Bankrate: How to pay off your mortgage early
Some homeowners are eager to get out of their mortgage early, with reasons ranging from eliminating the psychological pressure of debt to slashing interest payments. For retirees, especially, paying off a home loan early can help increase cash flow.
Whatever your motivation, paying down your mortgage ahead of time reduces the amount of interest you’ll pay on the loan. Here are some early payoff strategies to help you achieve that goal.
Can you pay off your mortgage early?
In most cases, you can pay your mortgage off early without penalty — but there are a few things to keep in mind before you do:
—Check for a prepayment penalty: Reach out to your loan servicer to find out if your mortgage has a prepayment penalty. Most mortgages don’t impose this fee, but if yours does, you’ll have to pay it. This can affect whether an early loan payoff is financially viable for you.
—Look for payment restrictions, if any: While you’re in touch with your servicer, make sure there aren’t any limitations on how and when you make additional mortgage payments. Some loans have terms that encourage you to follow the payment schedule. It’s important to ensure that whatever extra payment you make goes to the loan principal, not interest.
5 ways to pay off your mortgage early
1. Make extra payments
There are two ways you can make extra mortgage payments to accelerate the payoff process:
Biweekly mortgage payments
You can split your monthly mortgage payment in half and make biweekly payments instead. By doing this, you’ll end up making the equivalent of 13 months of mortgage payments in one year, instead of 12. This tactic could be easy for some homeowners because the extra cash might not be as noticeable in the monthly budget.Consult with your lender or servicer first to confirm whether it accepts biweekly payments (most do). If not, it’s up to you to set aside those biweekly payments and lump them into a single payment each month. The benefit of the extra annual payment is still there, but without the convenience of the lender allowing you to schedule payments every two weeks.
Extra monthly payment
The second approach is to pay extra against the principal each month, or make an extra principal-only payment annually. This can be a better tactic than refinancing, as it doesn’t lock you into a payment. If for some reason you can’t add more to your monthly mortgage payment, you won’t be penalized.If you go this route, make sure to check with your lender that the payments will be applied in the correct way to reduce the principal, not prepay the interest. You’ll also want to ensure the lender understands the extra payment is not for the next month’s mortgage payment.
2. Refinance your mortgage
Refinancing your mortgage to pay it off early only makes sense if you can get a lower interest rate or shorten the loan term. Be mindful that there are costs associated with refinancing, so you’ll want to make sure the savings outweigh those costs.Refinancing into a shorter-term loan, such as switching from a 30-year mortgage to a 15-year mortgage, can also help bring down your interest rate while putting you on the path to early payoff. However, with a shorter term, your monthly payment will be higher, which could stretch your budget too thin. You can use Bankrate’s calculator to compare payments and total interest between 30-year and 15-year terms.
3. Make lump-sum payments toward your principal
You might also want to make lump-sum payments to your principal any time you get a windfall, like a bonus at work, tax refund, inheritance or proceeds from the sale of valuables. You must specify with your servicer that these excess payments are to be put toward the principal.
4. Recast your mortgage
Mortgage recasting allows you to keep your existing loan; you’ll pay a lump sum toward the principal and your lender then adjusts your amortization schedule to reflect the new balance. This nets you a lower monthly payment, but your loan term and interest rate also stays the same.
One major benefit to recasting is that the fees are significantly lower than the cost of refinancing. Usually, mortgage recasting fees are between $200 and $300 (contact your lender to request the service and confirm the costs). Plus, if you have a low interest rate, you get to keep it. On the flip side, if you have a high interest rate, refinancing might be a better option.Note: FHA and VA loans can’t be recast.
5. Get a loan modification
If your mortgage payments are unaffordable but you want to get back on track and potentially pay the loan off early, consider a home loan modification.
Generally reserved for borrowers experiencing financial hardship, a loan modification entails the lender adjusting the interest rate or loan term to help bring the loan current.
With this option, you could save on interest and pay the loan off faster. There could be consequences for your credit, however, depending on how your lender or servicer reports it to the credit agencies, so be sure to discuss this with your lender upfront.
Pros and cons of paying off your mortgage early
Advantages of early mortgage payoff
—You’ll eliminate an expense: Getting rid of your mortgage payment is a big deal for your budget. You’ll have more room to pursue other financial goals, including cutting down other forms of debt and saving for retirement.
—You’ll save: If you pay your mortgage off early, you’ll avoid some of the interest charges you would’ve paid had you kept to the original amortization schedule.
—You could feel peace of mind: Without a mortgage payment, you might find it much easier to budget, save and spend on what matters most. This can work wonders for your wellbeing. (Keep in mind, although you won’t have a mortgage payment, you’ll still need to account for homeowners insurance premiums, property taxes and upkeep costs).
Disadvantages of early mortgage payoff
—You can’t leverage your home as easily: A home is an illiquid asset, meaning you’ll need to either sell (liquidate) it or obtain a home equity loan or line of credit to take advantage of its value. If you know you’ll need quicker access to cash, it might not make sense to put your money into your home prematurely.
—There’s an opportunity cost: If you have strong credit, a mortgage is one of the lowest-cost ways to borrow. If you have extra money to put toward your loan, you could be better off putting it toward higher-interest debt or investing in the stock market.
Should you pay off your mortgage early?
Whether you should pay your mortgage off early depends on many factors, including the interest rate of your current loan and your personal risk tolerance.
Start by considering the opportunity cost. If you repay your mortgage ahead of schedule, you’re putting money into the mortgage when you could have used those funds for other financial priorities. You’ll save on interest, of course, but if you invested the extra payments elsewhere instead of putting them toward your mortgage, you might find you’d have earned a higher return.
On the other hand, if you know you’re likely to spend that extra money if you don’t put it toward your mortgage, making additional payments can be a good idea. The peace of mind that you get from owning your home mortgage-free can also be worthwhile, and is important to consider.
Also, think about how much cash you have available for emergencies. You don’t want to tie all of your money up in your home and have no way to access it quickly if you encounter a crisis.
Ultimately, with mortgage rates still low, it’s generally better in the long run to hold a mortgage with a low rate now and to invest your extra cash. Still, you can check Bankrate’s mortgage payoff calculator to see how much you can save by settling your mortgage early if you’re set on doing so.
FAQ about early mortgage payoff
—What happens when you pay off your mortgage?
When you pay off your mortgage, you’ll receive the promissory note from your lender indicating you’ve fully repaid the loan. You might also receive a certificate of satisfaction confirming you no longer owe on your home.
—How do I pay off a 30-year mortgage in 10 years?
There are several ways to prepay your mortgage, including biweekly payments, extra payments or a lump-sum payment. Alternatively, if you can get a lower rate, you might opt to refinance to a 10-year loan.
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(Visit Bankrate online at bankrate.com.)
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