How to Pay Off Your Mortgage Early and Save Thousands
If you own a home, your mortgage payment is probably your biggest monthly expense.
But what if you could eliminate that huge financial obligation ahead of schedule — and own your home free and clear?
There are a few tried-and-true ways to pay off your mortgage early. This includes simple changes like making an extra monthly payment as well as more complex and expensive options such as refinancing.
Paying off your mortgage early doesn’t make sense for everyone. It’s important to consider your circumstances, including your monthly budget. But if your top priority is paying off your mortgage faster, these tips can help you make it a reality.
Benefits of Paying Off Your Mortgage Early
Why pay off your mortgage early? The most obvious reason is for financial freedom, but there are additional benefits.
1. Reducing Interest Costs
Here’s one of the most significant advantages: savings on interest payments. As mortgages accrue interest over the life of your loan, the amount you pay on interest can add up. Making extra payments on your mortgage or otherwise paying it off early allows you to decrease the total amount of interest paid, potentially saving thousands of dollars.
2. Eliminating Monthly Payments
Paying off your mortgage early means freedom from monthly payments. You can increase your cash flow and enjoy some financial flexibility. Those funds can be redirected to other opportunities like investments, retirement, travel, savings or hobbies.
3. Increasing Home Equity Faster
The faster you pay down your mortgage, the faster you can obtain home equity. The more you reduce your principal balance, the more quickly you can enjoy equity in your home. This benefit is a plus if you plan to sell your home or use your equity for other financial opportunities.
4. Peace of Mind
For some folks, the peace of mind that comes with being debt-free is priceless. Eliminating one of your biggest financial obligations, your mortgage, can be the key to reducing your stress levels.
5. Increased Financial Flexibility
Want to change jobs, start a business, retire early or take a sabbatical? With your mortgage paid off, these dreams are easier to make a reality. You can reinvest funds into these opportunities, knowing you own your home free and clear.
The 4 Best Strategies to Pay Off Your Mortgage Early
The good news is there are plenty of ways to pay your mortgage early. Each one requires a different level of commitment and cash flow. We’ve rounded up our top four strategies for paying off your mortgage early that you can do whether you have a little or a lot of wiggle room in your budget.
1. Make One Extra Payment a Year
Making 13 mortgage payments in a year instead of 12 may not sound like a big deal — but it really adds up.
How effective is this strategy?
One extra payment per year on a $250,000 30-year fixed-rate mortgage with a 3.5% interest rate means you’ll pay off your mortgage debt four years early and save more than $20,000 in interest.
There are a couple ways you can squeeze extra mortgage payments out of your yearly budget.
One option is depositing one-twelfth of the monthly principal into a savings account each month. So, if your monthly principal is $850, set aside about $71 a month.
At the end of the year, empty the account to fund your 13th mortgage payment.
If you’re worried about dipping into savings, you can always pay one-twelfth extra on your mortgage each month. So, instead of paying $850, you’d pay $921.
This way, you’ll pay the equivalent of an extra payment by the end of the year.
2. Pad your Payment Each Month (If You Can Afford It)
It might not always be possible to make that extra mortgage payment each year, or set aside one-twelfth of the principal each month.
If there’s not much wiggle room in your budget, you can still take smaller steps to chip away at your principal.
Even $50 a month in extra payments can result in a dramatic drop in your loan balance and how much interest you pay over the life of your loan.
One strategy is to simply round up your mortgage payment to the nearest $100 when you can afford it. So if your mortgage payment is $875, pay $900 instead. (As always, ask your loan servicer to put the difference toward the principal).
If you want to take a small, gradual approach, you can increase your mortgage payment each time you get a raise at work.
You don’t have to put all your bumped up take-home pay toward your mortgage (that’s probably not a great idea anyway). Instead, apply a percentage.
Let’s say your new raise at work means $600 more in your bank account each month. If your top priority is paying off your mortgage as quickly as possible, assign 70% to 80% of your new raise to your monthly payment (in this case $420 to $480).
If your dollars are better spent on different financial priorities, like beefing up your 401(k) contributions or paying down higher-interest debt like credit cards or student loans, then assign just 10% to 25% of your new raise to your mortgage ($60 to $150 using the former example).
This gradual ramp-up might be a good strategy if you’re young and plan on steadily increasing your annual income over time.
