Guide: Understanding How to Pay Off Your Mortgage Early
Paying off debt is an important part of maintaining healthy finances. For many people, their mortgage is the largest, most significant form of debt that they ever choose to tackle.
Staring down a 30-year payment plan and the attached interest could be overwhelming to anyone, and paying it down as fast as possible may be a priority.
Often, people choose to accelerate their mortgage repayment in an attempt to curtail the affects of their interest rate.
There are so many methods to choose from, and each offers different pros and cons. It is very important to find the best way to pay off your mortgage for your finances to help you achieve your goals.
Should I Pay Off My Mortgage Early?
When trying to find the best way to pay off a mortgage, many people encounter similar questions:
- Should you pay off your mortgage quickly?
- What is the fastest way to pay off a mortgage?
- Is it possible to pay off a mortgage in 5 years?
- How can I find the best way to pay off my mortgage?
To answer these questions and more, AdvisoryHQ has built this guide to help you understand different methods for paying down a mortgage and the advantages and disadvantages offered by each. Each approach has been examined to give you the best information as quickly as possible.
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The Benefits of Paying Off Your Mortgage
A mortgage is essentially just another form of debt, and it is almost always best to eliminate as much debt as possible. One of the biggest benefits of paying off your mortgage quickly is that it will limit the total amount of interest that you are required to pay.
Interest makes up a huge portion of the total amount that will be paid by a borrower over the entire term of the loan, but it may be partially avoided if you pay off a mortgage early.
For example, a $150,000, 30-year fixed-rate mortgage with a 5% interest rate has a monthly payment of around $800, not including mortgage insurance or additional costs. If the mortgage is paid in full over the entire 30-year term, the borrower will end up paying $140,000 in just interest.
That interest is in addition to the $150,000 of principal that they will need to pay to cover the cost of their home. When a homeowner is able to pay off their mortgage early, in some cases, they can reduce their interest.
Another benefit of paying off your mortgage quickly is that it will increase the amount of equity that you hold in your home. This means that if you choose to sell your house, that increased equity can be used toward your next down payment. A large down payment will allow you to take out a smaller mortgage, which can result in huge savings.
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Disadvantages of Fast Mortgage Payoff
Though there are many benefits of paying off a mortgage quickly, there are some disadvantages as well. The main drawback to paying a loan back quickly is that, though less interest will be paid, more money must be invested immediately.
Instead of putting extra funds into a savings account, investment, or using it to pay down another debt, any money used to pay off a mortgage early will be attached to your home and therefore largely inaccessible.
It may be a better use of resources to pay down a high-interest debt, like a student loan or credit card balance. Mortgages carry relatively low interest rates when compared to other forms of debt. They also allow people to access tax benefits, which can help reduce their cost.
It is true that eliminating a monthly mortgage payment can free up extra income. However, when you choose to pay off a mortgage faster, it is possible that it will not resolve your mortgage quickly enough to be worth it. It may end up just diverting funds from a more useful cause.
It is entirely possible that none of these disadvantages are enough to outweigh the benefits of reducing your mortgage. It is important to look at each option and be sure that, if you choose to pay off your mortgage faster, it is the right choice for your finances.
The best way to pay off a mortgage is to do so whichever way benefits your finances the most. Make sure that you have a savings fund for emergencies, are saving for retirement, and have paid off as much high-interest debt as possible. Remember to look at your finances holistically and prioritize your debts appropriately.
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Increase Payments to Pay Off Mortgage Early
One of the best ways to pay off your mortgage quickly is to simply increase the amount paid toward the loan each month.
There are a few strategies that can be used to increase payments when paying off a mortgage. Perhaps the easiest and fastest way to pay off a mortgage is to divide the minimum required monthly payment by a factor of twelve and add that to your payment every month.
It is important to use the total monthly payment for this calculation, including both interest and principal. This will increase the amount of money headed toward paying down your mortgage by one entire payment at the end of the year. Essentially, you will be making 13 payments each year instead of 12.
