How to Pay Off Your Mortgage Early

Tips to Pay Off Your Mortgage Faster

Paying off a mortgage ahead of schedule isn't ideal for everyone, but if it makes sense for you, here are some ways to make it happen.

Increase Your Regular Payments

Increase your monthly mortgage payments by an amount you can afford. It's key these extra contributions go toward your principal, not your interest or next month's bill, so check your loan terms and talk with your mortgage servicer to make sure.

A regular payment increase that adds up to even just one additional full mortgage payment annually can save you thousands of dollars in interest over the life of a 30-year mortgage. You can make extra payments manually when your budget allows, or add an ongoing principal-only amount to your regular payment (many lenders allow you to adjust your payment to include the extra amount).

You can also start making payments biweekly if your lender allows it; if they don't, put aside the cash to do it yourself. This way, you pay half your monthly mortgage bill every other week. Since it adds up to an extra payment per year, this is another way to save on interest over time.

Learn more >> How Does Mortgage Interest Work?

Put Windfalls Toward Your Mortgage

If you receive a windfall, like an inheritance, work bonus, tax refund or family gift, consider putting some or all of it toward your mortgage principal.

Occasional extra payments from windfalls might not accelerate your mortgage payoff as rapidly as increasing regular payments, but they can still significantly lower your long-term interest costs.

Refinance Your Mortgage

Replacing your current mortgage with a new one through a mortgage refinance could mean a shorter repayment period and possibly a lower interest rate, depending on factors like your home's value, current loan terms and your credit score.

You'll pay closing costs and origination fees on the new loan, which could negate your interest savings if you move before breaking even. But if you plan to be in your home for many years, reducing your loan term may save a significant sum.

Learn more >> How Does Refinancing a Mortgage Work?

Recast Your Mortgage

A mortgage recast is essentially a recalculation of your mortgage after you make a sizable lump-sum payment. Your lender adjusts the monthly payment and interest rate to match your lower balance for the remainder of the loan.

While your loan's term length and interest rate stay the same, the recast reduces the amount of interest you'll pay on the loan, as well as your monthly payment. A loan recast typically costs $250 to $500, which is significantly less than a typical refinance. Another plus: You may be eligible even if you don't qualify for refinancing or the current interest rates don't make refinancing worthwhile.

Mistakes to Avoid When Paying Off Your Mortgage Early

Wiping out your mortgage ahead of time can be a major victory, but it's not always the right call and can come with pitfalls. Aim to avoid these common mistakes if you plan to repay early.

• Failing to check for prepayment penalties: Some mortgage lenders charge a prepayment penalty if you pay off your mortgage early to make up for their loss of interest revenue. Review your loan agreement to see if your mortgage has this fee and, if so, its parameters. For example, some lenders only charge a prepayment penalty if you pay off the loan very early, such as within three or five years. Others may levy a fee if you reduce your loan's balance by more than 20% in a year. If your loan's terms contain a prepayment penalty, run the numbers to determine if the penalty cost is worth the savings in interest payments.
• Neglecting to save for emergencies first: If you've devoted all your focus to paying off your mortgage early, make sure it's not at the expense of other financial priorities, like building an emergency fund.
• Tapping into your retirement savings early: Pulling money from retirement accounts too soon often results in fees and tax penalties. Withdrawing retirement money early or taking a 401(k) loan could make sense in a dire financial emergency, but it's likely not worth the costs—and risks of reducing your retirement savings—just to get ahead on your mortgage.
• Not maximizing returns: Some financial experts believe paying extra on your mortgage is a wasted opportunity. That's because mortgage interest rates are low compared to other types of debts; if you instead put that extra money toward investing, you might ultimately make higher returns in the long run—though investment returns are never guaranteed.
• Losing tax benefits: Do you benefit from annual tax deductions on mortgage interest? Talk to an accountant to find out how your taxes could change without a mortgage (like receiving a lower refund) so you can determine if the loss is worth it.

Learn more >> Reasons Not to Pay Off Your Mortgage Early

When to Pay Off Your Mortgage Early

It's important to balance the advantages of paying off your mortgage early with the need to prioritize other financial goals, like saving for retirement or paying down higher-interest debts.

It can make sense to pay off your mortgage early when:

• You've already built an emergency fund
• You have adequate retirement savings (or have maxed out contributions)
• You don't have any outstanding high-interest debt
• You already have some non-retirement investments

On the other hand, if you're behind on other critical financial goals, or you're spending money on steep interest payments on credit cards or other loans, it may be better to prioritize those first. This could mean spending more on interest payments over the life of the loan, but it will give you time to chip away at other important financial goals.

Learn more >> Financial Priorities to Help You Plan