3. Recast Your Mortgage Loan
An alternative to refinancing your mortgage is recasting the loan.
Mortgage recasting is the process of reducing your mortgage balance by paying a lump-sum on the principal. Your mortgage lender then adjusts your repayment, or amortization, schedule to reflect the new balance.
The result: Smaller monthly mortgage payments. You’ll also save money on interest over the life of your loan.
Recasting has a few benefits. First, your monthly payments get smaller, not larger.
You’ll also pay significantly lower closing costs compared to refinancing. Recasting fees are typically a few hundred dollars — not several thousand.
Recasting won’t change your interest rate, though. That’s nice if your interest rate is already low — not so nice if it’s high.
It’s also debatable if recasting your loan will actually help you pay off your mortgage faster. After all, it doesn’t shorten your loan term — it just reduces how much you pay each month.
But at least in theory, lowering your payments can make it more feasible to pay off your mortgage early. If you’re paying $1,200 a month instead of $1,600, it might be easier to make that one extra payment a year, for example.
Recasting isn’t an option for everyone.
You need a pretty big chunk of cash to put down on your mortgage balance. Lenders often set a minimum amount, such as $5,000 to $10,000. Others may require 10% of your outstanding mortgage balance.
If you’ve recently come into an influx of extra money, mortgage recasting may be an attractive option.
However, not all mortgage lenders offer recasting and not all loans are eligible (FHA loans and VA loans, for example, don’t qualify).
In that case, you can still make a lump sum payment on your own (we’ll talk more about that next). Doing so still decreases your loan balance, but your monthly payments won’t get any smaller.
4. Put Any Windfall Toward Your Mortgage
If you’re serious about getting out from under the major monthly expense of a mortgage payment, consider putting unexpected cash toward the principal.
Tax refunds, work bonuses and inheritance payments give you a chance to pay off a chunk of your mortgage without significantly impacting your monthly budget.
Other windfalls can include profits from selling a car, gaining access to trust money, cashing out an investment or winning the lottery.
Because VA and FHA loans can’t be recast, making a big payment toward the principal yourself is a nice alternative. Plus, you won’t pay any closing fees.
You’ll need to decide if stashing your newfound cash in an illiquid asset is the right move for your finances. But it’s a good option if you’re laser focused on paying your mortgage off early.
Just make sure to coordinate with your loan servicer so the money goes toward reducing your principal, not paying off interest.
How Extra Payments Can Reduce Mortgage Debt
Wondering how making extra payments on your mortgage can help pay down your loan? Essentially, this strategy saves on interest and reduces the length of your loan. By making extra payments toward the principal, you reduce the amount of money that incurs interest. So, more of your monthly payment goes toward reducing your principal balance.
Let’s review how this strategy plays out on 15 and 30-year mortgages.
30-year Mortgage Example
Say you have a 30-year mortgage with an interest rate of 4% on a loan amount of $300,00. Your estimated monthly payment (principal and interest) is $1,432. Without extra payments, you’ll pay a total interest over 30 years of $215,609. That makes your total payment $515,609, no small chunk of change.
With an extra payment of $200 per month (toward the principal), your new monthly payment would be $1,632 and your new loan term would be approximately 25 years. Thanks to this strategy, you’ll save $36,645 on interest for a total interest paid amount of $178,964.
15-year Mortgage Example
For the example of a 15-year mortgage, let’s say you take out a loan of $300,000 with an interest rate of 3.5%. Your monthly payment (principal and interest) is $2,143. Without extra payments, the total interest paid over 15 years would be $72,305 for a total payment (principal and interest) of $372,305.
If you make an additional $200 payment each month (toward the principal), your new monthly payment will be $2,343. Your new loan term would be approximately 13 years with a total interest paid of $55,000. Your total savings on interest in this scenario amounts to $17,305.
The Impact
Whether you have a 30 or 15-year mortgage, you’ll find that following an extra payment strategy like those outlined above will significantly shorten the life of your loan. You’ll also pay down your principal faster, which reduces the amount of interest paid over time.
Biweekly Payment Plans and Mortgage Payoff
Another option is to set up biweekly payments. This strategy is an easy way to cross off 13 mortgage payments in a single year.
Some mortgage lenders let you sign up for this option, which allows you to make half of your mortgage payment every two weeks. This results in 26 half-payments — or 13 full monthly payments — each calendar year.
