Although most fixed-rate mortgages are for 30 years, it doesn’t have to take that long to pay it off. There are several strategies you can use to speed up the process, reduce the amount you pay in interest, and own your home sooner. However, it’s important to consider the opportunity costs of paying off an existing mortgage early versus investing in other financial options. If you’re ready to take the plunge and own your home free and clear, here are several actionable tips to help you pay off your mortgage faster.
Understanding Your Mortgage
Before diving into strategies for paying off your mortgage early, it’s crucial to understand your mortgage. A mortgage is a loan from a lender that allows you to buy a home. In exchange, you agree to make regular payments that include both principal (the amount borrowed) and interest (the cost of borrowing).
Knowing the key terms of your mortgage — such as your interest rate, loan term, and payment amount — will help you make informed decisions. Additionally, some mortgages have prepayment penalties for paying off the loan early, which could increase the cost of your early payoff. Be sure to review your mortgage documents or consult with a financial advisor to fully understand the terms of your loan.
How to Pay Your Mortgage off Early
1. Round Up Your Extra Mortgage Payments
You don’t need to make drastic changes to your budget to start chipping away at your mortgage. Even small changes can make a big impact. One effective method is to round up your mortgage payments.
For example, if your monthly mortgage payment is $921, send $930 instead. If you have a little more room in your budget, round up to $1,000. Over time, these small extra payments add up, reducing your loan balance faster and saving you money on interest.
Be sure to specify that any excess amount should be applied to the principal rather than future payments or escrow.
2. Increase Your Monthly Payments by One-Twelfth
Another simple strategy to speed up your mortgage payoff is to increase your monthly payments by one-twelfth of your annual mortgage payment. For instance, if your mortgage is $2,400 per month, increase it by $200 each month. By the end of the year, you will have made one extra payment — 13 full payments instead of the usual 12.
This approach can significantly reduce the length of your loan and save you a substantial amount in interest.
3. Apply Windfalls to Your Mortgage Principal
Windfalls, like tax refunds, work bonuses, or inheritance money, can be a great way to pay off your mortgage faster. Instead of spending these windfalls, apply them directly to your mortgage principal. For example, in 2024, over 104 million Americans received a tax refund, with the average amount being $3,138. Using this money to pay down your mortgage can make a huge difference.
Remember, the goal is to reduce the principal balance as much as possible. The more you can apply directly to the principal, the less you’ll pay in interest over time. File your taxes with ezTaxReturn today and use your refund to make a dent in your mortgage!
4. Use a Mortgage Payoff Calculator
A mortgage payoff calculator is a powerful tool to visualize how extra payments and lump-sum payments can shorten the length of your loan and reduce your interest payments. By entering your mortgage balance, interest rate, and monthly payments, you can see exactly how different payment strategies will affect your loan.
Key benefits of using a mortgage payoff calculator:
- Determine how much interest you could save by making extra payments.
- See how making lump-sum payments or paying biweekly can impact your mortgage payoff timeline.
- Compare scenarios to find the best strategy for your financial goals.
5. Refinance to a Shorter-Term Loan
If you plan to stay in your home long-term and can afford higher monthly payments, refinancing to a 15-year mortgage is an excellent option. A 15-year mortgage typically offers a lower interest rate compared to a 30-year mortgage. Refinancing can help you pay off your mortgage faster and save a significant amount on interest.
Before deciding to refinance, use a refinance calculator to compare your options. Remember, refinancing involves closing costs (about 3% of the loan amount), so ensure that the long-term savings outweigh the upfront costs.
6. Avoid Prepayment Penalties
Prepayment penalties are fees some lenders charge when you pay off your mortgage early. While not all mortgages have them, it’s important to check your loan documents to see if you’ll incur any penalties. Prepayment penalties can come in several forms:
- A percentage of the remaining loan balance.
- A flat fee.
- A set number of months’ interest.
To avoid these penalties:
- Review your mortgage documents to confirm if a prepayment penalty applies.
- Ask your lender directly about any potential penalties before making extra payments.
- Consider refinancing into a loan with no prepayment penalties.
7. Biweekly Payments: A Popular Strategy
Biweekly payments are one of the most popular strategies for paying off a mortgage early. With this strategy, you make half of your regular monthly payment every two weeks, which results in 26 half-payments (or 13 full payments) over the course of a year instead of the usual 12.
By making extra payments each year, you can reduce your loan balance faster and save on interest. However, be sure to check with your lender to confirm that they allow biweekly payments and that there are no hidden fees.
8. Consider Downsizing or Relocating
If your mortgage payments are too high and you’re open to a change, consider downsizing or relocating to a more affordable area. Selling your current home and moving to a less expensive one can free up equity that can be used to pay off your mortgage faster or reduce the size of your new loan.
While this approach may come with emotional and logistical challenges, it’s worth considering if you want to achieve financial freedom and reduce your debt.
9. Reevaluate Your Budget & Financial Priorities
To make significant progress in paying off your mortgage, reevaluate your budget and financial goals. Cutting back on discretionary spending can free up more cash to apply toward your mortgage. Consider things like:
- Canceling unused subscriptions.
- Reducing dining out or entertainment costs.
- Refinancing other high-interest debts to lower rates, freeing up funds for your mortgage.
By aligning your budget with your goal of paying off your mortgage early, you can stay focused and disciplined in achieving financial freedom.
Conclusion: Start Paying Off Your Mortgage Today
Paying off your mortgage early can offer tremendous financial benefits, including less debt, less interest paid, and more freedom. Start with simple steps like rounding up your payments or making one extra payment per year. You can also take advantage of windfalls, consider refinancing, or even downsize if it aligns with your goals.
Use the tools available to you, such as mortgage payoff calculators, and make sure you understand your mortgage terms, including any prepayment penalties, before making any changes. By adopting these strategies, you can own your home free and clear much sooner than you think!
File your taxes with ezTaxReturn for the biggest possible refund guaranteed, and use it to pay off your mortgage faster.
The articles and content published on this blog are provided for informational purposes only. The information presented is not intended to be, and should not be taken as, legal, financial, or professional advice. Readers are advised to seek appropriate professional guidance and conduct their own due diligence before making any decisions based on the information provided.
