Ever wonder what it would be like to own your house free and clear? No mortgage loan. No monthly house payments to a lender. To use the money that’s earmarked for the monthly mortgage payments and put it toward college tuition for the kids, retirement savings or even that European vacation you’ve been dreaming about?
If this describes you, stop dreaming. There are ways to pay off your mortgage faster! And paying off your mortgage can have benefits for you, such as freeing up monthly cash flow which was previously earmarked for the mortgage payment or avoiding the accrual of additional interest which can result in financial savings for you. Consider the following techniques, or a combination of them, to help you decide if paying off your mortgage early is the right decision for you.
- Refinance to a better rate or a shorter term (or both!)
- Apply extra funds to the mortgage balance
- Make an additional principal payment annually
- Pay more each month
(Use our Early Mortgage Payoff Calculator to see the long term benefits!)
There are benefits to each approach, so you’ll need to think through each one carefully and consider how they will fit into your personal financial situation, financial goals and financial future.
Let’s examine these four approaches to paying off your mortgage early
1. Shorten your mortgage term
Refinancing your mortgage to a shorter term (usually from 30-years down to 15 or 20-years) can help you pay off your loan faster under certain conditions. Keep an eye on interest rates and you could end up refinancing with a double advantage – a shorter term and a lower rate. We’ve seen historically low interest rate trends in 2020-21. This will move you more quickly out of mortgage debt by cutting your interest costs over the life of the loan. Just be sure to examine the big picture and your overall household budget, including whether you have the funds to not only cover all of the closing costs associated with a refinance, but more importantly, cover (what will likely be) higher monthly mortgage payments when going from a 30-year amortization to a 15 or 20-year amortization. Even if you qualify for a shorter term at a lower rate, your monthly payment may increase. Shortening the term of your mortgage loan may be a great option if your personal income has considerably increased since you took out that original mortgage, so you can now more comfortable cover a higher monthly mortgage payment. Use our home refinance calculator to give you an estimate of what your monthly and total loan payments could look like with a refinance.
2. Put extra funds toward your mortgage
Let’s say you inherit some money, earn an annual bonus, or come into an unexpected windfall? It will take discipline but use a large portion or all of these proceeds to make an additional payment toward your principal balance. Are there annual sums of money you can usually count on? (Hello, tax refund!) Using these one-time sources of income to pay a large sum towards your mortgage loan may not affect your monthly budget and will help reduce your repayment term, perhaps by several years, and cut the total interest owed on the life of the loan.
3. Make an extra payment every year
We’re all used to making 12 mortgage payments per year, but what if you make it a baker’s dozen? If you can put an income tax refund, commission check or bonus towards an extra monthly payment, then you can make 13 total payments for the year . And for some people, an easier approach might be to see if your lender offers an automatic flexible drafting program. For instance, at AmeriSave, we offer a program known as FLEX that allows borrowers to make two semi-monthly half payments each month in place of one full payment. This program provides borrowers not only with added convenience but also could save them money over the life of the loan.
4. Pay more each month
Instead of waiting until the end of the year to make an extra payment, you can pay more toward principal each month. This option is ideal for those who can’t swing a full additional payment each year but still want to chip away at the mortgage because, well, every little bit helps. Use any extra money you have to round up your regular payment each month or by adding an extra $50 or $100 to it. Or maybe you can cut back on buying your morning cup of joe or eating out less and then put the proceeds toward your mortgage. Anything extra you can put toward your mortgage is helpful if you are motivated to pay off your mortgage early. Use our mortgage payoff calculator to see how quickly you can pay off your loan by paying extra each month. Again, direct your servicer to apply extra payments towards the principal balance.
Before you get started on paying off your mortgage balance early, ask yourself these questions
- Does my loan have a prepayment penalty? (If you’re not sure, talk to your lender.)
- Can I make extra payments at any time, and how do I ensure those extra payments are applied to the principal balance? (Again, talk to your lender or loan service provider.)
- Where am I within the loan term? Keep in mind that prepaying on a fixed-rate loan at the beginning of the term can be beneficial because paying down the principal balances reduces the interest that will accrue over the life of the loan. By reducing the principal balance early in the term of a mortgage, a higher percentage of each payment goes towards principal over interest. As the loan ages, more of the payment will towards principal versus interest. In amortization schedules, each month’s interest is determined by the total amount owed (interest + principal) so you’ll be reducing interest over the term of the loan.
- How long do I plan to stay in this home? (If you plan to move in the next few years, refinancing may not be an ideal option due to closing costs and resetting amortization schedules.)
- Can I pay more towards my mortgage without jeopardizing my family’s financial situation, including our emergency fund?
- Does it make more financial sense to put my extra money into investments or retirement accounts now? Or will paying off my mortgage early mean I can repurpose those funds and then invest them?
- Will I lose anything in terms of a mortgage interest tax write-off by paying off my mortgage early?
- Should I consult with my financial advisor and loan provider when making these type of financial decisions and deciding to pay more aggressively on my mortgage? (Hint: Yes!) Work with them to analyze your loan payment schedule and to fully understand how paying down your mortgage will help you at different points in the loan term.
AmeriSave works alongside borrowers throughout every stage of the mortgage process, and that includes helping borrowers who want to shorten the lifespan of their mortgages. Talk to us about your financial goals, whatever they are, and let us be your advocate as you work to meet them.
*Please be advised that AmeriSave Mortgage Corporation and its affiliates do not provide tax or financial advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax or financial advice. We encourage you to consult with your own tax or financial advisors about the tax or financial implications of your home loan and to identify a plan that works best for your particular situation.