Thu. May 26th, 2022
your-homebuyer’s-guide-to-how-to-pay-off-a-mortgage-faster

When you signed on the dotted line for your 30-year mortgage, it probably felt equal parts daunting and surreal. On one hand, three decades is an awfully long financial commitment — but on the other, it’s not as though you’re absolutely locked in with no possible way out. You can always sell your home, or refinance using a loan with better terms, or perhaps you’ll stumble into a windfall of cash that will eliminate all your debts with a flourish. (Hey, you never know!)

Taking on a mortgage is no casual agreement — which is why the loan qualification process is so stringent — but you’ll nearly always have options. And perhaps one of the most exciting is the prospect of paying off your mortgage early.

Many homeowners have questions when it comes to how to pay off a mortgage faster, including concerns about whether it’s actually a good idea or not. To help address these quandaries, we’re exploring strategies for paying off your mortgage early, and looking into the pros and cons — all with lots of research and the help of financial experts.

A car traveling through the desert because a mortgage is paid off.
Source: (Dino Reichmuth / Unsplash)

Why pay off a mortgage early?

Paying off your mortgage faster may seem like an obvious advantage — you’ll eliminate a big monthly payment and save potentially thousands of dollars on interest charges.

The money you’ll save by not having to make a mortgage payment each month will free up cash to use for literally anything else, from home renovation projects to far-flung travels, funding a new hobby, or bolstering your retirement account.

Generally speaking, mortgages get paid off early either because a homeowner prioritizes paying down the mortgage as quickly as possible, or because they sell the home.

Homeowners who sell their home while still holding a mortgage will pay it off with the proceeds of the sale — even if they end up taking on a new loan with the purchase of another property.

Early payoff due to sale is actually quite common — a recent report by the National Association of Realtors® indicates that 87% of buyers finance their purchase, and that sellers typically live in their home for 10 years before selling. This means that even if someone has a 15-year mortgage, there’s a good chance they’ll sell the home before the loan fully matures.

(And yes, some homeowners pay off their mortgage early because they’ve won lottery money, hit it big in Las Vegas, or inherited money from a relative. But for practical purposes, we’ll skip using these examples as strategies!)

What do financial experts think about early mortgage payoff?

Regardless of why someone might pay off a mortgage faster than is required by the terms of the loan, the questions that most folks have involve the how do I and should I even factors.

Experts are, as with seemingly every topic related to personal finance, divided on their stance about early mortgage payoff.

Staunch believers in carrying no debt, regardless of how “good” a debt it may be considered, advocate for paying off a mortgage as soon as possible, no matter the accompanying sacrifice. But if you tightened your metaphorical belt to save for a down payment, you already know how challenging — and often unsustainable — those drastic spending cutbacks can be.

Other financial experts, however, actually caution against paying off a mortgage early.

“It’s not always a good idea,” says Alex Williams, a certified financial planner. “As a homeowner, you can claim the amount you pay in mortgage interest on your taxes to lower your taxable income. If you pay off your mortgage early, you lose this benefit.”

Whether this will make a big difference to your own annual tax situation may be a conversation to have with your accountant or tax advisor, but it’s certainly worth keeping in mind as a possible downside of early payoff.

Another aspect Williams wants homeowners to be aware of is the fact that your money may be put to better use in other investments.

“Keep an eye on the stock market — the average stock market return over a decade is about 9%, so you might be better off investing the money instead,” he says.

With mortgage interest rates at historic lows, this advice is nothing to sneeze at, especially if you paused contributions — or even borrowed money against your retirement savings — for your down payment when purchasing your home.

A stock market graph used to invest instead of paying off the mortgage early.
Source: (Jeremy Bezanger / Unsplash)

Pros and cons of early mortgage payoff

Unless money is no object for you, there’s much to consider when deciding whether to prioritize paying off your mortgage early.

Advantages of early payoff

  • No more monthly mortgage payments! You’ll free up funds for other activities, investments, or savings.
  • You’ll own 100% equity in your home.
  • You’ll likely save thousands of dollars on mortgage interest charges (you can play around with a mortgage payoff calculator to experiment).
  • Faster mortgage payoff is generally a low-risk endeavor.

Disadvantages of early payoff

  • Your loan terms may penalize early payoff — read the fine print of your mortgage documents, or contact your lender to determine whether you’ll face a prepayment penalty.
  • You won’t be able to reap the aforementioned tax benefits that accompany payments on mortgage interest.
  • The money you allocate toward your mortgage payoff could potentially be put to better use in the stock market or other investments.
  • If you have other debts — especially those with higher interest rates than your mortgage — you may be prioritizing the wrong account.

Everyone’s lifestyle looks different, and certainly your own willingness to cut expenses or boost your income to meet financial goals may differ from someone else’s.

If you carry no other debts, you have an emergency savings fund, your retirement accounts are in good shape, and you’re comfortable with your current investment portfolio — then, sure, paying off your mortgage early may do no harm.

But if you do owe elsewhere, it’s probably not the ideal time to focus on paying off your mortgage just yet.

