Many homeowners want to get out of their mortgage early to slash interest payments or eliminate the psychological pressure of debt.
Whatever the reason, early mortgage payment lessens the interest payable on the loan and can lead to significant savings.
This blog discusses the pros and cons of paying off a mortgage faster and strategies to help you achieve this goal.
1. Can You Pay Off Your Mortgage Early?
Yes. You can pay off your mortgage ahead of time without penalty — but you need to consider a few things:
Contact your loan servicer to check whether your mortgage has a prepayment penalty. Paying an additional fee to repay your loan before time doesn't make it a viable option.
Ensure there are no terms and conditions on how and when you can make extra payments.
Ensure whatever additional loan payment you make goes to the principal in place of interest.
2. Is It Smart To Pay Off Your House Early?
Paying your mortgage before the loan term depends on the:
Your financial situation and goals
The interest rate of the current loan
Your risk tolerance
Here are a few considerations to guide you in making the right financial move:
If you owe on any loan with a higher interest rate, you should eliminate that debt before making early payments on a low-interest loan.
Build an emergency fund and contribute to retirement funds like 401(k)s over paying off a mortgage. As these are necessities, pay attention to them.
If you have children, it could be better to fund a college savings account for them than repay your mortgage faster. It is an investment in their future that gives you tax benefits too.
Early mortgage repayment might free you from debt sooner, but holding a mortgage gives you tax benefits. Keeping a low-interest mortgage is worth the secondary advantage of a larger tax refund.
Additionally, assess the pros and cons of early mortgage payment to visualize your decision's direct impact on your lifestyle and finances.
Freeing up cash flow lowers stress and helps you meet your monthly payment obligations.
Being debt-free gives you peace of mind knowing that you won't lose your home if you lose your job, get injured, or face any other financial issue.
A deposit toward your mortgage payment is an assured return equal to your present interest rate.
You can save thousands of dollars in interest charges and redirect the savings to other priorities, such as repaying a high-interest debt or building an emergency fund.
You can stop paying PMI premiums once you hold 20% equity in your home.
Eliminating future payments strengthens your financial stability.
By paying off your mortgage, you lose your mortgage tax deduction. It could result in a larger tax bill in the future.
You could invest your funds to get a higher return in the long run. It is particularly beneficial if you have a low-interest mortgage.
You might lose access to the liquid cash that otherwise could help you build a corpus to deal with emergencies. You may rely on higher-interest credit cards to pay sudden expenses without emergency funds.
Most financial experts motivate homeowners to park their additional money into retirement accounts instead of repaying mortgages early.
3. Should You Pay Off Your Mortgage Early Or Refinance?
Often people ask, when should you not pay extra on your mortgage? If you are concerned about your mortgage interest rate, refinancing for a shorter term to a lower rate is more beneficial than making additional payments on your current mortgage.
On the other hand, paying off the mortgage faster can be a good option than refinancing if you have an ideal loan term and a competitive interest rate. It will help you pay less interest and save more.
While you decide, consider whether you could earn higher by investing in securities or save more by paying down your mortgage balance quickly.
Putting your additional money in a tax-preferred IRA could give you more peace of mind than freeing your home from debt sooner. However, before you invest, you should talk to a financial advisor about the associated risks.
4. What Are The Best Ways To Pay Off Mortgage Fast?
If you want financial stability and to save money in the longer term by accruing less interest, then follow the steps:
Step 1: Refinance Your Mortgage To A Shorter Term
Refinancing helps as it can lower the interest rate and lead to significant savings. Though a 30-year mortgage is the most popular, lenders offer shorter loan terms, such as 15-year, 10-year, 20-year, and 25-year loans.
Homeowners can refinance for a shorter term to reduce the mortgage term and get out of debt more quickly. Although monthly payments will be more with a shorter period, homeowners can cut their interest costs over the loan span.
Step 2: Recast Your Mortgage
You can make a lump-sum payment toward the principal if you inherit money or other windfalls such as holiday bonuses, credit card rewards, and tax returns.
With recasting, the term stays the same, but the monthly payment reduces based on the reduced principal. To use this strategy, continue making your last payment and apply the additional money toward the principal.
Step 3: Make Biweekly Mortgage Payments
It is another good tactic to pay off your mortgage fast. You must divide your monthly mortgage payment into two parts and send it every two weeks.
This way, you make mortgage payments equivalent to 13 months by the end of the year instead of 12 and save a lot on interest.
Before you use this strategy, ensure your loan servicer accepts biweekly payments. Otherwise, you can set aside those biweekly payments, combine them into one unit, and pay each month.
With this strategy, you can reduce a typical 30-year loan by four to six years based on your interest rate and loan amount. In the case of a 15-year mortgage, biweekly payments may reduce by one to three years from the repayment time.
Step 4: Get A Loan Modification
If you can't afford your mortgage payments but want to pay the loan off early, then a home loan modification can help. This method suits borrowers who experience financial hardship.
Here, the lender adjusts the loan term or interest rate to help bring the loan current. It allows borrowers to save on interest and pay their loans before repayment.
