If you own a home, your mortgage payment can be your biggest monthly expense.
But what if you could eliminate huge financial obligations early and have the freedom and clarity to own your home?
There are proven ways to pay off your mortgage early—simple changes, like extra monthly payments, and more complex and expensive options, like refinancing.
Paying off your mortgage early doesn’t make sense for everyone. It’s important to consider your personal circumstances, including your monthly budget. But if your priority is to pay off your mortgage faster, these tips can help you get there.
Rules for Paying Additional Mortgage
Most loan servicers allow you to pay off your mortgage early without penalty — but that’s not always the case.
Some companies only accept additional payments at certain times. Others may charge a prepayment penalty.
Check with your loan service provider to see if any restrictions apply to additional mortgage payments.
You’ll also need to clarify that you want the additional payment to be applied to the principal of your loan – not interest or next month’s payment. By cutting off the principal, you can reduce the amount of interest you pay over time.
Lenders will usually give you the option to apply for additional payments on the principal only online.
If this option is not clearly marked, please contact your lender for instructions.
6 Ways to Pay Off Your Mortgage Early
Check out these six strategies before you decide you don’t have enough extra money to pay off your mortgage early. They are not as painful as you might think.
1. Pay an additional fee each year
Making 13 mortgage payments in a year instead of 12 might not sound like a big deal — but it does add up.
How effective is this strategy?
Pay extra once a year Buy a $250,000 30-year fixed-rate mortgage at 3.5%, which means you’ll pay off your mortgage debt four years early and save over $20,000 in interest.
There are several ways to squeeze extra mortgage out of your annual budget.
One option is to put one-twelfth of your monthly principal into a savings account. So if your monthly principal is $850, you have about $71 a month set aside.
At the end of the year, clear the account to pay your 13th mortgage.
If you’re worried about tapping into your savings, you can always pay an extra 1/12th of your mortgage each month. So instead of paying $850, you pay $921.
That way, you’ll pay the equivalent of an additional payment by the end of the year.
2. Paid every two weeks
Setting a bi-weekly payment schedule is an easy way to cross off 13 mortgage payments in a year.
Some mortgage lenders allow you to sign up for this option, allowing you to pay half your mortgage every two weeks.
This results in 26 half-payments per calendar year – or 13 full-month payments.
This means you’ll pay less interest over time while reducing your principal balance at an accelerated rate.
Bi-weekly payments can be a good strategy for homeowners who get paid every other week. That way, you can schedule your home payments on payday.
However, some lenders may charge additional fees if you opt for biweekly payments. Others may not offer the service at all.
If that’s the case, explore your other options, like setting aside a little extra cash each month or paying a slightly larger monthly fee like we discussed earlier.
You’ll still benefit from making an extra payment each year—you just don’t get the convenience of a lender to create a monthly payment split for you.
3. Make a monthly payment (if you can afford it)
It may not always be possible to pay an additional mortgage each year, or set aside a twelfth of the principal each month.
If your budget doesn’t have much wiggle room, you can still take smaller steps to cut your principal.
Even making an extra $50 a month can cause your loan balance and the interest you pay over the life of the loan to plummet.
One strategy is to simply round up your mortgage payment to the nearest $100 if you can afford it. So if your mortgage payment is $875, pay $900 instead. (As always, ask your loan servicer to pay the difference to the principal).
If you want to take a small, incremental approach, you can increase your mortgage repayments with each pay raise at your job.
You don’t have to put all of your incremental take-home pay toward your mortgage (which is probably not a good idea anyway). Instead, apply a percentage.
Let’s say your new raise at work means an extra $600 a month in your bank account. If your priority is to pay off your mortgage as quickly as possible, allocate 70% to 80% of the new raise to your monthly payments ($420 to $480 in this case).
If your money is better spent on different financial priorities, like strengthening your 401(k) contributions Or pay off high-interest debt like credit cards or student loans, then allocate 10% to 25% of the new raise to the mortgage ($60 to $150 using the previous example).
This gradual increase can be a good strategy if you are young and plan to steadily increase your annual income over time.
4. Refinance your loan
Another way to pay off your mortgage early is Refinance your loan Short-term and/or lower interest rates.
