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6 Simple Ways to Pay Off Your Mortgage Early

For most people it’s hard enough to make the regular payments for the mortgage, but if you can come up with something different you’re definitely going to save a great deal of money. Here are 6 ways to pay off your mortgage early:
Author: Russell White
Russell White

Writer, Contributor

Experience

As a finance geek and Content editor with 13 years of journalism experience, Russell makes sure every article has the right flow, edits for accuracy, and consumer value. In addition, Russell contributes his own ideas about budgeting, savings, and credit cards.

Review & Fact Check: Baruch Mann (Silvermann)

Russell White

Writer, Contributor

Experience

As a finance geek and Content editor with 13 years of journalism experience, Russell makes sure every article has the right flow, edits for accuracy, and consumer value. In addition, Russell contributes his own ideas about budgeting, savings, and credit cards.
Author: Russell White
Russell White

Writer, Contributor

Experience

As a finance geek and Content editor with 13 years of journalism experience, Russell makes sure every article has the right flow, edits for accuracy, and consumer value. In addition, Russell contributes his own ideas about budgeting, savings, and credit cards.

Review & Fact Check: Baruch Mann (Silvermann)

Baruch Mann (Silvermann)

Financial Expert, The Smart Investor CEO

Experience

Baruch Mann (Silvermann) is a financial expert and founder of The Smart Investor. Above all, he is passionate about teaching people how to manage their money and helping millions on their journey to a better financial future.

You can trust the integrity of our unbiased, independent editorial staff. We may, however, receive compensation from the issuers of some products mentioned in this article. See how we make money.

Table Of Content

When it comes to a home mortgage most people get one for somewhere around 25 to 30 years. Of course, there’s always the option to get something longer or even something shorter. After all, a 30-year mortgage means that you’ll be paying off your house for about a third of your lifetime and that’s definitely going to be a long time.

Chart: Total U.S. Mortgage Originations 2000 – 2021 (in billion USD)

What you should know, however, is that your house actually can be paid off early. Usually, there’s no prepayment penalty (though you’ll have to look at your mortgage agreement) and that means you can pay it off whenever you have the money. For most people it’s hard enough to make the regular payments for the mortgage, let anyone paying extra, but if you can come up with something different (like we’ll talk about here) you’re definitely going to save a great deal of money and you could end up increasing the amount of money in your household budget.

Is There a Penalty For Paying Off The Mortgage Early?

There is usually a pre-payment penalty if you decide to pay off your mortgage early. Most lenders add this is on an incentive because they want borrowers to pay back the mortgage slowly over time. This allows them to make money from interest.

It doesn’t always happen when you make payments early though or when you make several payments at the same time. Most lenders allow you to pay up to 20% of your mortgage early. However, if you pay the entire mortgage off early, you may face fees.

Do I Save or Lose Taxes When Paying Off The Mortgage?

Once your mortgage is paid off, you will stop paying interest and will lose the ability to write off the expense. This will increase your taxes. If you aren’t sure whether you will lose or save money on your taxes, you need to consider if you will pay more in interest than what you would save in taxes.

If your mortgage loan is very high in interest, it would be better to pay off and owe more in taxes than keep paying the very high interest.

Is it a Good Idea to Pay Off Your Mortgage Early?

Those who already have enough money to cover an emergency are the best candidates for early mortgage payoffs. Before you start focusing on paying off your mortgage, you should have at least 3 – 6 months' worth of household expenses in liquid cash. This is due to the fact that taking money out of your home is much more difficult than withdrawing money from a savings account.

Here are a few questions to help you decide which option is best for you:

  • Do I Have a Sufficient Reserve – Before you pay off your mortgage early, make sure you have enough savings to maintain your current standard of living for at least three months.
  • What would you do with the money you'd save on monthly payments? You should have a plan for how you'll spend the extra cash. If you want to replace your $1,000 mortgage payment with an investment of $1,000 per month, that could be a good use of your money.
  • Do I have any other outstanding debts – debts that are onerous are those that will cost you a lot of money to pay off over time. Credit cards and store cards are notorious for charging exorbitant interest rates for only a year. Unsecured loans with interest rates higher than your mortgage rate are another example.
  • Is there a savings rate that is higher than my mortgage interest rate – It might be a better idea to put your money into a savings account instead of paying off your mortgage. That depends on whether you can find a savings account with a higher interest rate than the one you're currently paying on your mortgage.

Whether you should pay off your mortgage early is ultimately determined by how much money you have available, what your alternatives are, and other factors specific to you. However, if it's something that's legitimately on your mind, make sure to carefully consider all of your options.

1. Refinance to a 15-Year Mortgage

If you currently have a 30-year mortgage on a $250,000 house with 5% interest you’re going to pay approximately $483,165 total on the life of that mortgage. But let’s say that you only pay that for the first 5 years.

