No matter how much they dislike debt, most people achieve home ownership with the help of a mortgage.
But while you might need a loan to get your foot in the home ownership door, that doesn’t mean you’re stuck with it for the next 30 years. By taking small steps to pay off your mortgage faster, you can save thousands of dollars in interest and eliminate the biggest debt on your personal balance sheet years ahead of schedule.
How to Pay Off Your Mortgage Early
If you want to pay down your mortgage faster, start by reviewing your papers to check if your loan came with a mortgage prepayment penalty. Fret not though — prepayment penalties usually lift after the first two or three years of the loan. And few of us can pay off a 30-year loan in under three years, no matter how high your savings rate.
If you’re dreaming of becoming truly debt-free, try these tactics to pay down your mortgage faster.
1. Make Biweekly Payments
If you want to pay off your mortgage early, but you don’t see any extra money in your budget, start here.
Call up your mortgage lender and switch to biweekly payments. But don’t pay the new amount they propose. Instead, pay half your current monthly payment. Schedule these payments to transfer automatically every two weeks.
By making 26 half-month payments each year, you effectively make 13 monthly payments: an extra month’s payment every year. You don’t notice the difference in your budget, but you pay down your loan faster and avoid unnecessary interest payments.
2. Make a Lump-Sum Payment
Have you received a sudden windfall, such as an inheritance, work bonus, or tax refund?
You can always put it towards your mortgage balance. That will skip some of the early high-interest phase of your amortization schedule, so more of each month’s payment goes toward principal. Which means every payment you make moving forward will lower your balance faster.
3. Mark Extra Mortgage Payments “Principal Only”
If you make your mortgage payment on the first of the month, and then on the 20th you send another regular payment, your lender may apply it as an early payment for the following month, rather than applying the entire amount to your principal balance.
But when you make your payment, you can mark extra amounts for “principal only.” The extra portion then goes directly toward your balance. You can specify “principal only” payments in your lender’s online payment system or when you send in a payment voucher by mail.
Of course, no one says you have to pay thousands of extra dollars at a time. Even an extra $50 here or $100 there can put a dent in your balance and remaining payments.
Every time you make additional payments and reduce your principal balance, you jump ahead in your amortization schedule. Which in turn skips that early high-interest period in your loan.
4. Refinance to a Shorter Term
Imagine you buy a home with a 30-year mortgage, and at the time, the monthly payment is all you can afford. A few years later you take a new job with a hefty pay raise, and suddenly you can afford much more each month.
You could simply send more money with each monthly or biweekly payment. And in most cases that’s precisely what you should do. Otherwise, you’ll face thousands of dollars in closing costs associated with a refinance loan.
But if interest rates have dropped since you took out a loan, or your credit score has improved, or you want to lock in the higher monthly payment to force yourself to pay down the loan faster, you can always refinance to a 15-year mortgage.
Don’t be afraid to negotiate and make lenders compete for your business. Sure, you should contact your current lender to ask about pricing. But you should also shop around to compare price quotes from other mortgage lenders to make sure you score the best deal.
Before committing to a shorter loan, read up on the pros and cons of refinancing and make sure you’re going to come out ahead. Often you’re better off just funneling more money toward your current mortgage to escape it faster.
5. Ditch PMI & Keep Making the Original Payment
If you pay down your home loan balance below 80% of your property value and you have a conventional mortgage, you can apply to remove private mortgage insurance (PMI) from your loan. Unfortunately, you may not be able to remove mortgage insurance from an FHA loan.
Removing PMI reduces your monthly payment. You can then put the savings toward other financial goals, such as paying down student loans, investing in your retirement account or brokerage account, or building an emergency fund savings account.
Alternatively, you can keep making your original payment amount and marking the extra as a “principal only” payment. This strategy puts more toward your loan’s principal and reduces your total interest expense over the life of the loan.
6. Recast Your Mortgage
If you want a lower monthly mortgage payment that reflects your lower loan balance, try recasting your mortgage.
It works like this: You make a large lump sum payment — typically at least $5,000 — and ask your lender to recast your loan. That resets your amortization schedule based on your new balance. Your loan term and interest rate remain the same, but your monthly payment becomes based on your current loan balance.
To pay off your loan faster, you can then continue making your previous mortgage payment amount. The extra money will go toward your principal balance.
In most cases, you can only recast conventional mortgage loans, not government-backed mortgages like FHA loans or VA loans.
7. Get a Loan Modification
You can sometimes arrange a loan modification with your lender. Modifications can include reducing your interest rate, switching from an adjustable-rate mortgage to a fixed-rate mortgage, or adding past-due payments to the end of your loan term.
Lenders typically only allow a loan modification if you run into financial hardship and have trouble making your payments. Loan modifications offer one way to avoid foreclosure, for example.
But if you do run into trouble, a loan modification can help you pay down your loan faster once you get back on your feet financially. For instance, a lower interest rate means a lower monthly payment. If you keep making your previous payment amount on a loan with a lower interest rate, you’ll knock down your balance faster.
Final Word
As great as it sounds to have no mortgage payment, you actually may be better off investing your extra money, rather than putting it toward your loan balance.
If you pay 3% or 4% interest on your mortgage, then you can earn an effective return of 3% or 4% by paying it off early. But the stock market has generated an average 10% return over the last hundred years — a far better return on your extra cash.
Besides, high-inflation environments favor borrowers, not lenders. Your mortgage payment remains fixed every month, even as the value of the dollar drops.
That said, as you approach retirement your appetite for risk dwindles. Paying off your debts offers the safest “investment” of all, with a guaranteed return equal to your interest rate.
And some homeowners simply sleep better at night knowing they own their house free and clear. You can’t put a price on peace of mind, no matter what the math says about the best return on your spare savings.