One downside to this plan for paying off your mortgage early is that some companies will not automatically accept this method. In order to pay off your mortgage faster, you must be sure that any additional payments are calculated correctly.
Contact your mortgage servicing company before you make any additional contributions to help pay off your mortgage faster. This will allow you to understand how to make extra payments.
Your company may ask that you indicate when special payments are made to ensure that they will be calculated in a way that will help pay off your mortgage early. They may also be able to offer suggestions about paying down your mortgage efficiently.
Increasing your monthly payment, even just by 1/12 can help you pay off your mortgage faster. The real question is: should you pay off your mortgage using this method or a different one?
To find the best method to pay off your mortgage early, it is important to consider your own needs and expectations. This method will affect every person’s mortgage differently because it relies on a number of different factors, like:
- The amount of mortgage already paid
- The length of time left in the mortgage
- The amount of remaining interest
- Private mortgage insurance
One example, provided by Bankrate.com, breaks down like this:
A $200,000 mortgage with a 4.5% interest rate that has been paid down with the minimum payment for 5 years will shorten by 3 years and 3 month with an extra 1/12 added to each monthly payment. This shortened mortgage length offers savings of more than $18,000, which may be adequate savings, and may not, depending on your expectations.
One of the best things about this method is that it only requires a small addition to each monthly payment. When considering the example above, this mortgage would have a minimum monthly payment of about $1,013, but the homeowner could save $18,000 worth of interest by simply adding $85 a month. This method also offers flexibility because in an emergency, the additional payment is not required.
Make Biweekly Mortgage Payments
Another of the best ways to pay off a mortgage quickly is to increase the number of mortgage payments made in a year. Making biweekly mortgage payments is a good way to do this without breaking the bank.
This method involves making a half of a regular payment every two weeks instead of once a month. Biweekly mortgage payments allow you to make an extra payment throughout the course of the year. This is because months do not divide evenly into four weeks, since there are 52 weeks in a year; you end up making two additional payments over 12 months.
This is a good way to increase the number of payments made without having to increase the cost of your monthly mortgage.
Though this is one of the best ways to pay off a mortgage, it comes with one disadvantage. Some lending companies will not accept biweekly mortgage payments. It is important to make sure that your lender will accept payments of this nature because otherwise they may simply hold your partial payment in escrow until you pay the full amount. This means that they will not apply the payment to principal early and you will miss out on savings.
It is important to calculate mortgage payoff potentials for each method to choose the right one for your finances. If you are looking for dramatic results, one extra payment a year may not be the best choice for you.
This method offers mortgage holders a chance to save thousands of dollars in interest over the course of the loan. However, it will not cut a mortgage term in half or anything that substantial.
In an example provided by the financial department of U.S. News, this payment method can offer the following results. A 30-year mortgage with a 4.5% interest rate for $100,000 paid off on a biweekly schedule will be reduced by 5.5 years. This can offer the mortgage holder a $14,000 savings on interest.
These results are significant, but they may not be possible for your own finances depending on the circumstances surrounding your mortgage. To find the best option for you, be sure to crunch the numbers for your own mortgage. This can be done manually or you can use any number of websites that offer tools to calculate mortgage payoffs.
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Refinance to Pay Off Your Mortgage Faster
One of the best ways to pay of your mortgage quickly is to redefine the terms of your loan. This can be done by refinancing your loan with a shorter term that requires paying off your mortgage early.
A shorter-term loan would require that you make higher monthly payments, but it would guarantee that you pay off the mortgage faster. It is crucial to keep in mind that this is not a flexible method. Once your loan has been refinanced, you will be required to make the higher payments every month and must continue paying off the mortgage.
Shorter-term mortgages often have interest rates that are between 1/4 and 3/4 of a percentage point lower than longer-term options. This can result in significant savings over the lifetime of the loan and make paying off your mortgage early even easier.
Refinancing a loan to pay off your mortgage early is not a magic fix. The refinancing process takes time and money and requires qualification and approval of the new mortgage terms. Applicants will need to deal with paper work, pass a credit check, and pay closing costs if they are approved.
