How to Pay Off the Mortgage Early

March 9, 2011 14 Comments »

early

Mortgage Q&A: “How to pay off the mortgage early?”

If you’re looking to pay off your mortgage early, now is an easy time to do so because interest rates are very attractive.

With mortgage rates still quite low historically, it’s possible for homeowners to make the same mortgage payments they’ve always been making, while paying off their mortgages early.

Let’s look at an example:

Loan amount: $300,000
Loan program: 30-year fixed
Current mortgage rate: 6.25%
Current mortgage payment: $1847.15 <===== keep making this payment
Refinance mortgage rate: 4.75%
New mortgage payment: $1564.94

If you were able to refinance your mortgage as specified above, your new mortgage payment would be roughly $282 cheaper per month, assuming you stayed with the same loan program.

While such a move clearly provides monthly payment relief, it could also shorten the term of your mortgage tremendously, assuming you made your old mortgage payment on the newly refinanced mortgage.  This is the trick to paying off your mortgage early.

If you continued to make the old monthly payment of $1847.15 per month, the $282 or so a month in overpayment would go toward the principal balance, shortening the amortization period from 30 years to about 22 years.

The total amount of interest paid over the life of the loan would also decrease from over $263,000 to less than $182,000, for total savings of nearly $82,000, not factoring in tax deductions and the interest you paid on the original loan.  Not bad for continuing to make the same monthly payment you were making before, right?

You could also refinance into a shorter term fixed mortgage, such as a 15-year fixed. The 15-year fixed mortgage payment in our example from above would be $2,219.06 (assuming a new refinance rate of 4%), which is a more significant jump that not all homeowners would be comfortable with.

But if there’s a wider spread on your current mortgage rate and the refinance rate, it could make a lot of sense to shorten the term with little or no monthly payment pressure.

Finally, you could leave your mortgage intact and just make larger monthly payments (toward principal), or look into biweekly mortgage payments.

Just keep in mind that if you make larger payments each month on your original mortgage, it WILL NOT lower your payment the next month.  The way mortgages are paid off, extra payments simply reduce your interest expense and shorten your term, they do not affect the amount of future monthly payments.

In other words, if you paid an extra $100 each month, you would still owe the same amount the following month, despite having a smaller outstanding balance.

Tip: Making extra payments earlier in the loan term will amount to greater savings, so if you plan to pay your mortgage off early, do it sooner rather than later!

30 Tricks to Pay Off Your Mortgage Early

  • Make extra payments to principal
  • Make an extra payment each quarter, semi-annually, or annually
  • Make biweekly mortgage payments
  • Round up your mortgage payments
  • Increase extra payments as salary rises
  • Apply your tax refund (or any other windfall) to your principal balance
  • Refinance your mortgage to a lower rate and make the old higher payment
  • Refinance to a shorter-term mortgage such as a 15-year or 10-year fixed loan
  • Don’t reset the clock when refinancing
  • Consolidate two loans to a lower blended interest rate
  • Go with an ARM that has a lower interest rate but beware of resets
  • Start with a lower rate by buying it down and pay closing costs out-of-pocket
  • Put more money down to avoid PMI and get a lower rate
  • Sell another property and use the proceeds to pay off a different mortgage
  • Sell stock or other investments and use the proceeds to pay down the mortgage
  • Find a roommate and use their rent to pay down the mortgage early
  • Rent out a garage and use the funds to pay off the mortgage
  • Put your property on Airbnb
  • Cash in your credit card rewards/points and apply them to your mortgage balance
  • Apply a bank sign-up bonus ($500 in some cases) to your mortgage balance
  • Pay your mortgage with a credit card and put cash back amount toward principal
  • Use some form of interest rate arbitrage, like a 0% APR credit card, to pay a chunk of the mortgage now
  • Put loose change in a collection jar and periodically deposit it and use it to pay down the mortgage
  • Get a side job and use the earnings to pay down the mortgage faster
  • Host a garage sale and apply proceeds to the mortgage balance
  • Ask for a no-interest loan from a family member and apply it to the mortgage balance
  • Ditch your car if you can get by without one, use extra cash on hand to pay off your mortgage early
  • Know which mortgage to pay first to save the most money!

Should I Pay Off My Mortgage Early?

Just keep in mind that mortgages are very cheap at the moment, and you might be able to get a better return for your money by investing it or contributing to a 401k or similar retirement account.

You also get a tax break for paying mortgage interest. And if you factor in inflation, which will probably surge in the coming years, you’ll essentially be paying off your mortgage with cheaper money of the future. Remember, a dollar today is worth more than it will be tomorrow.

Additionally, a home is an illiquid asset, so if you pay off your mortgage and experience some kind of financial emergency, having all your cash tied up in your home and none on hand could put you in a tough spot.

Yes, you need to be able to qualify for a mortgage to tap your equity, so if you prepay your mortgage and later need that cash back, you might be out of luck if you can’t get approved.

Also note that if you have credit cards and other more expensive debt, you’ll want to attack those first as well. There’s no sense in paying down your mortgage quicker than you have to if there are other debts hanging over your head.

At the same time, if you don’t want to pay all that extra interest and take any investing risks, it may make sense to pay off the mortgage early.  This can be especially true if you’re close to retirement and anticipate living on a fixed income.  Peace of mind has quite a bit of value too you know…

Before deciding whether to pay your mortgage down early or not, do the math and look at all possible scenarios to see what will work best for you and your unique financial position.

There might be a good middle ground where you can pay a bit extra while still maximizing your retirement account(s) and setting aside money for a rainy day.

Every situation is different, so don’t assume what works for someone else will work for you.