“In many cases, people have higher-interest debts that need handling first,” says Melanie Hanson, a financial professional. “Credit cards, student loans, and car loans will all [likely] cost you more in the long run if you don’t get them taken care of quickly.”

Hanson recommends using the snowball method to build momentum and make progress with your debt repayment.

In short, the snowball method involves tackling your smallest debt first — that $1,300 balance on a store credit card at your preferred home improvement center, for example — by routing all additional funds toward that account. Other debts receive only the minimum payment until the target debt is eliminated, at which point you’ll then move to your next-smallest debt and continue the pattern until you’ve effectively snowballed your way to financial freedom.

Or, at least in this case, paid off everything else except your mortgage.

Ultimately, whether it’s better for you to pay off your mortgage early or focus on other financial priorities is always going to be a personal evaluation. Seek the advice of experts like your accountant, tax advisor, or financial planner if you’re unsure of how to proceed.

A calendar used to pay off a mortgage faster.
Source: (Blessing Ri / Unsplash)

8 top strategies to pay off your mortgage faster

So you’ve crunched the numbers, consulted relevant experts, and determined that paying off your mortgage is the right path for you. Great! Let’s take a look at a few effective strategies for doing just that.

Try biweekly payments

Let’s say your monthly mortgage payment is $2,000. In one calendar year of standard bill-paying, you’ll make 12 payments totalling $24,000.

If you switch your payment strategy to biweekly — that is, splitting the monthly amount due and making a payment every two weeks — you’ll end up making a full extra mortgage payment each year. The math breaks down like this:

There are 52 weeks in a year. If you take your $2,000 monthly payment and instead pay $1,000 every two weeks, you’ll ultimately make 26 payments, totalling $26,000.

This is a budget-friendly way to make an extra payment and, if kept up consistently, you can shorten your loan by years — which also means you’ll pay less in mortgage interest.

“Depending on your interest rate, this tactic can shave about five years off of a typical 30-year loan,” says Williams.

But before changing your payment plan, do check with your lender to make sure this type of payment strategy won’t invoke any penalties.

Or, just make an extra payment each year

This is a different tactic with the same results: Simply make one additional payment every year as a lump sum.

Which method is easiest for you will probably depend on how you receive your income in relation to other expenses (such as a salaried employee versus someone who is freelance) — but either strategy is helpful in the quest to pay off your mortgage faster.

Put more toward principal each month

Whether your idea of “more” means $20 or $200, tacking a little extra onto your monthly mortgage payment can allow you to chip away at the principal balance as your budget allows.

Again, this is a strategy you’ll want to cross-check with your lender to make sure you won’t incur any penalties, but lowering your principal means saving money on interest in the long run.

Make a lump sum principal payment

This is a great option if you happen to find yourself with an extra bit of cash. Maybe there’s a tax refund, a generous bonus at work, or maybe you’ve decided to sell off your collection of 1950s vinyl records.

“I recommend funneling any additional money that comes in throughout the year into your mortgage payments,” says mortgage advisor Rebecca Awram. “These are additional sources of income that you hadn’t planned out in your budget anyway, so you won’t miss it much to put toward your mortgage.”

Whatever the source of your funds, routing a few thousand dollars directly to your loan principal will definitely help pay off your mortgage faster. Providing that your loan allows these types of payments without penalty, you can toss extra cash at your mortgage whenever is convenient for you throughout the year — or even just once.

Recast your mortgage

Not to be confused with refinancing, recasting your mortgage involves paying a large lump sum, after which your lender reamortizes your loan.

It’s kind of like hitting the refresh button on your mortgage. This strategy pays down your balance and lowers your monthly payment, all without the headache — or closing costs — of refinancing.

The amount you’ll need to come up with to recast your mortgage will depend on the status and terms of your loan. You might be able to recast with as little as $5,000, or you may need an amount closer to $20,000. Talk to your lender to see if this is a possibility for you, and if so, what you’ll be looking at to make it happen.

Refinance your mortgage

Yes, this is technically trading one mortgage for another, but if your existing mortgage is sitting at a higher interest rate than what is currently available, there may be an opportunity to save money.

You can refinance to a shorter-term loan (such as going from a 30-year mortgage to a 15-year), or a lower interest rate — or potentially both.

Your lender can help you assess whether refinancing your mortgage is a good option for you (the process is not without cost), but this is a common strategy for eliminating your mortgage in a shorter period of time.

Choose a shorter mortgage term

This goes hand-in-hand with refinancing, but it’s also something to consider if you haven’t bought a home yet. The shorter your loan term, the faster you’ll be finished paying it off!

This also, however, means that your monthly payment will be higher. If you’re looking at a favorable interest rate in the case of either a 15-year or 30-year mortgage, but the higher monthly payment of the shorter loan makes you nervous, remember that you can always pay extra — but you can’t pay less.

In some cases, it may make more sense to take a longer loan term and make additional payments when you have the financial flexibility to do so — rather than committing to a shorter mortgage term and uncomfortably stretching your budget month after month.

