Paying off your mortgage faster involves finding room in your budget, using creative payment strategies, and putting unexpected windfalls towards your loan’s principal.
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For many homebuyers, a 30-year mortgage is the traditional way to borrow money for a home that offers a fixed or unfixed interest rate with predictable, affordable monthly payments. But 30 years is a long time, and homeowners may feel like they’ll be in debt forever.
Mortgage rates are starting to climb, so you may want to start paying off your mortgage early if you have variable interest rates. Even if you have a traditional mortgage, paying it off earlier can reduce the lifetime of your loan.
Paying off your mortgage faster involves finding room in your budget, using creative payment strategies and using unexpected windfalls to reduce your loan’s principal. “My wife and I paid off our mortgage in less than ten years,” and the benefits of paying it off ranged from financial to psychological, says Sam Zelinka, a federal worker who runs GovWorker, a personal finance website for federal employees.
Here’s 4 strategies to paying off your mortgage faster.
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The more you pay toward your mortgage now the quicker you can pay off your loan and more equity you’ll have. Look at your budget and find some room to put extra money toward your mortgage. If you need to, cut back on discretionary spending like dining out. Even putting an extra few hundred bucks a month can make a difference in the long run.
Once you reach 22% equity in your home, your lender will automatically cancel private mortgage insurance if you didn’t provide a 20% down payment when you bought the house. Once you stop paying for PMI, you can put that extra money towards an early mortgage payoff.
To figure out exactly how much more you should contribute, use an online mortgage repayment calculator. Simply plug in the particulars of your loan and how much you think you can afford to pay extra.
You can pay half your mortgage payment every two weeks by switching to biweekly mortgage payments which happen twice a month, or 26 times per year, which is kind of like making an extra monthly payment every year. Doing this will cut your 30-year repayment period to 25 years and eight months. Check that your lender will accept biweekly payments before you go this route.
Your mortgage lender charges interest based on your loan’s principal, and you could end up paying hundreds of thousands of dollars in interest by the time you’re done. By applying extra money toward the principal of your loan, you are reducing the interest you pay over time because there is a smaller balance for the lender to charge interest on.
Any time you receive extra cash that isn’t part of your regular income, put some (or all) of it toward your mortgage. Tax refunds, stimulus checks, inheritances and work bonuses can make a big difference in reducing your loan when combined with paying extra on a fixed schedule every month. If you’re diligent about your payment schedule, it’s possible to pay off your mortgage in five years.
“We were always making extra mortgage payments any time we found extra cash. Some examples included selling items on Facebook marketplace, getting a refund from a purchase we returned or getting a tax return,” Zelinka says.
You’ll want to make sure the extra money you put toward your loan is going toward the principal on the loan and not your interest or next month’s mortgage bill, so double check before sending extra money in, Zelinka says. Sometimes smaller extra payments are automatically applied to the principal, but you should also be able to indicate the amount to go toward the principal on your mortgage statement or in your lender’s online payment portal.
Refinancing your mortgage can change the type of loan you have and shorten the loan term. For example, you can refinance a 30 year loan to 15 years, regardless of where you are in the payment schedule. This can lower your interest rate and reduce the amount of interest you pay in total, since you’re paying the loan off much faster.
It will cost money to refinance your mortgage. Closing costs for mortgage refinancing typically range from 2% to 6% of the mortgage loan, which could offset some of the benefits of a more aggressive payment schedule. Also, shortening the length of the loan can significantly increase your monthly payment.
While you may be able to afford it now, you’re still on the hook for that payment if you lose your job or encounter another financial emergency. With a larger chunk of your budget going toward your monthly mortgage payment, you’ll be less able to prioritize other financial goals like saving for retirement, building up your emergency fund, investing, or just spending it on whatever you want.
“Refinancing can reduce your flexibility if it means that your payment increases dramatically,” Zelinka says.
After you pay off your home you’ll have a lot more financial flexibility. You could save more for retirement, build up your emergency fund, invest in the stock market or do things you want like travel more. You could even reinvest in your home by tackling projects like home upgrades or repairs.
Despite the benefits to paying more toward your mortgage, there are some scenarios where it just doesn’t make sense. If you aren’t saving for retirement, you need to start. Waiting to save for retirement can cause you to lose out on significant earnings from compound interest alone. You have the potential to earn higher returns than you would “gain” by reducing your mortgage interest.
If paying extra toward your mortgage would cause you to lose focus on higher interest debt like credit card balances, you could end up digging yourself into a hole. Don’t pay extra on your mortgage if you’ll have to add to your debt elsewhere.
While the mathematical reasons for paying off your mortgage are purely financial, there are less tangible benefits too. The freedom of not having a mortgage payment and owning your home outright can bestow a sense of financial freedom and greater security.
“Our biggest benefit was peace of mind. We know that we own our house and don't need to worry about money if my wife or I lose our jobs,” Zelinka says.
Image: jhorrocks / Getty Images