This is one of the best ways to pay off a mortgage with dramatic effects. However, it is important to calculate the mortgage payoff potential offered by a shorter-term loan to see if you’ll really pay off your mortgage faster.
In an example offered by Bankrate.com, a 30-year fixed-rate mortgage with a 4.5% interest rate and 5 years of payments could be refinanced into a shorter 15-year mortgage with a 4% interest rate. This change, it you qualify for it, has the potential to save more than $60,000.
Savings are possible because of the lower interest rate and because paying down your mortgage quickly results in fewer interest payments. The significant reduction in time and money spent on the loan may make the hassle of refinancing worth it. However, it is important to remember that this will increase monthly payments and is not a flexible option.
Pay Off Your Mortgage in 5 Years
Maybe reducing your mortgage by a few years or refinancing your loan is just not for you. Maybe you are looking for something a little more extreme. Making a plan to pay off your mortgage in 5 years might seem like a tall order, but it is possible with a lot of capital and a lot of motivation.
A few tips to help you pay off your mortgage in 5 years include:
Stick to a budget
Using a budget is a great way to regulate your spending. Reducing your costs as much as possible on things like grocery bills, vacations, and entertainment can really add up. Be sure to keep an emergency fund on hand, but funnel as much as possible into your mortgage payment for dramatic effects. Build additional mortgage payments into your budget to keep yourself on track.
Sometimes credit card payments can sneak up on you. Large debts of this nature can keep you from making large mortgage payments. One strategy is to only make purchases that you can afford at the time to keep yourself from adding to your debt instead of paying it down.
Know your goals and progress
Set a definitive goal as to when and how you would like to pay off your mortgage. Make sure that it is realistic, achievable, and specific. Keep track of your progress to make sure that you will reach your goal on time.
Downsize to Pay Off Mortgage Early
Paying off a mortgage at an accelerated rate usually means making larger or more frequent payments. However, there are some methods to pay off a mortgage faster that may not require paying more money.
One way to pay off a mortgage faster is to downsize your home, and therefore, your mortgage. Purchasing an entirely new home just to pay off a mortgage early may seem radical and may not be the right choice for some homeowners. However, for mortgage holders who are serious about finding the fastest way to pay off a mortgage or reduce payments, this is an effective method.
Calculate Mortgage Payoff
Mortgage holders with relatively valuable homes may be able to sell their house and put profits from the sale toward the cost of a new home. If the sale price was high enough, or the value of the new home low enough, they may be able to purchase the new home outright and skip a new mortgage altogether.
Even if a new mortgage is necessary, it is likely to be much smaller than the original mortgage and have smaller payments, which makes paying off your mortgage early that much easier. This is because the profits from the original home can be used to make a substantial down payment, and the new mortgage will be for less, which means smaller monthly payments.
If the buyer continues to make large monthly payments as if they were still paying down the mortgage for their old home, they will be able to pay off the mortgage faster. This method for paying off a mortgage may be particularly helpful for retirees or empty nesters who no longer want or need to keep up with the maintenance of a larger home.
Conclusion: Understanding How to Pay Off Your Mortgage Early
The biggest question to ask yourself when exploring the idea of quick mortgage payoff plan is: Should you pay off your mortgage quickly or bide your time? The answer to this question will be different for everyone, and it is important to allocate your funds appropriately based on your own financial needs.
To find the best information for you, keep some of our larger points in mind:
- Paying off a mortgage early can save thousands of dollars in interest payments
- Refinancing with a shorter-term mortgage can save on interest but increase monthly payments
- Making one extra payment a year can shorten your mortgage term by years
- It is important to work with your lender to ensure that extra payments are calculated correctly
Paying off a mortgage quickly is one of the fastest ways to build equity and reduce interest payments. Each of the methods presented here has both positive and negative attributes. Choosing the most dramatic or fastest way to pay off a mortgage may not be the best choice for every homeowner. It is very important to find the best way to pay off your mortgage that balances both your finances and goals.
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