How to Pay Off Your Mortgage Early
Lower your monthly payments—or even pay off your mortgage more quickly—with these smart strategies.
If you own your home, you’re likely already very aware of the many benefits (both personal and financial) of homeownership. If you don’t own a home yet, but you’re ready to buy one, you’re in luck: Interest rates are at historic lows (hovering around 3 percent for a 30-year fixed loan). For people in either situation, once you own your home, paying off that huge debt is the next step. Fortunately, taking out a 30-year mortgage to buy a home doesn’t have to mean you’ll spend the next 30 years paying it off: Paying off your mortgage early is always an option.
Part of understanding your mortgage means understanding that the term of your mortgage only outlines how long you have to pay it off. If you want to reduce that mortgage debt more quickly—thus increasing your home equity, eliminating housing costs, and making room in your budget for paying off other debts or working toward other goals—you can always take steps to pay off your mortgage early.
If you’re financially secure (meaning you’re free of high-interest debt, you’re investing in your retirement, and you have an emergency savings account that will cover 6 to 12 months’ worth of vital living expenses), paying off your mortgage early makes sense—yes, even though interest payments are tax-deductible. Learning how to pay off your mortgage early (and then actually doing it) isn’t easy, but it does pay off, literally: You’ll save money on interest and then, once you’ve made that last mortgage payment, you’ll have extra room in your budget to use however you like. Here’s how to make it happen.
How to pay off your mortgage early
With mortgage and refinance rates at a new low, now could be a very smart time to refinance. (If you can—some lenders have been overwhelmed in recent months by the spike in refinance requests brought on by falling rates. Also, if you’ve lost income with the pandemic and associated economic recession, now may not be a good time to take on the upfront costs associated with refinancing.)
Borrowers who refinance now can get a rate of around 3 percent, 1 to 2 percent lower than most new, 30-year, fixed rate mortgages taken out between 2010 and now, according to data from Freddie Mac. Use the refinance calculator from HSH to see how much you could save, when you would recoup the upfront costs of refinancing, and more.
If your current mortgage rate is 4 percent or higher, you plan on staying in your home for at least a few more years, and you’re less than halfway through the length of your mortgage (10 years into a 30-year mortgage, for example), ask your current loan servicer or lender for its best refinancing rate, and then shop around for the best rate. You can always opt to work with an independent mortgage broker to find the lowest rate, says Keith Gumbinger, the vice president of HSH, a mortgage information site. If you can reduce your current interest rate by 1 to 2 percent, go ahead and refinance.
Just remember: Refinancing can reduce your monthly payments and the total amount you pay in interest, but it won’t necessarily decrease the time it takes to pay off your mortgage unless you commit to putting any extra money toward your principal. (More on this below.)
To help the process go smoothly, gather the following paperwork: proof of income (two recent pay stubs), copies of asset information, your tax returns for the previous two years, and proof of investments and other income. Additionally, be prepared to offer explanations for any recent income irregularities, credit inquiries, or job gaps. “Lenders question these situations because they could be an indication that you can't afford your current loan,” Gumbinger says.
Refinancing doesn’t have to be all about just getting a lower interest rate: It’s becoming increasingly popular for home owners—even those on tight budgets—to refinance their 30-year fixed-rate mortgages to 20- or even 15-year ones. Today’s low rates—which are even lower for 15-year mortgages than 30-year ones—allow you to do this while keeping your monthly payment fairly close to the current amount, says Erin Lantz, the director of Zillow’s Mortgage Marketplace, a real estate–valuation website.
Say you’ve been making payments on a 30-year, 6 percent fixed-rate mortgage of $200,000 for five years. If you refinance to a 15-year, 2.87 percent fixed-rate loan, for example, your payments will increase by less than $80 a month. Yet you would pay off the loan 10 years earlier, build equity faster, and save an astonishing $130,477 in interest.
Did you receive a tax refund? An inheritance? Or come across a small stash of cash? Consider applying some or all of this money to your principal balance.
“This is one of the best strategies you can employ, because you’re not required to make a higher monthly payment,” Gumbinger says. “And you didn’t count on having the money in the first place, so you won't miss it.” Making a single $5,000 payment on, say, a 30-year, 4.5 percent fixed-rate mortgage of $225,000 would save a homeowner more than $13,000 in interest and reduce her repayment term by 15 months.
Take note: Call your lender to verify that your mortgage doesn’t have a prepayment penalty. If it does, you could be hit with a fee—usually 1 percent of the loan amount.
Simply by making half your monthly payment every two weeks, you will chop off almost six years off a 30-year mortgage, says Greg McBride, a senior financial analyst at Bankrate, a personal-finance website. Plus, you’ll save tens of thousands of dollars over the life of the loan. All you have to do is contact your lender to change your payment schedule (be prepared to pay a onetime setup fee of $250 or more). Remember that twice a year, you’ll be making three payments a month instead of two, so be sure that there are enough funds in your bank account.
Every little bit—even if it’s just $20 or $50 a month—that you pay toward your principal is less that you’ll ultimately pay in interest. For instance, maybe you have a monthly mortgage payment of $954.83. If you round up the payment to $1,000 by putting in an extra $45.17, you’ll pay off your debt two years and five months early. (Use HSH’s round-up prepayment calculator to calculate your savings.)
“This is a great option for anybody with a little additional cash, especially someone who has already refinanced or who doesn’t qualify for refinancing,” Gumbinger says.