Many homeowners who have 30-year mortgages may feel that they will be in debt for the rest of their lives. This leads many to wonder if it’s a good idea to pay off their mortgage early and how they can go about doing so.
If you’re thinking about paying off your mortgage early, we advise doing so carefully and considering all your options. While there are advantages to being debt-free, there may also be disadvantages to paying your mortgage in-full before the end of the loan program term.
Why Pay Your Mortgage Off Early?
Homeowners who plan on staying in the same home long-term may find that having full ownership of their house, along with living debt-free, is more attractive than making payments for 30 years. Paying off a mortgage early, or faster than the loan term, may help you save on interest payments and could reduce the amount of money you spend on the mortgage over time.
Additionally, interest rates nowadays for home loans have been relatively low compared to what homeowners have seen in the past. With the chance of these interest rates increasing in the future, some may feel that it would be best to pay their mortgage off sooner rather than later.
Without a mortgage payment, you and your family can redirect that money toward other priorities. Many homeowners may choose to put the money they would’ve used for their mortgage into other investment options.
Overall, paying off your mortgage early can give you the peace of mind that you’re living debt-free and potentially minimize the chances of losing the house if you ever become unemployed.
Tips for Paying Off Your Mortgage Early
So, what is the best way to pay your mortgage off early? You can use a few different strategies to cut down the length of your home loan—many of which don’t require spending excessive amounts of extra money. We will detail some of our top tips below.
1. Refinance to a Loan with a Shorter Term
One of the most common approaches to paying down a mortgage more quickly is refinancing to a shorter loan term. Most home loans are 30 years long, but many lenders offer other options, including 10, 15, 20, and 25 years.
When you refinance your mortgage, you’re typically opting to pay a higher monthly payment in exchange for a shorter loan term and a potentially lower interest rate. Although your mortgage payment each month is more, you would end up paying less interest over the life of the loan. This means that you would see significant savings by the end of the loan term.
Since shorter loan terms usually have lower interest rates, refinancing is a great option for homeowners to get out of debt more quickly. In addition to saving money by paying less interest, you won’t have to worry about scheduling extra payments or penalties associated with not having a mortgage.
2. Make Extra Payments Toward Your Principal
Another way to pay off your mortgage early is to put extra money toward your loan’s principal balance. You can do this by paying extra each month and specifying to your lender that you want it to go toward the principal amount. Doing so monthly can shave off time from the loan term and save you money on interest.
The extra money you put toward your loan’s principal amount doesn’t have to be large. In fact, many homeowners simply round up their monthly payment to the nearest hundred. For example, if your mortgage payment is $1,150 per month, you may consider paying $1,200 with that extra $50 credited to the principal. $50 may not seem like a lot now, but down the road, it can bring you interest savings, especially in the early years of your mortgage.
3. Make One Extra Mortgage Payment Per Year
Like paying extra toward your loan’s principal amount each month, you may also be wondering what happens if you make one extra mortgage payment a year. Adding a 13th mortgage payment annually works in the same way in that it can help shorten the loan term and save you money on interest.
As a homeowner, you may decide to make an extra payment each year when receiving a large chunk of extra money, like an income tax return or a yearly bonus. You can also talk to your lender about making bi-weekly payments, where you pay half of your mortgage every other week rather than paying the amount in full once a month. By the end of the year, this method allows you to make 26 mortgage payments rather than 24.
4. Recast Your Mortgage
Recasting your home loan is similar to refinancing, though this method for paying your mortgage off early allows you to keep your existing loan. When recasting your mortgage, you can make a lump-sum payment toward the principal amount, and your lender will then adjust your payoff schedule based on the loan’s new balance.
This tactic allows the length of the loan term to be shortened without changing the interest rate. Your monthly payment amount would also be lowered based on the reduced principal amount. Many homeowners find this option more beneficial because they can save money on fees and closing costs typically associated with refinancing a home loan.
5. Make a Lump-Sum Payment
Making a lump-sum payment to your mortgage can help to decrease your monthly payment and lower the financial burden of having a loan. If you’ve recently inherited money, sold another property, or received a large bonus or tax return, you can apply these proceeds to the principal balance of your mortgage.
Downsides to Paying Your Mortgage Off Early
While there isn’t always necessarily a penalty for paying off your mortgage early, there can be some disadvantages that homeowners should consider. Some loan servicers may charge you a prepayment penalty for paying off your loan early, which is usually based on a certain percentage amount that you would’ve paid in interest anyway. It’s best to talk to your lender to see if the terms of your loan include this as a caveat.
Those who plan to refinance or sell their home rather than living there for the long haul may find that paying their mortgage off early would be unwise. Additionally, if you have extra cash, it may generate more value elsewhere rather than being spent on your mortgage.
Here’s a look at some cons of paying off your mortgage early that you may want to consider:
- Loss of Money Toward Other Necessities: If you’re focused on paying off your mortgage as quickly as possible, you may draw money away from living expenses or emergency savings. It’s way easier to withdraw money from a savings account if you need it, so if you haven’t saved three to six months’ worth of income in case of emergency, it’s probably best to keep your mortgage and save that money for personal necessities.
- Loss of Tax Benefit: Taxpayers with a mortgage can usually take advantage of the mortgage tax deduction when doing their taxes at the end of the year. This means that some of the money you pay toward your mortgage may come back to you in your income tax return from the federal government.
- Loss of Money for Investments: Rather than paying off their mortgage early, many people find that putting extra money toward an emergency fund, retirement fund, 401(k), or other investment account is more beneficial, since the interest rates from these sources can give you more of a return on your investment.
- Loss of Money Toward Other Debt: It may not be wise to focus on paying your mortgage off early if you have other debt that takes precedence. Student loans, credit card bills, and other forms of debt typically have higher interest rates than your mortgage, meaning they’ll accrue interest faster over time. Because of this, it might serve you better to pay these debts off first.
Ultimately, the choice to pay your mortgage off early is a personal decision and will depend on several factors. When considering whether it is the best option for you, you’ll want to keep all aspects of your individual circumstances in mind.
First Fidelis is a local mortgage lender based in the Kansas City area. If you’re thinking about paying off your mortgage or refinancing your home loan, give us a call at 913-205-9978 to see what options are available to you.