Consider an adjustable-rate mortgage

If you’re still pre-purchase or considering refinancing, an adjustable-rate mortgage (ARM) might offer some flexibility.

A low introductory rate can let you make faster progress toward paying down the principal, but ARMs sometimes have prepayment penalties. And depending on your timeframe, that scheduled rate increase — and higher monthly mortgage payment — could happen before you’re ready to accommodate higher payments.

An experienced lender can help you determine if an ARM is a good choice for your financial goals, or if you may be better off with another type of loan.

How to pay off a mortgage in 5, 10, or 15 years

Let’s put a few examples in practice to see how much money you can actually save by paying off your mortgage faster.

We’ll assume a $275,000 home loan with a 3% interest rate. (For the sake of this example, we’re not factoring in extras like homeowner’s insurance, mortgage insurance, or property taxes.)

Years to payoff Monthly payment

amount

Extra paid monthly Total extra paid annually Total paid over the life of the loan Total saved
5 years $1,159 $3,782 $45,384 $296,483 $120,905
10 years $1,159 $1,496 $17,952 $318,650 $98,738
15 years $1,159 $740 $8,880 $341,838 $75,550
30 years $1,159 $0 $0 $417,388 $0

By paying off this mortgage in just five years rather than 30, you could save $120,905 — that’s a big chunk of change! It is also, of course, a drastically different payment amount.

But this does go to show how much money can be left on the table if you simply make the minimum payment over the life of the loan. Though it may feel like you’re throwing cash into the void when you slip an extra $500 toward your principal here and there, every dollar really does count!

Vegetables purchased to save money for mortgage.
Source: (nrd / Unsplash)

So, should you actually pay off your mortgage early?

There’s no disputing you’ll save thousands of dollars — tens of thousands, more likely — if you pay off your mortgage early. The bigger question is whether that money could be serving you better elsewhere.

Again, we implore you to sit down with a financial expert to go over your personal situation in detail, but there are a few questions you can ask yourself if you’re thinking about paying down your mortgage as fast as possible.

How long do you plan to stay in the home?

If you’re planning to sell in six or seven years, there’s probably less value in hustling to pay down the mortgage than if this is intended to be your forever home.

How much extra do you have in your budget?

Yes, everything helps, but it’s important to be realistic. If one extra mortgage payment per year is doable, great! If it feels more comfortable to slip an extra $50 toward the principal every couple of months, that’s also useful.

What’s your mortgage interest rate?

The interest rate on your mortgage determines how much it costs you to borrow the money over time. With a lower rate, borrowing money is relatively cheap compared to what you could earn on investments. That’s why some experts encourage looking to the stock market rather than an early mortgage payoff — so do the math on what that $20,000 lump sum could turn into with strategic investing versus applying it to your mortgage principal.

What will you have to sacrifice to pay off your home early?

If you happen upon a major windfall and can pay off your mortgage without so much as skipping a dinner out — by all means, go for it!

But if paying off your mortgage faster will mean scrimping and restricting to the detriment of your quality of life, it’s fair to ask yourself if the rewards are worth the effort. Maybe aiming for a 25-year payoff is more reasonable than doing it in 20 years?

Do you have enough in emergency savings?

Considering that just 39% of people in the U.S. could pay for an unexpected expense of $1,000 if necessary, the concept of having a stable emergency fund is not something to gloss over.

Unless you have a solid three to six months’ worth of living expenses to cover life’s unpredictabilities, paying down your mortgage probably should not be your priority.

Are there other ways you can cut costs?

If your strongest motivation for paying off your mortgage early is so that you can get rid of the monthly payment, you’re likely in for a long uphill climb. Instead, examine your spending habits and see if there are other ways you can cut costs. Consider:

  • Setting a budget (or updating the one you currently have)
  • Cutting expenses (visit discount grocery stores, cancel subscription services, and so on)
  • Making your home more energy efficient (start with quick swaps like new light bulbs, then work your way up to new windows and insulation)
  • Downsizing — if your current home is larger than you really need

Do you have other retirement investments?

To save for retirement is to play the long game, so before prioritizing your mortgage payoff, take a look at your retirement accounts and see if there’s room for optimization.

Are there prepayment penalties to think about?

We mentioned this earlier, but you’ll want to review your loan terms to determine whether you’ll be penalized for early payments. If so, is it still financially advantageous to pay off your mortgage early?

Could you refinance instead?

Particularly if you’ve had your mortgage for a few years, there may be a more favorable rate available now. Talk with a lender to explore your options.

A bottom line representing a paid off mortgage.
Source: (Denny Müller / Unsplash)

Paying off a mortgage depends on your bottom line

At the end of the day, paying off your mortgage faster is a personal choice. If your budget and wider financial situation give you the wiggle room to comfortably direct more money toward the loan on your home — then sure, up those payments!

But if not? Don’t stress.

“Save money wherever you can, but don’t panic if there are areas where you can’t,” says Awram. “Paying off your mortgage early may be the ultimate goal, but as long as you’re using your money in a smart way for your family, you can be happy.”

Header Image Source: (Spacejoy / Unsplash)

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