Step 5: Use an Adjustable-Rate Mortgage
Adjustable-rate mortgages are helpful for financially stable families or those who anticipate their move anytime soon, like military families. This strategy helps you build equity in a home fast. During the low-interest phase, you can put extra money in a household budget toward the principal.
However, it is essential to look closely at the details and understand the possible increase in rate and monthly payment. Make sure your budget allows you to manage payments at a higher amount.
Step 6: Downsize
Consider downsizing your house or selling your bigger house and using the profits to buy a less expensive home. If you don't find one, you can consider moving to an area that offers more affordable housing.
Even if doing this requires a small mortgage, your debt will still reduce. The smaller the debt balance, the sooner you can come out of it.
Step 7: Do-It-Yourself Method
It is the easiest and an affordable option, but it requires discipline to achieve your goal. You need to create a plan to add a certain monthly amount and make one additional payment each year.
Try these money-saving ways to find the extra cash:
Make frugal living decisions
Limit streaming subscriptions
Visit parks and museums or anywhere with minor or no admission fees
Shop at discounted stores and boutiques
You can put in more money to the mortgage if you get a salary raise or a new job. Thus, the DIY plan offers flexibility in how you approach the mortgage.
Step 8: Apply The Dollar-A-Month Technique
This strategy should be workable if your earnings increase slightly yet consistently with time. Every month, you increase your monthly loan payment by $1.
If you have a $900-per-month mortgage for 30 years with a 6% fixed interest rate, you could use this plan to reduce the mortgage term by eight years.
Step 9: Round Up Your Mortgage Payments
Another helpful technique to reduce your loan term significantly is to round up the monthly payments.
When budgeting for the mortgage payment, round up to the next highest amount of $100. For example, if your monthly payment is $764, then instead of paying it, you pay $800.
5. What Questions To Ask Before Repaying Your Mortgage Early?
Repaying your mortgage sooner than the schedule is the best financial decision you make for yourself and your family.
We have listed a questionnaire below to help you guide your decision:
How long do you wish to stay in your home? If you plan to sell the house within a couple of years, you are less likely to benefit from the advantages of refinancing or early mortgage repayment.
How much additional money do you have to pay down the mortgage?
Do you have an emergency fund equivalent to at least three months of living expenses?
Do you have adequate flexibility to make repayments and focus on other financial goals simultaneously?
6. Does Paying Off A Mortgage Early Hurt Your Credit Score?
Yes. Early mortgage payments dip your credit history and score a little. Why does it happen –
Your credit score is calculated based on the following:
Your payment history
Credit utilization ratio
Length of your credit history
The number of credit cards and loans you have applied for recently
The types of loans you have, or credit mix
When you pay your long-held loan, it shortens your credit history and could damage your credit score. Additionally, paying off your mortgage and remaining with only credit card loans reflects poorly on your credit mix. It is because mortgages are perceived as healthy debts, while credit cards aren't.
However, it would be best if you continued paying off your mortgage early due to the fear of a dip in your credit score. If it helps enhance your financial situation, it is worth making.
7. What Happens After Paying The Mortgage Early?
Upon fully repaying your mortgage, your lender sends you a cancelled promissory note. It shows that you fulfilled your responsibility to pay off the loan.
Some lenders even provide you with a certificate of satisfaction that confirms you don't owe any amount on your home.
They may also notify the city recorder that you are now the sole title holder of the residence.
8. How To Pay Off A 30-Year Mortgage In 15 Years?
Assume you owe a $200,000 mortgage for 30 years at a 4% interest rate. Have you thought about what happens if I pay an extra $500 a month on my mortgage towards your principal?
It will bring down your repayment period from 30 to about 15 years. It may be significant for several households, but smaller repayments can still significantly affect your interest savings and payoff period.
9. How To Pay Off A 30-Year Mortgage In 10 Years?
Paying for a 30-year mortgage may feel like you will always be paying off your house. One of the ways to reduce the loan term is to make a down payment in a lump sum. The bigger your down payment, the smaller your mortgage--and the faster you can get out of debt.
However, in the absence of a lump sum, you can use a combination of strategies (that don't require much money) to slash the payoff time from 30 years to 10 years.
Make a more significant payment each month. You can take the help of mortgage calculators to find out how much extra you should pay every month to pay off your mortgage in 10 years.
Consider refinancing to lower your interest rate. Choose a shorter loan duration, and make extra principal payments per month.
Consider ways to pay down a mortgage faster, like home sharing, renting out a room, cutting back on futile spending, etc., to find extra cash and use it towards the goal.
Designate windfall gains towards the principal to ensure your additional payments don't credit to unearned interest.
You can earn side income to pay your mortgage if you have extra time. It will help lower the amount of time you are in debt.
10. How To Pay Off Mortgage In 5 Years?
An amortization calculator is an invaluable tool for visualizing a way forward. All you need is to enter the following details to compute how much monthly payment you need to close your loan in five years.
Your remaining mortgage balance,
When you want to pay it (i.e., five years)
Your mortgage interest rate
It is an excellent financial goal to become debt-free. However, before you make a significant financial move, make sure you weigh out all of your options.
Check with the lender about prepayment penalties, and ensure you have a decent contingency fund before making extra payments on your mortgage.
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