For example, you can refinance a 30-year mortgage for 20 or 15 years.
The monthly payments will almost certainly be larger, and you’ll pay settlement fees, although these are usually charged to the loan balance. Regardless, refinancing your current loan may be a good idea, as it greatly reduces your long-term interest payments.
Below is an example of a short-term refinancing.
- Suppose you have a 30-year mortgage that has been paid off for 8 years. When you buy a home for $349,000, you’ll need to put down a 6% down payment.
- At the 4.5% interest rate, you’ll still have to pay approximately $439,000 in principal and interest over the last 22 years of the loan.
- If you refinance your 15-year mortgage at 3%, your monthly mortgage payment will increase by about $250.
- But you’ll cancel the loan seven years early and save yourself $94,000 in interest in the process.
A shorter mortgage term means it goes away faster, but you need to allocate more of your monthly budget to housing.
That’s because short-term refinancing can increase your monthly mortgage payments — especially if you’re refinancing early in the loan term.
It makes sense — the repayment period is shortened, so you have to pay more in less time.
On the other hand, if you bought your home when interest rates were higher, refinancing at a lower rate now could mean only a small increase in your monthly payments. But you can still enjoy big savings in the long term.
You need to make sure your monthly budget can handle this extra cost.
If your finances are tight, paying hundreds of dollars more per month for housing is risky.It may limit your ability to meet other financial priorities, such as saving for retirement or stay healthy emergency fund.
If you think your income may decrease in the future, it’s wise to explore other options, such as providing extra cash for your mortgage if you can afford it, as we discussed earlier.
You also need to consider refinancing settlement costs, which are typically 2% to 3% of your loan principal. For example, a $200,000 mortgage refinance might cost you $4,000, plus a 2% refinance fee.
You need to make sure these fees don’t offset the interest savings, otherwise refinancing to pay off your mortgage early doesn’t make much sense.
5. Recast your mortgage
Another way to refinance your mortgage is to refinance the loan.
Mortgage recasting is the process of reducing your mortgage balance by making a one-time principal payment. Your mortgage lender will then adjust your repayment or amortization schedule to reflect the new balance.
The result: a reduction in monthly mortgage payments. You can also save on interest over the life of the loan.
Reforging has some benefits. First, your monthly payments get smaller, not bigger.
You’ll also pay significantly lower settlement costs compared to refinancing. Recast fees are usually a few hundred dollars, not thousands.
However, recasting will not change your interest rate. Great if your interest rates are already low – not so good if they are high.
It’s also debatable if recasting your loan will actually help you pay off your mortgage faster. After all, it won’t shorten your loan term — it will only reduce your monthly payments.
But at least in theory, lowering your repayments could make paying off your mortgage early more feasible. For example, if you’re paying $1,200 a month instead of $1,600, it might be easier to pay an extra yearly fee.
Recasting is not an option for everyone.
You need a lot of cash to pay off your mortgage balance. Lenders usually set a minimum amount, such as $5,000 to $10,000. Others may require 10% of your outstanding mortgage balance.
Mortgage refinancing can be an attractive option if you have had a recent influx of additional funds.
However, not all mortgage lenders offer recasting, and not all loans are eligible (for example, FHA loans and VA loans are not).
In this case, you can still make a one-time payment yourself (which we’ll discuss in more detail next). Doing so will still reduce your loan balance, but your monthly payments will not.
6. Use any windfall on your mortgage
If you really want to get out of your major monthly mortgage outlay, consider putting your unexpected cash on the principal.
Tax rebates, job bonuses, and estate payments give you the opportunity to pay off most of your mortgage without significantly impacting your monthly budget.
Other windfalls may include selling a car, receiving trust money, cashing out an investment or winning a jackpot.
Since VA and FHA loans cannot be recast, making large payments to the principal yourself is a good option. Plus, you don’t pay any billing fees.
You’ll need to decide whether keeping your newfound cash in illiquid assets is right for your financial situation. But if you’re focused on paying off your mortgage early, it’s a great option.
Just be sure to coordinate with your loan servicer so that the funds are used to reduce your principal and not repay interest.
Rachel Christian is a certified educator in personal finance and senior writer for The Penny Hoarder.