a hefty penalty.
Understand Your Mortgage Payment
Your mortgage payment is defined as your principal and interest payment in this mortgage payoff calculator. When you pay extra on your principal balance, you reduce the amount of your loan and save money on interest.
Keep in mind that you may pay for other costs in your monthly payment, such as homeowners insurance, property taxes, and private mortgage insurance . For a breakdown of your mortgage payment costs, try our free mortgage calculator.
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When Paying Off Your Mortgage Early Works
You might assume that you need to shell out hundreds of extra dollars each month to pay off your mortgage early. The truth is, even a very small monthly or one annual payment can make a major difference over the course of your loan.
Contributing just $50 extra a month can help you pay off your mortgage years ahead of schedule. You dont need to find a way to earn an extra $10,000 a year to pay off your mortgage.
Play around with our Rocket Mortgage® mortgage amortization calculator to see for yourself how a small amount of money can impact your loan. It might surprise you. Most people can manage to save at least a few thousand dollars in interest with a small monthly extra payment. This is especially true if you start paying more on your loan in the early years of your mortgage.
The best candidates for early mortgage payoffs are those who already have enough money to cover an emergency. Youll want at least 3 6 months worth of household expenses in liquid cash before you focus on paying off your mortgage. This is because its much more difficult to take money out of your home than it is to withdraw money from a savings account.
When To Consider Refinancing
Aside from making extra payments, mortgage refinancing is another strategy to shorten your term. But other than that, it can help you obtain lower interest rates. You can decrease your loan term and acquire a lower interest rate to pay your mortgage early. If you have a 30-year mortgage, you can refinance to a 15-year mortgage with reduced interest. Moreover, it allows you to shift from a fixed-rate mortgage to an adjustable-rate mortgage , and vice versa. But dont forget: It should be done early enough into the loan term.
Heres when its good to refinance from a 30-year to 15-year term:
- If interest rates are low
- If you have a qualifying or high credit score
- If youve paid your loan for just a couple of years
- If you are not planning to move out of the house
- If you are able to make higher monthly payments Refinancing to a shorter term makes your monthly payment higher even with a reduced interest rate. This yields significant interest savings.
Moreover, refinancing is taking out a new loan to replace your old one with more favorable terms. This means you need to go through all the credit checks and paper work. It requires a high qualifying credit score , with the best rates going to consumers with 740 credit scores. On top of this, you must shoulder many fees, including inspection, recording fees, origination fees, and housing certifications.
Refinancing is not ideal under the following circumstances:
Whats the Ideal Interest Rate to Refinance?
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How Long Will It Take Me To Pay Off My Student Loan
The value of your student debt depends on a number of factors: where you studied, when you studied, and how long for. Ultimately though, the general rule remains the same: the more you pay towards it, the faster the debt will shrink.
Whether you really need to concern yourself with overpaying to shrink the debt is dependent on where you studied. British students have a more relaxed, means-tested approach, whilst US students face a harsher system and therefore more urgency in paying off their loans.
Are There Other Ways To Save On Interest
Yes! Consider applying any extra funds at the end of the month toward your loan balance. Even paying an extra $50 or $100 a month allows you to pay off your mortgage faster.
Another idea is to refinance to a 15-year mortgage. Though your payments will be a bit higher, your overall savings will be greater. The shorter loan term also means that youll pay off your home loan in a fraction of the time.
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Put Those Windfalls To Work
Maybe your monthly budget doesnt have wiggle room and paying the costs to refinance isnt in the cards. Theres another option.
Tax returns, bonus checks, and inheritance payments present the opportunity to pay off a chunk of your mortgage without feeling the pain in your monthly budget. This could mean thousands of additional dollars chipping away at this massive financial responsibility each year. Sometimes your money could be better spent elsewhere like paying off high-interest debt but if wiping out your mortgage early is a priority, this is a great place to start.
Paying Down Your Mortgage First
Let’s say youre finally in the home stretch with a mortgage you took out years ago. Its been a long haul, and youre tempted to pay it off in one final payment and finally be free and clearor, at least, accelerate your payments a little to be done sooner.
While it may seem tempting to pay down your mortgage near the end, its actually better to do so at the beginning. Although you make the same size payment each month , most of your money in those early years is going toward interest and doing little to reduce the loan’s principal.
So by making extra payments early onand reducing the principal on which you’re being charged interestyou could pay considerably less in interest over the life of the loan. The same principles of compound interest that apply to your investments also apply to your debts, so by paying down more of your principal early, the savings are compounded over time.
By contrast, in the later years, your payments are going more toward the loan principal. Paying more wont reduce your total interest burden as quickly itll just build your equity in the home faster . Not that theres anything wrong with that, but were looking for the best uses for your money.
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Payoff In 14 Years And 4 Months
The remaining term of the loan is 24 years and 4 months. By paying extra $500.00 per month, the loan will be paid off in 14 years and 4 months. It is 10 years earlier. This results in savings of $94,554.73 in interest.
If Pay Extra $500.00 per month
|Remaining Term||14 years and 4 months|
|24 years and 4 months|
The Mortgage Payoff Calculator above helps evaluate the different mortgage payoff options, including making one-time or periodic extra payments, biweekly repayments, or paying off the mortgage in full. It calculates the remaining time to pay off, the difference in payoff time, and interest savings for different payoff options.
Why You Can Trust Bankrate
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. Weve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next.
Bankrate follows a strict editorial policy, so you can trust that were putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.
Our mortgage reporters and editors focus on the points consumers care about most the latest rates, the best lenders, navigating the homebuying process, refinancing your mortgage and more so you can feel confident when you make decisions as a homebuyer and a homeowner.
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Mistake #: Extending Your Loan Term When Refinancing
Refinancing can save you money in multiple ways, as it allows you to convert to either a shorter or longer loan term, depending on whats best for you. So if youre 10 years into a 30-year mortgage term, you could potentially refinance to a 10-year term and shave off 10 years. On the flip side, you could go for another 30-year term to lower your monthly payments.
However, loans with shorter terms tend to have lower interest rates, allowing you to both save on interest and reach full ownership much sooner. In some cases, though, refinancing could cost you more in the long run, especially if youre planning to extend your loan term. Before you refinance, its a good idea to crunch some numbers and figure out whether having a longer mortgage term really makes sense.
Dont forget closing costs either. If your lender agrees to let you roll those costs into your loan, you could end up paying more money. After all, youll now be on the hook for interest on a larger loan amount.
Extra Home Mortgage Payment Calculator
You may also come into some more money that you want to put toward your mortgage. For example, you may get a great bonus from work at the end of the year or at the completion of a special project. You may win some money through a raffle or a special trip to the casino. You may come into some inheritance that you want to use to pay down your mortgage quicker. You may just get a better job in which you’re making more money, or you may eliminate some other debts or free up some money in your monthly budget that you now want to put toward your mortgage to pay it off faster.
Paying extra money on your mortgage, whether you do it each month or you do it in periodic payments such as when you get a bonus, can help you to save money over the life of the loan. You’ll reduce the overall interest you have to pay. Depending on how much extra you pay, you could save yourself thousands in interest charges over the years.