It’s possible to pay off a mortgage faster than your mortgage term if you make extra payments or refinance. If you decide to repay your home loan early, you’ll be debt-free sooner, and you can also save a significant chunk of change on interest charges. But early repayment can also get in the way of your other financial goals and even lead to less wealth in the long run. It’s important to consider your financial situation before paying off your mortgage early.
Key Takeaways
- If you repay your mortgage over a shorter period, you’ll save money on your overall borrowing costs.
- You can potentially save up to thousands of dollars in interest over the life of your loan with early repayment.
- One way to pay off your mortgage faster is by refinancing to a lower interest rate.
- You can also make extra payments towards your principal.
- It may not be a good idea to pay off your home loan faster if you have other high-interest debt, insufficient savings, a high opportunity cost, or other goals that require you to save.
Evaluate Your Current Financial Situation
While paying off your mortgage early saves you money in the long run, it can affect your immediate budget. When you put more money toward your debt, you have less to spend. So, consider your financial situation and your future goals before choosing a strategy to pay your mortgage loan faster.
Questions you may want to ask yourself include:
- Do I have enough discretionary income to pay my mortgage faster? Paying off your mortgage faster requires you to have extra cash in your budget. This would be money that isn’t already allotted to your housing expenses and other necessary costs. If you’re refinancing, you will also need extra cash. Even if you refinance at a lower rate that results in a lower mortgage payment, you’ll need to pay closing costs now.
- Is my emergency fund secure? Most financial experts recommend keeping between three and six months of expenses in a savings account as an emergency fund. You may need more than that if your monthly income varies or there’s a high risk of layoffs in your field. If paying off your mortgage early would affect your emergency fund, you may want to delay this strategy, especially in an uncertain economy.
- Is my mortgage rate lower than available high-yield savings rates? It’s important to compare your borrowing costs to your opportunity cost when deciding whether to repay your mortgage faster. You can potentially earn greater than 5% from high-yield savings accounts, certificates of deposit (CDs), and treasury bills, all of which offer the safety of government backing. If you have a fixed mortgage with a lower rate, (as is the case for many homeowners who bought their homes in the decade before 2022), saving your extra cash may yield greater wealth than using it to pay down your mortgage.
- Do I have other debts with higher interest rates? If you have credit card debt or other debt with an interest rate higher than your mortgage rate, consider tackling that higher-interest debt before putting extra money towards your mortgage.
- Do I have other financial goals? Even if you have plenty of savings, extra funds, and a high mortgage rate, paying your mortgage early might not be your first priority. You may have other financial goals like starting a family, saving for college, or investing in real estate. If you’re unsure how to prioritize your goals, consider consulting a financial advisor.
Mortgage Payoff Strategies
There’s more than one way to pay down your mortgage early.
Make Extra Mortgage Payments
If you have extra cash, such as from a raise, tax refund, or investment returns, you can reduce your loan costs by making additional mortgage payments. This strategy is especially helpful if your loan-to-value ratio still exceeds 80%, since extra payments could help you remove private mortgage insurance earlier, which would result in lower monthly costs.
Make sure the extra mortgage payment goes towards your principal rather than other mortgage costs. Some home loan agreements require the borrower to make a separate payment with a written request for the funds to be paid toward the principal balance, so be sure to read your contract.
Refinance at a Lower Interest Rate
Refinancing is taking out a new mortgage to pay off your old one, usually with the goal of getting a lower interest rate. Depending on the new loan term, refinancing may reduce your overall borrowing costs and/or your monthly payments. Some homeowners also refinance to avoid the unpredictable mortgage payments associated with adjustable-rate mortgages in the variable period.
If your goal is to pay off your mortgage faster, you’ll achieve that by getting a new mortgage with a shorter term. This may mean a higher monthly payment unless you can also get a significantly lower interest rate compared to your existing mortgage’s rate. You can use a refinancing calculator to determine your new monthly payment and figure out how much you’ll save over time.
