6 Ways to Pay Off Your Mortgage Faster
If you’re a homeowner with a mortgage, you may have felt daunted by the prospect of making payments for another 10, 20, or 30 years before you finally own your home free and clear. Wondering if you can – or should – pay off your mortgage faster? Read on to learn some pros, cons, and helpful tips.
Should You Pay Off Your Mortgage Early?
Making additional payments toward your mortgage can offer big returns in the long run, but it’s not always the right decision for everyone. Here are some points to consider before you decide on a course of action:
- The first thing to keep in mind is that when you pay down your mortgage faster, you also reduce the amount of interest you pay. As you’ll see in the examples below, relatively modest extra payment plans can mean thousands in savings over the length of the loan.
- Speaking of interest – assess whether investing your money elsewhere could earn you more interest than you could save with early loan payoff. Some experts might recommend putting extra cash into market-based investments or income-generating assets. Just remember that all investments come with some amount of risk.
- If you have student loans, credit card debt, or other higher-interest debt, paying these down first is likely the best move.
- Consider your cash flow. Making extra payments now will free up cashflow later on in life – such as in retirement, when you might want to use it to travel. But you don’t want to tie up all of your liquidity and strain your household budget to its limit. Make sure that you have a sound emergency fund (enough to pay three to six months of expenses) and are on track with retirement savings before embarking on optional strategies like early mortgage paydown.
- One last important detail – find out if you’re subject to a prepayment penalty (a fee that some lenders charge if you pay off your loan ahead of schedule). If so, you’ll definitely need to factor that into your cost/benefit analysis.
6 Strategies for Paying Down Your Mortgage Faster
If you’re thinking that making extra payments toward your home loan might be a smart choice, here are some ways you can make it happen:
- Make an Extra Payment Per Year- One of the simplest ways to pay off your mortgage faster is to save up an extra mortgage payment over the course of the year and apply it directly to your principal (principal-only).
- Switch to Biweekly Payments- A typical mortgage is paid monthly, but you may have the option to make half your monthly payment every two weeks instead. You might find this makes household budgeting easier (if you get paid biweekly too), and you’ll pay down your loan faster because there are two months a year when you’ll make an additional half-payment. You’ll effectively be making 13 payments with the additional payment going toward principal. Not every lender accepts biweekly payments, discuss your payment options with your lender.
- Round Up Your Payment- It may not sound like much, but simply bumping up your monthly mortgage payment to the nearest hundred dollars can add up to major savings over time.
- Invest your Windfalls- If you simply can’t work extra payments into your monthly budget, you can choose to put any unexpected funds you receive over the years toward your mortgage. Windfalls might come from bonuses, tax refunds, gifts, inheritances, or even a winning scratch-off ticket.
- Refinance Your Mortgage– If you use a mortgage refinance to shorten the term of your loan – say, from 30 to 15 years – you can chop off years of repayment and potentially get a lower interest rate as well.
- Recast Your Mortgage- Recasting is a way to refresh a loan without going through the full refinancing process (and paying refi fees). This may be a good strategy if you have cash on hand to make a sizeable one-time payment toward the principal balance of the loan. Your lender can then create a new amortization schedule with a shorter loan term and less accrued interest. It’s important to know that recasting your mortgage will not change the interest rate or the terms of your loan.
You’re Paid in Full! Now What?
After you make your very last mortgage payment, here’s what will happen:
- First, you’ll breathe a big sigh of relief!
- You can expect to receive a canceled promissory note, mortgage release document, and/or certificate of satisfaction from your lender, indicating that you don’t owe them anything more on the home loan.
- Your lender may also notify your local recording office that you are now the sole title holder on the property – but sometimes this paperwork is left to you. Check in with your lender as you approach your final payment to go over what steps will need to be taken and by whom.
- If there’s leftover money in your escrow account, your lender will issue you a refund. You’ll be responsible for making homeowners insurance and property tax payments from here on out. Contact your insurance agent to have your lender removed from your policy and keep coverage in place, and find out how taxes are charged in your area.
- The last step is to obtain a free credit report and make sure that it accurately reflects that there is no outstanding mortgage in your name.
The Last Word
Homeowners are constantly faced with important questions – like whether to pay down their mortgage faster – and there are seldom any one-size-fits-all answers. When you work with the right lender, you’ll have a trusted partner that will help you make the smartest choices for your individual circumstances. For more information or to ask any questions you may have, contact one of our Mortgage Experts.