And then, you switch it over to a 15-year mortgage and you manage to get 4% interest. Just dropping that 1% for those next 15 years could save you a total of $96,935. And all you’re going to pay is an extra $300 a month. Plus, you’re going to have your mortgage paid in 20 years total rather than 30. That’s going to mean a whole lot of extra money in your pocket over the long run.

 APRMonthly PaymentAmount You'd Save in InterestPayment Time You Cut
30 year (original mortgage)5%$1,342  
Pay 5 Years, then Refinance into 15-Year Mortgage4%$1,698$ 96,93510 years
Pay 5 Years, then Refinance into 10-Year Mortgage4%$2,324$123,67915 years
Pay 5 Years, then add 1/125%$1,453$27,3573 years, 5 months

What if you really want to make a difference and you want to pay off your loan even faster than that? Well then, you can shorten the term of your new refinance to 10 years.

If you still get that same 4% and you owe approximately $229,575 on the house at the end of the first 5 years where you had that 30-year mortgage you’re going to increase your payment by almost $1,000 a month. That’s going to be a whole lot of money, but it’s going to get your house paid off in only 15 years total. And that means you’ll have over $20,000 per year in your pocket a whole lot sooner than you would otherwise.

The rate on a fixed 15-year fixed-rate mortgage has been below 7% from 2005 to 2021, according to Frediemac. The highest mortgage rate recorded in this period was 6.07% in 2006, and this period was followed by a gradual decline until 2012 when the interest rates fell to 2.93%. The lowest rate on a fixed 15-year mortgage was reported in the first quarter of 2021 at 2.28%.

Chart: Rates on 15-Year Fixed Rate Mortgage in the U.S. 2005-2021

Now, not everyone can afford to make that kind of contribution and who could blame you? Instead, just make a single extra payment every single year and you’re going to end up saving a whole lot of money. You can even break it up over the 12 monthly payments you already make, so you pay 1/12 extra over the month. If your monthly payment is already $1,342 you’d pay $1,453, which doesn’t make a huge difference to your monthly budget. In a year though, that’s an extra payment and over the life of your 30 year mortgage you’re going to save over $27,357. Plus, you’re going to cut 3 years and 5 months off your timeline.

 

2. Increase Your Payments

The next thing to do is to increase your payment each month. You want to divide the amount of your monthly principal and your interest by 12 and then you’ll at that amount to your payment every month. It doesn’t add up to much on your monthly payment, but it’s going to give you a full extra payment every year.

If we take that same $250,000 mortgage on a 30-year loan and the 5% annual percentage rate we already mentioned your payments will be $1,342. If you pay this for 5 years and then jump to that extra 1/12 every month you’re going to pay $111 extra and you’re going to pay off the mortgage earlier. Plus, you’re going to save over $27,000 in interest charges and how great is that? Take a look at this with different loan terms.

TermPaymentInterestSaving Interest
30 year$1,342$232,588/
20 year$1,649$146,125$86,463
15 year$1,976$105,943$126,645
10 year$2,651$68,219$164,369
    

Now, before you make any kind of changes to the payments you’re making it’s important that you talk to your lender about your options. You want to make sure that any additional money you’re paying in goes immediately to the loan rather than toward the next payment you’re supposed to make. Tell them you’re trying to pay down the loan more quickly and they should be able to help you figure out how to do that.

You want to make sure you’re always checking the mortgage statements you get to make sure that you’re getting all payments applied the right w ay so you can actually save money rather than just applying it to the next payment.

3. Add Money to the Principal

We all get unexpected money every so often throughout the year, right? You win on a lottery ticket, you get a bonus at work, a family member gives you money for your birthday and you use that money for other things that you don’t really need. If you’re interested in paying off your mortgage as quickly as possible, however, that money should be going toward your mortgage right away. You don’t have to worry about coming up with extra money when you do this, and you’ll be able to pay off your loan quicker too.

It’s important to note that even a small amount of extra money paid to the principal of your loan can save you a whole lot of money over the life of the loan. You could end up getting paid off within a shorter span of time too. Even if you can round up your current payment, like that $1,342 that can be rounded up to $1,300. That little bit extra every month is going to make a big difference over the life of your loan, especially if you keep it at 30 years.

4. Give Yourself Some Motivation

If you set a specific date that you expect to have your mortgage paid off by you’re going to have a goal to reach for and that’s definitely going to motivate you to work a little harder at it. Plus, you can figure out just how much you need to pay every month to make it happen.

You just need to take a calculator and do a bit of math. When we take that same house with the 30-year, $250,000 mortgage and the 5% APR you’re going to have payments of $1,342. Let’s say you took that out only 2 years ago but you want to pay it off entirely at the 15-year mark instead. If you divide out the total you’re going to need to pay an extra $635 each month. If you’re looking to pay it off in only 10 years you’ll need to add an extra $1,309 per month.

5. Pay Every Other Week

Right now you’re making a large payment on your mortgage every month, right? And you can’t afford to make two payments a month. Well, you won’t have to with this method. Instead, you’re going to cut your mortgage payment in half and pay half of the mortgage every two weeks.

