How to pay off your mortgage early

Father holds toddler while watering the lawn in front of their home.Image: Father holds toddler while watering the lawn in front of their home.

In a Nutshell

Paying off your mortgage early can save you money over the life of your loan. Options to do so include paying extra on your mortgage each month or refinancing to a shorter loan term.
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A 30-year mortgage doesn’t have to take 30 years to pay off.

If you make your required payment each month, you’ll pay off your mortgage in exactly the amount of time it specifies. But that’s not your only option. If you want to get mortgage-free faster, there are several strategies you can use to pay down your mortgage more quickly.

You can make extra payments along the way, or switch to a new loan that will allow you to pay off your mortgage ahead of your original schedule. We’ll go over some of these strategies and discuss the advantages and disadvantages of going this route.



How to pay off a mortgage early

Here are four of the more common ways you can pay off your mortgage ahead of schedule.

Refinancing

When you refinance your mortgage, you take out a new mortgage that pays off and replaces the one you currently have. You may do this to save money if interest rates have fallen, but you can also refinance to switch to a loan with a shorter term. For example, you could move from a 30-year mortgage to a 15-year mortgage, shaving years off the time you’ll be making payments.

Your monthly payment will generally go up with a shorter loan term, since you’re lowering the number of payments the cost of the home is spread over — but you also typically save money in the total interest you pay over the life of the loan. This is because shorter-term loans often have lower interest rates and you’re paying for less time.

Paying extra each month

When you make your standard monthly payment on your mortgage, a portion of it goes to the principal of the loan — the amount you borrowed — and another portion goes to interest. If you choose to pay extra, you may be able to apply all of the additional amount to the principal, helping you to pay down the mortgage more quickly.

You can choose to add to your standard monthly payment, but make sure the mortgage servicer knows to apply the additional amount to the principal of the loan. You can also choose to make half of your monthly payment every two weeks. Over the course of the year, you effectively make an extra monthly payment.

The effects can be dramatic. Let’s say you took out a $250,000 30-year loan at a 4% fixed interest rate. Your monthly payments are $1,292 for principal and interest. If you pay $100 extra each month from the beginning, you’ll shave off more than four years off your mortgage, saving yourself more than $27,000 in interest.

Lump sum payments

Extra payments don’t have to come every month. You can also make lump sum extra payments toward your mortgage and ask your mortgage servicer to apply the amount to your principal balance. You can choose to make an extra monthly payment at the end of the year, for example, or use an annual bonus from work, your tax refund or other extra cash to start paying off your mortgage faster.

Recasting

If you can choose to make a lump sum extra payment, you may be able to take advantage of a strategy that also lowers your monthly payments. Called recasting, this involves making a lump sum payment toward the principal of your loan and asking your lender to recalculate your mortgage at the lower amount. Your interest rate and loan term don’t change, but your monthly payments are reduced. This process typically involves a fee.

While recasting itself doesn’t mean you pay off your mortgage more quickly, it can make it easier to find room for extra payments in your budget. You may choose to keep paying the same monthly amount even though your required payment is now lower. Recasting is not an option for government-backed mortgages like VA loans, FHA mortgages and USDA home loans.

Is it smart to pay off your mortgage early? Pros and cons

Like any financial decision, there are advantages and disadvantages to paying off your mortgage ahead of schedule.

Pros

  • Save money in interest. Paying off your mortgage early typically means paying less total interest over the life of your loan, saving you money.
  • Build equity faster. Equity is the difference between what you owe on your mortgage and what your home is worth. It can be a valuable tool, as lenders allow you to borrow against your equity to finance things like home improvements. Paying down your principal boosts your equity, which can make a big difference early on in your mortgage when a majority of your regular payment goes toward interest.
  • Get closer to being debt-free. Owning your home free and clear by paying off the mortgage early can ease your financial burden and give you more financial flexibility.

Cons

  • Lose flexibility in your budget. If you decide to put extra money toward your mortgage, that means less money for other priorities. You may not be able to build up an emergency savings fund as quickly, which can become an issue if you lose your job or otherwise need to tap your savings.
  • Miss out on investment gains. Putting extra money into investments might yield you a better return than putting it toward your mortgage. You may be able to earn more in the market than you are paying in interest on your loan.
  • Face potential penalties. Some mortgages charge a prepayment penalty for paying off the mortgage early. You may also face a penalty for paying off a large chunk of the mortgage all at once, so read the terms of your loan carefully before embarking on a plan to pay off your mortgage faster.

Should I refinance or pay extra on my mortgage?

The decision to refinance or pay extra toward your mortgage will come down to your individual financial situation and overall market conditions.

If interest rates have risen or if your credit scores have fallen since you took out your original mortgage, it might not make sense to refinance your mortgage. Your new loan may have a higher interest rate than your current one, forcing you to pay more over the life of the loan. In these scenarios, it may make more sense to put extra money toward your mortgage if your goal is to pay it off more quickly.

Using a refinance loan to shorten your loan term may work in some situations. Since shorter mortgages typically have lower interest rates, you may be able to find a better rate by switching from a 30-year mortgage to a 15-year or 10-year mortgage.

A loan representative can usually help you run the numbers on different scenarios and figure out the best course of action to achieve your financial goals.    

What’s next? Once you’ve decided to pay off your mortgage early?

Is it a good idea to pay off your mortgage early? If you’re considering it, here are a few next steps you should take.

  • Check your loan terms. Review your mortgage to see if there are any prepayment penalties or other complicating factors you must account for as you pay down your mortgage ahead of schedule.
  • Contact your lender. Get in touch with your lender or mortgage servicer to let them know your plan and ask them to put extra payments toward the principal of your loan.
  • Keep an eye on interest rates. Once you’ve set this goal, it’s a good idea to monitor the market to see where interest rates go. If rates fall, or if you can otherwise qualify for a better rate than the one you currently have, it may make sense to refinance to help pay off your mortgage early.
  • Make a payment plan. The easiest way to start paying off your mortgage faster may be to begin paying extra on your mortgage each month. Take a look at your budget to see how much room you have to make additional payments and what savings that can add up to over time.

About the author: Andrew Dunn is a veteran journalist with more than a decade of experience as a reporter and editor at North Carolina news organizations, including the Charlotte Observer and the StarNews in Wilmington. In those roles,… Read more.