If you own a home, your mortgage payment is probably your biggest monthly expense.
But what if you couldeliminate that huge financial obligationahead of schedule and own your home free and clear?
There are a few tried-and-true ways to pay off your mortgage early.
Paying off your mortgage early doesnt make sense for everyone.
Its important to consider your circumstances, including your monthly budget.
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Benefits of Paying Off Your Mortgage Early
Why pay off your mortgage early?
The most obvious reason is for financial freedom, but there are additional benefits.
Heres one of the most significant advantages: savings on interest payments.
Paying off your mortgage early means freedom from monthly payments.
you’ve got the option to increase your cash flow and enjoy some financial flexibility.
Those funds can be redirected to other opportunities like investments, retirement,travel, savings or hobbies.
The faster you pay down your mortgage, the faster you might obtain home equity.
For some folks, the peace of mind that comes with being debt-free is priceless.
Want to change jobs, start a business, retire early or take a sabbatical?
With your mortgage paid off, these dreams are easier to make a reality.
you’re free to reinvest funds into these opportunities, knowing you own your home free and clear.
Each one requires a different level of commitment and cash flow.
How effective is this strategy?
There are a couple ways you’re free to squeeze extra mortgage payments out of your yearly budget.
One option is depositing one-twelfth of the monthly principal into a savings account each month.
So, if your monthly principal is $850, set aside about $71 a month.
At the end of the year, empty the account to fund your 13th mortgage payment.
So, instead of paying $850, youd pay $921.
This way, youll pay the equivalent of an extra payment by the end of the year.
So if your mortgage payment is $875, pay $900 instead.
(As always, ask your loan servicer to put the difference toward the principal).
Instead, apply a percentage.
Lets say your new raise at work means $600 more in your bank account each month.
Recast Your Mortgage Loan
An alternative to refinancing your mortgage is recasting the loan.
Mortgage recasting is the process of reducing your mortgage balance by paying a lump-sum on the principal.
Your mortgage lender then adjusts your repayment, or amortization, schedule to reflect the new balance.
The result: Smaller monthly mortgage payments.
Youll also save money on interest over the life of your loan.
Recasting has a few benefits.
First, your monthly payments get smaller, not larger.
Youll also pay significantly lower closing costs compared to refinancing.
Recasting fees are typically a few hundred dollars not several thousand.
Recasting wont change your interest rate, though.
Thats nice if your interest rate is already low not so nice if its high.
Its also debatable if recasting your loan will actually help you pay off your mortgage faster.
After all, it doesnt shorten your loan term it just reduces how much you pay each month.
Recasting isnt an option for everyone.
You need a pretty big chunk of cash to put down on your mortgage balance.
Lenders often set a minimum amount, such as $5,000 to $10,000.
Others may require 10% of your outstanding mortgage balance.
If youve recently come into an influx of extra money, mortgage recasting may be an attractive option.
Doing so still decreases your loan balance, but your monthly payments wont get any smaller.
Plus, you wont pay any closing fees.
But its a good option if youre laser focused on paying your mortgage off early.
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Essentially, this strategy saves on interest and reduces the length of your loan.
By making extra payments toward the principal, you reduce the amount of money that incurs interest.
So, more of your monthly payment goes toward reducing your principal balance.
Lets review how this strategy plays out on 15 and 30-year mortgages.
Your estimated monthly payment (principal and interest) is $1,432.
Without extra payments, youll pay a total interest over 30 years of $215,609.
That makes your total payment $515,609, no small chunk of change.
Your monthly payment (principal and interest) is $2,143.
Your new loan term would be approximately 13 years with a total interest paid of $55,000.
Your total savings on interest in this scenario amounts to $17,305.
Youll also pay down your principal faster, which reduces the amount of interest paid over time.
Biweekly Payment Plans and Mortgage Payoff
Another option is to set up biweekly payments.
This strategy is an easy way to cross off 13 mortgage payments in a single year.
This results in 26 half-payments or 13 full monthly payments each calendar year.
That means youll pay less interest over time while lowering your principal balance at an accelerated rate.
Biweekly payments can be a good strategy for homeowners who get paid every other week.
This way you’re free to schedule your house payments around your paydays.
However, some lenders may charge extra fees if you opt for biweekly payments.
Others may not offer the service at all.
For example, you could refinance a 30-year mortgage for a 20-year or 15-year term.
Regardless, refinancing your current loan can be a good idea because it dramatically reduces your long-term interest payments.
Heres an example of what refinancing to a shorter term might look like.
Lets say you have a 30-year mortgage thats been paid down for eight years.
When you bought your home for $349,000, you put a 6% down payment on it.
But youll still enjoy big savings long-term.
you oughta ensure your monthly budget can handle this added expense.
If your finances are tight, paying hundreds of dollars more a month on housing is risky.
It can limit your ability to meet other financial priorities, likesaving for retirementor maintaining ahealthy emergency fund.
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Some companies only accept extra payments at specific times.
Others may charge prepayment penalties.
Check with your loan service provider to see if any restrictions apply to extra mortgage payments.
By hacking away at the principal, you reduce how much you shell out in interest over time.
Lenders usually give you the option online to apply extra payments to the principal only.
If this option isnt clearly marked, reach out to your loan company for instructions.
Understanding these terms is essential for avoiding unexpected costs.
Its important to consider other opportunities for the cash you would divert to extra payments.
Overlooking Tax Implications
In some cases, mortgage interestcan be tax-deductible.
If you pay off your mortgage early, youll miss out on this deduction.
That can be worth it but it depends on your financial situation.
To be sure, consult with a tax professional so you fully understand the implications for your tax situation.
Rachel Christian is a Certified Educator in Personal Finance and a senior writer for The Penny Hoarder.