So, if you normally pay $1,200 a month you would pay $600 every two weeks. This feels like you’re only making the same payments that you would normally, but with 52 weeks in a year you’re actually going to be making 13 monthly payments instead of just 12. That’s going to give you  a savings of nearly $43,000 over the life of your 30-year mortgage. That’s definitely a whole lot of money.

6. Double Up Options

If you’re interested in multiple options from this list then go for it. You could put a little extra money toward your mortgage every month and then add in the extra money that you get throughout the year. Or you could pay biweekly and increase your payments by a little bit at the same time.

There are a number of ways you can combine different options to make sure you’re getting that mortgage paid off a whole lot faster than you might have thought. And you’re going to see a whole lot of benefit in the long run because you’re going to have more money a whole lot sooner.

Should You Pay Your Mortgage Off Early?

It’s going to be entirely up to you if you really want to pay off your mortgage early. For some people it’s great because it frees up your money in the future, but it’s going to cost you more money in the present and that might not be as good of an idea for everyone.

Deciding on this is going to depend on things like your current income, your debt and your investments. But you’ll want to pay attention to each of these things before you make a decision.

The Benefits

There are some great benefits of paying off your mortgage:

  • Decrease Interest Costs – When you pay off your mortgage early you’re going to pay less in total interest. That’s definitely going to be a big amount of money (and if you’ve never looked at it you should).
  • Downsize Later in Life – If you decide to downsize your home later on in life you may want to use the money that you’ve paid off on your house to help you with the cost of the next house. It’s definitely going to make a big difference for you in the long run.
  • Free and Clear – You can feel more secure when you know that you own your house completely free and clear and that you don’t have to worry about paying anyone else ever again (or losing your house).

The Drawbacks

Here are the main drawbacks to take into account:

  • Liquidity –  If you pay off your house sooner you’re not going to have that money to do the other things that you want to do at the same time, like paying into your retirement or an emergency fund.
  • You’re Not Growing Your Money – Because you can’t put that money into an account where it will make money for you it’s actually going to reduce the amount of interest that you can earn. You’re not going to get the compound growth and more.
  • Loss of Tax Breaks – When you have a large mortgage payment and high interest you can use it as a tax break, but that goes away as you cut down on the interest you pay.

Bottom Line

In the long run, paying off your mortgage early can save you a lot of money. Even a small additional monthly payment can help you own your home sooner. Before you put money toward your loan, make sure you have an emergency fund. Also, save for retirement and pay down other debts before adding to what you're already paying on your mortgage.

However, when you pay off your mortgage early, you not only lose motivation, but you also tie up capital in an illiquid asset. Having a lot of capital in the form of home equity can be a bad thing unless you have a very diverse net worth. Your house could be destroyed in the next storm or burned down in a fire. With interest rates at an all-time low, it may make more sense to refinance your mortgage into a low fixed-rate term for as long as you intend to own the property — and then invest the difference.

Making extra payments, refinancing, or changing your repayment schedule are all options for paying off your mortgage early. The correct answer is determined by your current situation, risk tolerance, and long-term goals. Before making any major decisions, it is always a good idea to consult with a financial planner.

FAQs

If you pay off your house, you won’t have to worry about making a mortgage payment every month. This allows you to have more money to spend freely and can give you more freedom when it comes to wanting to spend your money on other things.

The sooner you pay off your mortgage, the less you will pay on interest as well. This means you will pay off less money as time goes by. If your home loan has high interest and you have enough money to make payments early, it could be very beneficial.

Yes, you can pay off your mortgage in one lump sum. This is called mortgage recast. Instead of just making extra payments every month or week, you can make one large lump sum payment towards the mortgage principal amount.

Once you pay the lump sum towards the main amount, your lender will recalculate the mortgage amount and then give you a new monthly payment.

If you pay an extra $100 on your mortgage every month, you will pay off the amount much earlier than expected. This will also reduce the number of monthly payments you have to pay off during the duration of the loan. If you’re only paying $100 a month extra, you also probably won’t face any early repayment fees either.  Use an mortgage payoff calculator to accurately forecast the impact on your mortgage.

If you are worried about early payment fees, make sure to ask your lender to be sure. This will help you to know for sure how much money you can pay each month to avoid early fees.

If you pay your mortgage off early, you will be able to have more free money in the future to use for other things. Having a mortgage during retirement can also be stressful because you are more limited on money and don’t want to see a huge portion of your income going towards a mortgage.

If you don’t have large payments for a mortgage, you can spend your retirement money on many other things such as vacations, hobbies, or home improvement projects.

Making extra payments on any kind of debt can help you be more financially stable. However, reducing credit card debt is better financially than reducing the mortgage, since credit card debt usually has much higher interest.

If your credit utilization is very high and it’s making your debt-to-income ratio high, you might benefit more from paying off credit card debt. In the end, though, you should pay off the debt that has higher interest.

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