If your credit score has fallen or the federal funds rate has increased since you applied for your existing mortgage, refinancing may cause a higher interest rate. If that’s the case, you’re better off choosing a different mortgage payoff strategy.
Also, keep in mind that you’ll pay closing costs when refinancing. You’ll want to calculate the break-even point, which tells you how long it will take for your savings to exceed the cost of the refinance. You can use an online mortgage calculator to determine your break-even point. If you plan to move before you recoup your loan costs, it’s generally not wise to refinance.
Use Additional Income
If your monthly budget hasn’t changed, but you’ve received a windfall like a bonus, tax refund, or inheritance, you can make a lump sum payment towards your mortgage. As with the extra payment strategy, you’ll want to ensure the lump sum payment is applied to your mortgage principal.
Before using this strategy, check your mortgage agreement for a prepayment penalty clause, which would allow the lender to charge you a fee for repaying your loan early. This typically won’t apply to you if you’re more than five years into your mortgage (or three years for home loans made since 2014). Some mortgages don’t have a prepayment penalty at all. But it’s a good idea to check before making a large payment toward your mortgage.
If you have a conventional mortgage loan, you may be able to use the lump sum payment to recast your mortgage and reduce your monthly payments going forward. This refinancing alternative doesn’t require a credit check or closing costs, but it also won’t reduce your interest rate or term.
Make Biweekly Payments
Some lenders allow biweekly mortgage payments instead of monthly payments. You may need to apply for the option, so you should get the details from your lender before taking this route. If your lender charges additional fees for making biweekly payments, you’re likely better off making a separate extra payment each year.
Making biweekly payments is equivalent to paying 13 monthly mortgage payments each year. Like other methods of putting extra cash toward your principal, biweekly mortgage payments allow you to pay off your mortgage faster and reduce your overall borrowing costs. A biweekly payment schedule also corresponds with the payday schedule for many hourly and salaried employees, which can make it easier to manage your finances.
Seek Professional Advice
If your financial situation is complex and you’re not sure whether you should take steps to repay your mortgage early, consider asking a professional for guidance. One option is to speak with a financial planner, who can evaluate the various factors affecting your finances and help you develop a detailed plan.
Make sure to evaluate the professional’s background before writing a check for their services. You can also get low-cost assistance from a HUD Housing Counselor.
How Can I Pay Off My 30-Year Mortgage in 10 Years?
There are a few ways to repay a 30-year mortgage in 10 years. You can refinance your home loan with a 10-year term, which will save you money in the long run as long as it doesn’t cause a higher interest rate. Or, you can put enough extra money toward your principal to repay your mortgage within 10 years, either with a lump-sum payment or extra payments over time.
What Happens If I Make Two Extra Mortgage Payments Every Year?
Extra mortgage payments allow you to reduce the amount of time you hold mortgage debt and save you money on interest. You can use an online calculator to figure out how much money you’ll save by making two extra mortgage payments, and how quickly you can get out of debt.
What Is the 10/15 Mortgage Rule?
The 10/15 mortgage rule is a concept made popular by a real estate social media influencer. It suggests that homeowners who can afford substantial extra payments can pay off a 30-year mortgage in 15 years by making a weekly extra payment, equal to 10% of their monthly mortgage payment, toward the principal. Whether this is a good strategy depends on a number of factors, including your potential investment income from using the money to invest in other assets.
What Are the Benefits of Paying Off Your Mortgage Faster?
One benefit of paying your mortgage early is that you’ll save money on interest that could add up to thousands of dollars over the life of your loan. Additionally, owning your home free and clear could make it easier to weather a job loss or income reduction in the future—as long as you didn’t use your emergency savings to pay down your mortgage.
The Bottom Line
Paying off a mortgage early can help you become free of debt sooner while reducing your overall mortgage costs. You can pay off a mortgage faster by refinancing or using a few different strategies to pay extra money toward your principal. But if paying your home loan early causes you to miss out on more lucrative opportunities or puts too much strain on your budget, it might not be the best choice for you. You should also pay off any higher-interest debts before you put any extra money toward your mortgage.
