How to pay off your mortgage early

September 21, 2022

Some homeowners are eager to get out of their mortgage early, with reasons ranging from eliminating the psychological pressure of debt to slashing interest payments. For retirees, paying off a home loan early can help increase cash flow. This is especially beneficial when transitioning to a fixed income.

Whatever your motivation, paying down your mortgage ahead of time reduces the amount of interest you’d pay on the loan. This can be a substantial savings. Here are some early payoff strategies to help you achieve that goal.

5 ways to pay off your mortgage early

1. Make extra payments

There are two ways you can make extra mortgage payments to accelerate the payoff process:

The first way is to split your monthly mortgage payment in half and make biweekly payments instead. By doing this, you’ll end up making the equivalent of 13 months of mortgage payments in one year, instead of 12, and saving a bundle in interest. This tactic might be easy for some homeowners because it’s barely noticeable in the monthly budget.

Consult with your lender or servicer first to confirm whether it accepts biweekly payments (most do). If not, it’s up to you to set aside those biweekly payments and lump them into a single payment each month. The benefit of the extra annual payment is still there, but without the convenience of the lender allowing you to schedule payments every two weeks. 

The second approach is to pay extra against the principal each month, or make an extra principal-only payment annually. It can also save you tens of thousands of dollars in interest over the life of the loan. 

Let’s say your 30-year mortgage is for $250,000 and your interest rate is 4 percent. If you make an additional $100 monthly payment to the principal balance of your loan, you’ll shave off four years and $27,957 in cumulative interest payments from your mortgage.

This can be a better tactic than refinancing, as it doesn’t lock you into a payment. If for some reason you can’t add more to your monthly mortgage payment, you won’t be penalized.

If you go this route, make sure to check with your lender that the payments will be applied in the correct way to reduce the principal, not prepay the interest. You’ll also want to make sure the lender understands the extra payment is not for the next month’s mortgage payment.

2. Refinance your mortgage

Refinancing your mortgage to pay it off early only makes sense if you can get a lower interest rate or shorten the loan term. Be mindful that there are costs associated with refinancing, so you’ll want to make sure the savings outweigh those costs.

Refinancing into a shorter-term loan, such as switching from a 30-year mortgage to a 15-year mortgage, can also help bring down your interest rate while putting you on the path to early payoff. However, with a shorter term, your monthly payment will be higher, which could stretch your budget too thin. You can use Bankrate’s calculator to compare payments and total interest between 30-year and 15-year terms.

3. Recast your mortgage 

Mortgage recasting is different from refinancing because you keep your existing loan, pay a lump sum toward the principal and your lender then adjusts your amortization schedule to reflect the new balance. This will result in a lower monthly payment, but your loan term and interest rate will stay the same.

One major benefit to recasting is that the fees are significantly lower than refinancing. Usually, mortgage recasting fees are between $200 and $300 (contact your lender to request the service and confirm the costs). Plus, if you have a low interest rate, you get to keep it. On the flip side, if you have a high interest rate, refinancing might be a better option.

4. Make lump-sum payments toward your principal

An alternative to recasting is to make lump-sum payments to your principal any time you get a financial windfall or unexpected influx of cash. This could be a bonus at work, tax refund, inheritance or funds earned from the sale of valuables. 

Unfortunately, VA and FHA loans can’t be recast. Consequently, lump-sum payments might be the next best thing for borrowers with these types of loans, and you’ll save yourself the lender’s fee for recasting.

With some mortgage servicers, you must specify that excess payments are to be put toward the principal. Check with your servicer if you are unsure how lump-sum payments will be applied.

5. Get a loan modification

If your mortgage payments are unaffordable but you want to get back on track and potentially pay the loan off early, consider a home loan modification. Generally reserved for borrowers experiencing financial hardship, a loan modification entails the lender adjusting the interest rate or loan term to help bring the loan current.

With this option, you could save on interest and pay the loan off faster. There could be consequences for your credit, however, depending on how your lender or servicer reports it to the credit agencies, so be sure to discuss this with your lender upfront.

Can you pay off your mortgage early? 

In most cases, you can pay your mortgage off early without penalty — but there are a few things to keep in mind before you do.

First, reach out to your loan servicer to find out if your mortgage has a prepayment penalty. If it does, you’ll have to pay an additional fee if you pay your loan off ahead of schedule. This can affect whether paying your mortgage off early is financially viable for you.

Second, make sure there aren’t any restrictions on how and when you can make additional payments. Some loans have terms that encourage you to follow the payment schedule, and it’s important to ensure that whatever extra payment you make goes to the principal and not interest.

Should you pay off your mortgage early? 

Whether you should pay your mortgage off early depends on many factors, including the interest rate of your current loan and your personal risk tolerance.

Start by considering the opportunity cost. If you repay your mortgage ahead of schedule, you’re putting money into the mortgage when you could have used those funds for other financial priorities. You’ll save on interest, of course, but if you invested the extra payments elsewhere instead of putting them toward your mortgage, you might find you’d have earned a higher return.

On the other hand, if you know you’re likely to spend that extra money if you don’t put it toward your mortgage, making additional payments can be a good idea. The peace of mind that you get from owning your home mortgage-free can also be worthwhile, and is important to consider.

Also, think about how much cash you have available for emergencies. You don’t want to tie all of your money up in your home and have no way to access it quickly if you encounter a crisis.

Ultimately, with mortgage rates still low, it’s generally better in the long run to hold a mortgage with a low rate now and to invest your extra cash. Still, you can check Bankrate’s mortgage payoff calculator to see how much you can save by settling your mortgage early if you’re set on doing so.

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Written by TJ Porter

Edited by Suzanne de Vita

Reviewed by Kenneth Chavis IV