The decision to pay off your mortgage early is a controversial one. But for some who have tackled many of their big financial goals and erased other debt, putting their home mortgage in their crosshairs can make sense.
Since your mortgage is such a large, long-term debt, it can be surprisingly easy to pay it off at least a little early. You might get out of a year’s worth of payments or more just by throwing a little extra towards your mortgage payment each month.
Some of these options will have you paying off your mortgage a decade or more early, while others will cut just a few months or a couple of years off of your debt. Either way, any of these options could save you money. Consider using a combination of these approaches to really hit that debt hard.
1. Refinance to a 15-year mortgage
An easy way to guarantee that you’ll pay off your mortgage twice as fast is to refinance your mortgage from a standard 30-year term to a 15-year mortgage.
If you refinance to a 15-year mortgage, you’ll typically pay a lower interest rate while making larger payments each month. But here’s the thing: since your term is so much shorter and the interest rate is likely much lower, you won’t pay anywhere near double your current mortgage payment.
Refinancing to a 15-year mortgage could save you hundreds of thousands of dollars in interest over the life of your loan, besides getting rid of mortgage payments much sooner. You’ll have to check out current estimated mortgage rates to see just how much this refinancing process could save you.
What’s the downside of this option? You get locked into a higher monthly payment, which gives you less flexibility in your budget. With a 30-year mortgage, you have lower payments, but you could always pay extra to get out of the loan sooner.
When you refinance to a 15-year mortgage, you’ll get stuck in the higher payment. Plus, you’ll have to deal with the actual costs of refinancing. Then if your income fluctuates for any reason, you may struggle to deal with the higher mortgage payment.
For this reason, you should definitely take time to consider whether or not refinancing to a 15-year mortgage is the best option for your needs. If you have plenty of room in your budget to cover the increased payments, it might be. But if you’re currently working on other competing financial goals, refinancing may not be your best bet.
2. Refinance but keep the same payments
Many who refinance do so to reduce their monthly payments. But if you refinance, you can double up by reducing your interest rate and continuing to make the same monthly payment. This has the same result as making extra payments each month on your current mortgage, but gives you a lower required payment. That means you have more budget flexibility, and can pay more towards your mortgage principal each month without ever increasing your payment.
Just how powerful this option could be depends largely on your current interest rate and your new interest rate. But here’s an example (using this calculator), just so you can see how it might work:
- Original loan amount: $200,000
- Original loan terms: 30 years, 5.5% interest
- Origination date: January 2015
- Original monthly payment: $1,136/month
- Current balance: $193,476
- New loan terms: 30 years, 3.82%
- New payment: $904/month
Let’s say you roll your refinancing costs–$3,600–into your new loan. So that brings your new balance to $197,000, give or take a few. Plug that balance, your 3.82% interest rate, and your 30-year term into this calculator. Then, add in the extra $200 you’ll add to every mortgage payment, bringing your total payment back up to what you’re already used to making.
At this rate, you’ll pay off your loan in 259 months–about 21.5 years–and you’ll save over $42,000 in interest.
Not bad for continuing to make the same mortgage payment, huh?
3. Use pay raises on your mortgage
One way to find extra cash to put toward your mortgage: apply raises from your job.
The goal is to put the same percentage of your income toward your mortgage even when your pay goes up. In other words, if you’re currently putting 15% of your income towards your mortgage payment, 15% of each annual raise amount will go towards your mortgage, in addition to what you’re already paying.
If you’re already leading a comfortable lifestyle and can avoid lifestyle inflation that often follows a raise, you can put your whole raise amount towards your mortgage balance.
This strategy works best for those who get regular raises over and above minor cost of living adjustments. If you aren’t expecting to see your income increase anytime soon, this strategy might not be the best option to start with.
4. Pay extra each month
Fifty bucks might not be much in your budget but consistently adding this much to your mortgage payment can make a big difference.
What if you have that same $200,000 mortgage at 5.5% interest? Maybe you decide not to refinance (though you should at least consider it if you qualify for today’s best mortgage rates!), but just to put extra money towards your mortgage each month.
Add just $50 per month to your mortgage payment, and you’ll pay it off in just over 27 years, saving $24,162 and some change in interest. That’s a pretty big difference for less than the cost of a nice dinner on the town each month!
The biggest problem with this approach, though, is that it requires willpower. To reap those benefits, you have to voluntarily put an extra $50 towards your mortgage payment every month.
5. Use cash windfalls to pay lump sums
Instead of paying a little extra each month, you could pay a large lump sum here and there. This can be done with a cash windfall, such as from a yearly tax refund, work bonus, or inheritance.
Just how big a difference windfalls can make depends. But the good thing about these payments is that you can apply them directly towards the principal of your loan. So if you put $3,000 towards your mortgage’s principal in April when you get your tax check, all of your payments from there on out are a little more effective because less of them is going towards interest.
6. Make biweekly payments
If you opt to make biweekly payments on your mortgage, you’ll make an extra mortgage payment every year. Making 26 payments a year with our example cuts almost five years off a typical 30-year mortgage.
There are a couple of ways to do this. You can manually log in to make 1/2 your mortgage payment every two weeks. This is great if it aligns with when you get paid! Or you can use a free bill pay service to set up automatic payments for this purpose.
If you’d rather stick to making your payments monthly, just add 1/12 of a monthly payment to each payment, and you’ll reap the same benefits of biweekly payments.
7. Set a target payoff date
Setting a target payoff date allows you to know exactly how much extra to pay each month to be mortgage-free by a certain date. You’ll have the added motivation of marking your calendar to plan the celebration.
This calculator is a good one for helping you do the math here. Let’s say you want to pay off that $200,000 mortgage in 18 years when your child goes to college. You’ll need to put an extra $325 towards your payment each month.
What if you want to pay off your mortgage in 10 years? You can not-quite-double your payments to $1,035 to achieve this goal.
8. Combine methods
There’s no need to select only one method from this list. Many mortgage-holders can choose a few options on this list and combine them to pay off their loan even earlier.
Let’s say you apply an extra $200 each month as well as your $3,000 tax refund every April.
Are you paying off your mortgage early? Let us know in the comments what your strategy is.
Listen to our podcast on the pros and cons of paying off a mortgage early: