Mortgages allow homeownership for the vast percentage of Americans that lack the cash to purchase outright. However, mortgage debt makes up a large percentage of most individuals’ monthly expenses. When you consider the fact that many mortgages have term lengths extending over decades, the prospect of paying a mortgage off early sounds much more appealing.
Why Pay Off Early?
The primary reasons most people choose to pay off a mortgage early include eliminating interest payments on the back end of the loan, freeing up funds for other uses, and reduced overall debt. Most importantly, you’ll reduce the total amount you pay on your loan over time.
No matter your reasons, early payoff holds numerous financial advantages. You’ll be able to utilize those freed-up assets for investments, purchases, savings, or other financial goals, all while experiencing the freedom of eliminating your largest debt. If you’re committed to early payoff, your next step is choosing which strategies you’ll use to achieve it.
Six Early Mortgage Payoff Strategies
Paying off your mortgage early is a commendable goal but is only possible with a feasible plan of action, a dedicated budget, and extra cash on hand. Each of these strategies requires you to change the way you think about your mortgage, so consider carefully which may be best for you.
1. Optimize Your Down Payment
If you’re still in the homebuying process, increasing your down payment above the 20% requested by most Seattle mortgage companies will decrease your total mortgage amount and reduce the amount of interest you’ll pay. While not technically a means of paying off an existing mortgage early, this strategy has the same effect.
2. Increase Your Monthly Payment Amount
This is by far the simplest way to up your contributions to the principal amount of your mortgage. By paying more than the mortgage amount each month, you’ll reduce the principal more quickly, taking years of interest off your payment. In addition, since this excess payment is by choice, there are no penalties for any months you can’t swing the additional amount, which is a significant advantage over other methods.
As an example, if you have a 30-year mortgage with a beginning principal of $200,000, a 4% interest rate results in a $343,739 total payment. However, upping your payment by just $100 each month will allow you to pay off your mortgage four years and eleven months earlier, and save you $26,855.
3. Switch to Biweekly Payments
Another way to increase the amount you’re paying towards your principal is by making biweekly payments of half your monthly due instead of once monthly payments. Payments every two weeks results in the equivalent of 13 mortgage payments per year instead of 12. This strategy allows you to pay off your principal just a bit faster.
If your lender doesn’t allow biweekly payments, you can achieve the same effect by setting aside funds throughout the year to build up an extra mortgage payment. Consider eliminating an extra, unnecessary expense and contributing that amount over time or utilizing smaller windfalls like cash gifts or annual rebates for the same purpose. Once you’ve accumulated an extra mortgage payment, apply it to your mortgage to reduce your principal.
4. Refinance Your Loan
One of the most popular ways to pay off a mortgage faster involves refinancing. Generally, people refinance to a mortgage with the same length and lower interest rates, but if you can refinance and continue to pay your original mortgage payment, you’ll take years of interest off the back end of your mortgage. Another strategy is to refinance for a shorter term; this not only lowers your interest rate but schedules your payments over a significantly shorter period of time.
5. Pay a Lump Sum Towards Your Principal
Another option for faster payment without involving official refinancing involves paying a large amount towards your principal when possible. A good strategy to use is setting aside part of any large sum of money you acquire for your mortgage. For example, if you inherit money, receive a bonus at work, sell a car, or receive a large tax refund, you could use a portion of those funds to reduce your mortgage amount.
6. Recast Your Loan
Recasting your loan is another way to officially decrease your mortgaged amount using a lump sum payment, without the need for refinancing. Your existing loan remains in place, less the lump sum paid towards the principal. Then, your lender will rewrite your amortization schedule to reflect the reduced loan amount.
Recasting usually comes with significantly lower fees than refinancing. You’ll also get to retain your interest rate – a benefit if rates are currently higher. However, not all lenders allow recasting and not all mortgages can be recast.
Consult with your lender concerning the availability of biweekly payments, recasting, or refinancing your mortgage type. A savvy lender will be able to help you determine how much your efforts will save you in the long run. With the proper initiative, you can begin paying your loan off early as soon as today.
