Part of understanding your mortgage means understanding that the term of your mortgage only outlines how long you have to pay it off. If you want to reduce that mortgage debt more quickly—thus increasing your home equity, eliminating housing costs, and making room in your budget for paying off other debts or working toward other goals—you can always take steps to pay off your mortgage early. If you’re financially secure (meaning you’re free of high-interest debt, you’re investing in your retirement, and you have an emergency savings account that will cover 6 to 12 months’ worth of vital living expenses), paying off your mortgage early makes sense—yes, even though interest payments are tax-deductible. Learning how to pay off your mortgage early (and then actually doing it) isn’t easy, but it does pay off, literally: You’ll save money on interest and then, once you’ve made that last mortgage payment, you’ll have extra room in your budget to use however you like. Here’s how to make it happen.
How to pay off your mortgage early
Borrowers who refinance now can get a rate of around 3 percent, 1 to 2 percent lower than most new, 30-year, fixed rate mortgages taken out between 2010 and now, according to data from Freddie Mac. Use the refinance calculator from HSH to see how much you could save, when you would recoup the upfront costs of refinancing, and more. If your current mortgage rate is 4 percent or higher, you plan on staying in your home for at least a few more years, and you’re less than halfway through the length of your mortgage (10 years into a 30-year mortgage, for example), ask your current loan servicer or lender for its best refinancing rate, and then shop around for the best rate. You can always opt to work with an independent mortgage broker to find the lowest rate, says Keith Gumbinger, the vice president of HSH, a mortgage information site. If you can reduce your current interest rate by 1 to 2 percent, go ahead and refinance. Just remember: Refinancing can reduce your monthly payments and the total amount you pay in interest, but it won’t necessarily decrease the time it takes to pay off your mortgage unless you commit to putting any extra money toward your principal. (More on this below.) To help the process go smoothly, gather the following paperwork: proof of income (two recent pay stubs), copies of asset information, your tax returns for the previous two years, and proof of investments and other income. Additionally, be prepared to offer explanations for any recent income irregularities, credit inquiries, or job gaps. “Lenders question these situations because they could be an indication that you can’t afford your current loan,” Gumbinger says. RELATED: What’s Happening With Mortgages Right Now? Here’s What to Know About Your Home Loan During Coronavirus Say you’ve been making payments on a 30-year, 6 percent fixed-rate mortgage of $200,000 for five years. If you refinance to a 15-year, 2.87 percent fixed-rate loan, for example, your payments will increase by less than $80 a month. Yet you would pay off the loan 10 years earlier, build equity faster, and save an astonishing $130,477 in interest. “This is one of the best strategies you can employ, because you’re not required to make a higher monthly payment,” Gumbinger says. “And you didn’t count on having the money in the first place, so you won’t miss it.” Making a single $5,000 payment on, say, a 30-year, 4.5 percent fixed-rate mortgage of $225,000 would save a homeowner more than $13,000 in interest and reduce her repayment term by 15 months. Take note: Call your lender to verify that your mortgage doesn’t have a prepayment penalty. If it does, you could be hit with a fee—usually 1 percent of the loan amount. “This is a great option for anybody with a little additional cash, especially someone who has already refinanced or who doesn’t qualify for refinancing,” Gumbinger says.