That means you’ll pay less interest over time while lowering your principal balance at an accelerated rate. Biweekly payments can be a good strategy for homeowners who get paid every other week. This way you can schedule your house payments around your paydays.
However, some lenders may charge extra fees if you opt for biweekly payments. Others may not offer the service at all. If that’s the case, explore your other options, such as setting aside a little extra cash each month or making a slightly larger monthly payment like we discussed earlier.
You’ll still reap the benefit of making one extra payment each year — you just won’t get the convenience of your lender creating a monthly payment split for you.
Refinancing to a Shorter-Term Mortgage
Another way to pay off your mortgage early is to refinance your loan for a shorter term and/or at a lower interest rate.
For example, you could refinance a 30-year mortgage for a 20-year or 15-year term. The monthly payment will almost certainly be bigger and you’ll pay closing costs, though those are generally folded into the loan balance. Regardless, refinancing your current loan can be a good idea because it dramatically reduces your long-term interest payments.
Here’s an example of what refinancing to a shorter term might look like.
Let’s say you have a 30-year mortgage that’s been paid down for eight years. When you bought your home for $349,000, you put a 6% down payment on it. With a 4.5% interest rate, you’d still owe about $439,000 in principal and interest for the final 22 years of the loan.
If you refinanced into a 15-year mortgage at a 3% interest rate, your monthly mortgage payment would increase by roughly $250. But you’d eliminate your loan seven years ahead of schedule and save yourself $94,000 of interest in the process.
A shorter term on a mortgage means it goes away sooner, but you’ll need to allocate more of your monthly budget for housing.
That’s because refinancing to a shorter term will likely increase your monthly mortgage payments — especially if you refinance earlier in the life of the loan. It makes sense — the repayment period gets crunched down, so you have to pay more over a shorter period.
On the other hand, if you bought your house longer ago when interest rates were higher, refinancing now at a lower rate could mean only a small increase in your monthly payment. But you’ll still enjoy big savings long-term.
You need to make sure your monthly budget can handle this added expense. If your finances are tight, paying hundreds of dollars more a month on housing is risky. It can limit your ability to meet other financial priorities, like saving for retirement or maintaining a healthy emergency fund.
If you think your income may decrease in the future, it’s wise to explore other options, like contributing extra cash to your mortgage when you can afford it like we discussed earlier.
You’ll also need to consider refinancing closing costs, which typically total 2% to 3% of your loan principal amount. As an example, a $200,000 mortgage refinance could cost you $4,000 with a 2% refinancing fee.
You’ll want to make sure those fees don’t negate the interest savings, otherwise refinancing to pay off your mortgage early doesn’t make much sense.
Common Mistakes to Avoid When Paying Off Your Mortgage Early
Before you decide to pay off your mortgage early, take note of these common pitfalls which could impact your financial wellness.
1. Not Considering Other Financial Goals
Owning your home free and clear is a worthy financial goal — as long as it doesn’t put you at risk of not achieving other important financial objectives. Before you divert all extra cash into your mortgage, make sure you have a healthy savings account and are contributing to your retirement account.
2. Ignoring Prepayment Penalties
Most loan servicers let you pay off your mortgage early without penalty — but this isn’t always the case.
Some companies only accept extra payments at specific times. Others may charge prepayment penalties. Check with your loan service provider to see if any restrictions apply to extra mortgage payments.
You also need to clarify that you want your extra payments applied to the principal of your loan — not to interest or the next month’s payment. By hacking away at the principal, you reduce how much you shell out in interest over time.
Lenders usually give you the option online to apply extra payments to the principal only. If this option isn’t clearly marked, reach out to your loan company for instructions. Understanding these terms is essential for avoiding unexpected costs.
3. Overestimating Interest Savings
Before paying down your mortgage early, calculate how much you’ll save on interest based on your repayment strategy. It’s important to consider other opportunities for the cash you would divert to extra payments. You may find investing that cash in other avenues could yield higher returns than the interest saved from early mortgage payoff.
4. Overlooking Tax Implications
In some cases, mortgage interest can be tax-deductible. If you pay off your mortgage early, you’ll miss out on this deduction. That can be worth it but it depends on your financial situation. To be sure, consult with a tax professional so you fully understand the implications for your tax situation.
Rachel Christian is a Certified Educator in Personal Finance and a senior writer for The Penny Hoarder.