Tip: Watch out for “mortgage accelerators” and “money merge accounts” that promise to shed years off your mortgage. These programs are often riddled with fees and could wind up doing more harm than good.

When It Makes Sense to Pay Off the Mortgage

  • You don’t have other higher-APR debt (mortgages are generally cheap!)
  • You are maximizing or at least contributing to retirement account(s)
  • You have an emergency fund set aside for unexpected expenses
  • You have money set aside for home maintenance
  • There’s not a better place for your funds
  • You’re close to retirement and will be living on a fixed income
  • If it will give you peace of mind to pay off your mortgage
  • Just remember you’ll still have to pay insurance/taxes forever, even if mortgage-free

14 Comments

  1. Pat Webster February 6, 2015 at 1:54 pm -

    How do I find a good mortgage broker in Orange County? Thank you for your most informative blog!

  2. Colin Robertson February 6, 2015 at 9:21 pm -

    Hey Pat,

    Probably best to speak to some friends/family who have used a broker there recently and ask for a referral. I can’t vouch for any specific person in the OC or elsewhere unfortunately.

  3. jessie watts March 16, 2015 at 7:20 pm -

    Hi Colin,
    I am in the process of purchasing a home. I was told that I can decrease the years if I put a payment down at closing cost. for instance a mortgage loan for the amount of 130,000, FHA, FOR 30 YEARS,with a closing cost of $6500.00. And at the end of closing the loan put another amount toward the principal $3,000 toward the principal will cut the years of the loan. Is this possible

  4. Colin Robertson March 16, 2015 at 9:55 pm -

    Jessie,

    If you have extra money to put down before you actually close, you could actually get a lower LTV and a better deal on your mortgage, possibly even avoid things like mortgage insurance. Once the loan is active you can make extra payments to principal whenever so long as there isn’t a prepayment penalty. The earlier extra payments are made the better.

  5. james July 20, 2015 at 7:31 pm -

    if i pay 100 extra a month i pay off mortgage 5 years earlier / why does 200 monthly only bring down 8 years earlier

  6. Colin Robertson July 23, 2015 at 11:44 am -

    James,

    It doesn’t double the savings, just like a 15-year payment isn’t double a 30-year payment.

  7. Dave Manalang September 1, 2015 at 1:18 am -

    Hello Colin,
    We are purchasing a new home and plan to pay off the loan in a few years. My wife just retired and has taxable pension benefit from her work which we want to use buy the house in full. Currently we are in a high tax bracket because of her salary and because of the tax consequence we opt to take a mortgage for now instead of paying it in full using the money from the pension. We then plan to pay it off within a few years. Isn’t the 5/1 arm mortgage advantageous for us than the 30-yr fixed with our current situation? Appreciate your advise. Thanks. Dave

  8. Colin Robertson September 1, 2015 at 9:47 am -

    Dave,

    If you truly plan to pay it off soon, a short-term ARM can be advantageous because you don’t have to worry about the rate resetting higher later (because the loan will be paid off in full before it adjusts). Conversely, you pay a premium to lock-in an interest rate for 30 years that you won’t actually benefit from once it’s paid off in a few years.

  9. Anne December 4, 2015 at 11:05 pm -

    I’ve just started to get my first refinance on my house. My brother builds and sells homes and he said that I should get multiple quotes from different lenders. Is there a way to find out customer satisfaction with mortgage companies? I’d like to save as much as possible. is it a big difference to refinance with FHA or a conventional loan? Will the bank that loans the money sell my loan after a year? If I accept the conventional loan, and later find a lower fixed rate will I be able to refinance again?

  10. Colin Robertson December 7, 2015 at 12:36 pm -

    Anne,

    You’ve got a lot of questions…a lender may or may not sell your loan…most do these days. You can refinance after a refinance as long as you still qualify in the future. JD Power does a customer satisfaction survey but it only seems to include the biggest lenders. I have specific articles on the other questions if you search my site. Good luck.

  11. Lance January 7, 2017 at 4:03 pm -

    Looking at my amortization schedule say payment #125. If I pay the principal payment for # 126, will it eliminate that payment interest and all?

  12. Colin Robertson January 9, 2017 at 10:12 am -

    Lance,

    It wouldn’t eliminate the subsequent payment, it would just lower your outstanding principal balance, so the loan would be paid off sooner and with less interest. But you’d have to continue making normal monthly payments until that point.

    See this post: http://www.thetruthaboutmortgage.com/paying-more-today-wont-lower-future-monthly-mortgage-payments/

  13. Mary Ellen Richardson April 18, 2017 at 8:15 am -

    I was able to pay off my 30 year mortgage in 17 years by paying extra on principal each month. I had gotten a home equity loan to do some home improvements and intended to pay extra on that once the mortgage was paid off but since the payment was coming out of my account automatically I did not jump on this as fast. When I remembered I would go online and make a principal only payment. Our bank was sold and I continued this practice with the new bank. Our new bank was then sold again and the new bank is not set up for principal only payments online. They take the money you pay and use it for future payments. So if you send extra online and it is enough for another payment they will not deduct your next months payment automatically but use the money you paid early. So you never really get ahead. I decided to get a payoff quote and just get rid of this loan. The quote shows a document cancellation fee of $30.50. Do you know if this is typical? I did not have to pay any fees when I paid the mortgage off early. Both the mortgage and the home equity loan indicated no early payoff penalty and neither mentioned any fees.

  14. Colin Robertson April 18, 2017 at 6:23 pm -

    Mary Ellen,

    Hmm, not sure about that fee…but if you log-on to your loan servicer’s website you’ll typically see a list of fees for things like that, which I’m sure vary from bank to bank. You make a good point that it’s important to ensure any extra payments actually go toward principal and aren’t just held for your next payment due.

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