How to Pay Off the Mortgage 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.

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
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 payments on the newly refinanced mortgage.

If you continued to make the old monthly payment $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 $263,378.40 to $181,732.92, for total savings of nearly $82,000, not factoring in tax deductions and the like.

Not bad for continuing to make the same monthly payment 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.

But if there’s a wider spread on your current mortgage rate and the refinance rate, it could make a lot of sense, without any monthly payment pressure.

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

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.

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.

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.

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.