How To Pay Off Your Mortgage Early

Home sweet home
Buying a home is a major purchase, maybe even the biggest one you’ll make in your lifetime. Many people see homeownership as a rite of passage into adulthood while others see it as an investment. Whatever buying a home means to you, it’s a big financial decision that carries a considerable amount of debt that can live with you for decades.

Fortunately, paying off your mortgage early is an achievable goal if you know what to do. Here are some tips to help you get started on the path to being mortgage-free. 

Should you pay off your mortgage early?

In recent years mortgage rates have been considerably low. Fortunately, gone are the days of 18% interest rates. Some homeowners today are enjoying rates as low as 3% depending on when they purchased (lucky!). Sounds like a steal. However, interest really does add up over time.

According to an Experian report, the average U.S. mortgage debt was $202,284 at the end of Q1 2019. Even with a low mortgage rate of 3.5% and a 30-year term, you’d pay $124,720.40 in interest, plus the principal balance over the life of the loan. That’s a lot of money that could be going into other things, like tuition funds and investments

But everyone’s situation is different. If you have a long list of debt that you’re knocking out, maybe you are focused on other financial goals at the moment. Prioritize your debt and make a plan that fits you and your timeline.

The number one way to pay off your mortgage early

When it comes to paying off your mortgage early, the number one way to do it is to make an extra mortgage payment as often as you can. You can also opt to make biweekly mortgage payments. This is where you make exactly half of a monthly mortgage payment every two weeks. By doing this, at the end of one year, you'd have made 13 mortgage payments instead of 12!

There are however some key things you need to know if you chose to do this.

1. Beware of prepayment penalties

It may sound crazy, but it’s true. Some mortgage issuers may charge a prepayment penalty for paying off the loan early. 

According to Nolo, “a prepayment penalty is a charge that the lender imposes on the borrower if the borrower pays all or part of the loan principal before its due date. For example, if you pay off your loan, refinance, or sell your home before a certain date, you could be subject to a prepayment penalty.” Fortunately, federal laws have been enacted laws that limit this practice.

The good news is that if you have a newer loan, it is unlikely that you would be subject to these extra fees. But it doesn’t hurt to check your statements or other notices to double-check. 

2. Make sure your extra mortgage payment goes toward the principal balance

Make sure the payment is applied toward the principal and not just toward the next month’s payment. Otherwise, you’ll just end up with a credit on your statement, and interest will continue to compound on that principal balance. You also want to make sure that your extra mortgage payment is not going towards future interest. This also varies by lender so check with them. You may see an option to make a principal-only payment on your issuer’s website or a checkbox on your monthly bill. 


7 additional tips to pay off your mortgage sooner

Wondering how to pay off your mortgage early? Here are some tips to get you on the right track!

1. Save for a significant down payment

20% is the recommended amount to put down on a home. But why stop at 20%? The more money you put down initially, the less you have to pay back later. So it's always wise to pay as much as you can upfront.

Set a goal for 25%, 30%, or much higher; the sky is your limit. It may take you a couple more months or years to save this higher down payment. Nonetheless, you won’t regret it when you see how much you'll save on interest payments.

Putting off buying a home until you can put down a significant amount will save you a lot of stress and worry in the future as you realize how quickly you can pay your mortgage off.

2. Stay under budget

Of course, the bank would like to make a significant profit. Giving you a mortgage that you will not be able to pay off soon, is in their best interest (literally).

There is no need to buy a home that is well above your means. Otherwise, the mortgage will be a significant sum you will have to come up with every month.

Owning a home comes with a different set of expenses than renting. At first glance, the mortgage might appear to be affordable. But once you take into account the upkeep and furnishing of your home, a lower mortgage is the more reasonable choice. That way you are not in a situation where you have to choose between the upkeep of your home or paying off the mortgage.

3. Try house hacking

Here's a unique method if you're wondering how to pay off your mortgage early — rent out parts of your home to other people. This is a house hacking method that can be used as a means of paying off your mortgage early. 

Airbnb or are great places to advertise your available space. Word of mouth and Facebook are other great ways to advertise your space without having to spend additional money on advertising.

4. Automate your mortgage payments

According to Brian Davis, co-founder of SparkRental, managing your payments efficiently is the best way how to pay off your mortgage early. Setting up automatic bi-weekly payments is a great way to manage your mortgage. The logic behind this is that instead of making a payment twice a month or 24 times a year, on a bi-weekly schedule you make 26 payments. That's two extra payments each year!

5. Round up your payments

Davis also recommends that you should round up your mortgage payment to the nearest hundred if you're wondering how to pay off your mortgage early. If that’s too much, add a flat amount like $30 or $40 to your mortgage payment every month. Over time, these extra payments will result in you paying off your mortgage much sooner.

6. Make an extra mortgage payment with any extra income

Do you receive regular bonuses or tax refunds? These are great to put toward your mortgage. Refund checks and bonuses seem to be spent up quickly, so why not put them to good use? If you can wing it, at the end of every quarter make an extra mortgage payment. Here's a great extra mortgage payment calculator to help you determine how much money you'd save over the life of your loan.

7. Refinance your home

Refinancing is a process that could result in a lower mortgage payment and potentially save you thousands of dollars. For instance, Sara of Gathering Dreams has refinanced three times in the last eight years. 

What really helped her with this process were the additions she made to her home. They increased the value of her home, which then made it possible for her to get a lower mortgage, and save almost $4,000 in a year!

Before you decide to refinance though, be sure you understand if you should refinance your mortgage or not based on the various pros and cons.

In closing

All in all, paying off your mortgage will be a difficult feat. But if you're trying to figure out how to pay off your mortgage early, these resources and tips will help you actualize your goals.

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