Want to Pay Off Your Mortgage Early? Strategies for Making It Happen

Do you want to pay off your mortgage early and join the growing group of homeowners who own their home outright? When the bank doesn’t own your house and you step onto your lawn, the grass feels different under your feet. It could be the effect of the financial freedom that comes with not being obligated to that monthly payment anymore!

Most people don’t know where to start once they decide to pay their mortgage off early. Don’t worry. We can show you some strategies so you join the ranks of debt-free homeowners. Let’s look at some of them below.

1. Make Room in Your Budget

The most effective method to pay off your mortgage faster is to pay more than the monthly amount due. This might sound obvious, but you also might not realize just how far a little extra money can go. Let’s say you have a 30-year mortgage of $250,000 with a fixed interest rate of 5% and have 25 years of payments remaining. This would mean your monthly payment is $1,342.05. If you just applied $20 more to your monthly payment you would shorten your repayment period by eight months and save $5,722 in interest expense.

You could simply cut out one fancy coffee a week or a couple of takeout lunches from your budget to come up with this $20 and be even closer to your goal of paying off your mortgage early.

2. Make Biweekly Payments

Another way to pay off your mortgage sooner is by paying your mortgage biweekly. With this method you split your monthly payment in half to make two smaller payments every two weeks. Most mortgages require a monthly payment, or 12 payments per year. If you switch to biweekly though, you end up making 26 payments per year – in effect one extra payment per year. This might not sound like much, but in the long term it makes a big difference. For example, let’s say you have a $300,000, 30-year mortgage, with a fixed interest rate of 5%. If you use the biweekly method, you will pay off your mortgage almost five years early and save almost $50,000 in interest expense!

3. Refinance Your Mortgage

The next way to pay off your mortgage early is to trade it in for a new mortgage with a lower interest rate and a shorter term. A good way to do this is to refinance from a 30-year mortgage to a 15-year mortgage. Most times the 15-year mortgage does come with a higher monthly payment, but if your income has risen and your cost of living has decreased it could really help you pay off your mortgage sooner if the payment is still within your budget. Let’s look at our prior example right above for more context. If you keep the 30-year mortgage, you will end up paying more than $279,000 in total interest over the life of the loan. If you switch to a 15-year mortgage with a lower 4.5% interest rate though, you end up saving more than $165,000 in total interest – and you will pay off your home in half the time!

Please be mindful though that there are costs associated with refinancing. These costs are typically 2% to 3% of the loan amount. So, you want to make sure that the interest savings outweigh these costs.

4. Recast Your Mortgage

A lot of people are familiar with refinancing a mortgage, but another option is recasting your mortgage. In a mortgage recast, you pay a lump sum, usually at least $5,000, towards the principal and then your lender adjusts your amortization schedule to reflect the new balance. This results in a lower monthly payment, but your loan and interest rate stay the same. If you continue to make your previous monthly payment amount and apply the extra money toward the principal this strategy can really help you pay off your mortgage quicker.

It is worth noting that not all mortgages are eligible for recasting. If you have a mortgage through the Federal Housing Administration or the US Department of Veteran Affairs your loan cannot be recast. Also, it would be wise to determine the different requirements and fees your lender has for recasting before exploring this option.

5. Use Unexpected Income

Have you ever received any unexpected windfalls? Holiday bonuses, tax returns, or an inheritance are a few examples. If so, what did you spend that money on? We know a lot of times you are inclined to spend that money on a new car you have been looking at, take an expensive trip, or upgrade your wardrobe. If you used this windfall instead and paid more on your mortgage it could really help you pay that mortgage off early.  In this case, since it is unexpected funds, the bonus is that it is not cutting into your regular monthly budget.

The information contained herein is for informational purposes only.  Any information is for illustrative purposes only, and is not intended to serve as investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Results will vary, and no suggestion is made about how any specific solution or strategy performed in reality. While MMBB made every attempt to ensure that the information is accurate, MMBB is not responsible for any errors or omissions or the results obtained from the use of this information.  MMBB is not liable for any success or failure that is directly or indirectly related to the use of the information contained herein.  The information contained herein does not constitute any financial, insurance, investment, legal, or tax advice.  In no event shall, MMBB and/or its fiduciaries, directors, officers, employees, or agents thereof be liable for any special, direct, indirect, consequential, or incidental damages or any damages whatsoever, whether in action of contract, negligence or tort, arising out of or in connection with the use of the information contained herein.