When you pay off your mortgage early, it helps you save thousands of dollars in interest. However, before you think about making such a decision, there are a few things you’ll need to consider and view whether it’s a smart option or not.
In this article, we’ll share some of the pros and cons of paying off your mortgage early – and give you a few tips you can use to reduce the interest you’ll pay on your loan.
Is It Worth Paying Off Your Mortgage Early?
Every time you make a mortgage payment, it’s split between your principal and interest. Most of your payment goes toward interest during the first few years of your loan. You owe less in interest as you pay down your principal, which is the amount of money you originally borrowed. At the end of your loan, a much larger percentage of your payment goes toward the principal.
You can apply for extra payments directly to the principal balance of your mortgage. Making additional principal payments reduces the amount of money you’ll pay interest on – before it can accrue. This can knock years off your mortgage term and save you thousands of dollars. For example, let’s say you borrow $150,000 to buy a home at 6% interest with a 30-year term. By the time you pay off your loan, you’ll have paid a whopping $173,757.28 in interest. This is in addition to the $150,000 you initially borrowed.
Achieve Financial Security
By paying off your mortgage early, you eliminate the burden of monthly mortgage payments sooner than expected. Imagine the sense of relief and financial security that comes with owning your home outright. No more worries about market fluctuations, interest rate hikes, or the risk of foreclosure. With no mortgage to pay, you free up your monthly budget, allowing you to allocate funds towards other financial goals such as investing, saving for retirement, or pursuing your dreams.
Build Equity Faster
Equity is the difference between your home's value and the remaining mortgage balance. Paying off your mortgage early enables you to build equity faster, giving you greater ownership and flexibility with your property. Increased equity can provide opportunities for future financial endeavors, such as using it to secure a loan for investments or renovations. Additionally, having more equity can offer peace of mind in times of economic uncertainty or as a safety net for unexpected expenses.
Enjoy Long-Term Financial Freedom
Imagine a future where you have no monthly mortgage payment. By paying off your mortgage early, you can accelerate the path to financial freedom. The extra cash flow can be directed towards your long-term financial goals, including retirement savings, starting a business, or pursuing new passions. Early mortgage payment provides a solid foundation for building wealth and grants you the freedom to make choices based on your aspirations and values, rather than being tied to a mortgage obligation.
Reduce Stress and Improve Quality of Life
Owning a home is meant to enhance your life, not become a source of stress. By paying off your mortgage early, you eliminate a significant financial burden, leading to reduced stress and improved overall quality of life. The financial freedom gained from a mortgage-free existence allows you to focus on what truly matters: spending time with loved ones, pursuing hobbies, and creating memories.
When Making Minimum Monthly Mortgage Payments Works Better
It may not seem a good idea to focus on paying off your mortgage early if you have other debt to worry about. Credit card debt, student loan debt, and other types of loans often have higher interest rates than most mortgages. This means that they accrue interest faster. You’ll save more money by paying these debts down than you would if you put all your money toward your mortgage. It’s best to sit down with your financial paperwork and compare the interest rates of your other debts to your mortgage interest rate. If your other debts have a higher interest rate, the best practice is you should pay them off completely first. You may want to avoid paying your loan off early if it carries a prepayment penalty. This is a fee your lender charges if you pay off your mortgage prematurely. Prepayment penalties are usually equal to a certain percentage you would have paid in interest. This means that if you pay off your principal very early, you might end up paying the interest you would have paid anyway. Prepayment penalties usually expire a few years into the loan. Consider consulting with your mortgage lender and ask about any prepayment penalties on your loan before you make a large extra payment. Prepayment penalties are also noted in your mortgage contract.
How To Balance Early Mortgage Repayment and Other Financial Responsibilities
While it’s possible to take cash out of your home equity with a refinance, this process takes time, which you may not have in an emergency. Just to be safe, make sure you have plenty of money set aside for emergencies before you put any extra toward your mortgage loan.
You may want to delay paying off your mortgage if you have another big expense coming up or you’d rather put money into your 401(k) or IRA. You might also want to consider diverting your extra money into a child’s college fund or into savings for an upcoming vacation or wedding.
There’s no benefit in paying off your mortgage if it means you might end up going into debt in the future.
How To Pay Off Your Mortgage Early: 3 Essential Tips
Are you considering paying off your mortgage early? Use these tips to own your home sooner.
1. Switch To A Biweekly Payment Schedule
One easy way to pay off your mortgage sooner is to pay your loan on a biweekly basis instead of monthly. For example, if your monthly mortgage payment is $1,000, you’d pay $500 every 2 weeks instead of $1,000 at the end of the month. If this strategy works for your finances, move forward and start saving!
Since there are 52 weeks in a year, following this schedule allows you to make 13 payments on your loan instead of the standard 12. This reduces your debt faster without making you feel strapped for cash.
2. Commit To Making One Extra Payment A Year
The average American gets about $2,933 in their tax refund, according to the IRS. For most individuals, this is more than enough money to cover an extra mortgage payment every year.
You can place your tax refund to good use and make an extra mortgage payment if you’re financially able to. On a $150,000, 30-year loan with a 6% interest rate, a single extra payment every year will help you pay off your mortgage 4.5 years early, saving 56 months’ worth of payments.
3. Refinance To A Shorter Loan
Have you built up a significant amount of equity in your home? If so, you may want to consider refinancing for a shorter term. Refinancing your mortgage allows you to save money on interest without worrying about penalties or scheduling extra payments. It also allows you to fully own your home much faster.
Keep in mind that refinancing your mortgage to a shorter term will increase your monthly payments. Do the math first and make sure you can cover the extra financial burden before you decide to refinance.
Early Mortgage Repayment FAQs
Let’s go over some of the most frequently asked questions regarding paying off a mortgage early.
What if I specifically want my extra payment to go toward the principal balance?
Make sure to communicate with your lender that you want your payment to go toward your principal if you do make advance payments on your mortgage. Some mortgage lenders apply any extra payment you make toward your next monthly minimum. This won’t help you reduce the amount of interest you owe.
How do I know if I’ll have to pay a prepayment penalty for paying off my principal early?
Nobody likes penalty fees, and we'll do what we need to avoid them at all costs. You can find out if your mortgage loan carries a prepayment penalty if you look at your mortgage note, or you can ask your lender. However, it’s important to know that not every mortgage has this penalty.
What if I make two extra mortgage payments a year?
If possible, making an additional payment on top of what you’d already be paying extra through a biweekly schedule or committing to one annual extra payment is ideal. Doing so is a great way to gain full ownership of your home even faster.
However, you should only consider this option if it won’t put your ability to pay for your other financial responsibilities at risk.
Would paying off my mortgage early with lump-sum payments be a good idea?
Deciding to reduce the amount you owe on your mortgage using a large lump-sum payment will depend on your personal situation. While your loan term technically remains the same when you do this, and while you won’t necessarily finish paying off your mortgage any earlier, your monthly payments will go down and the overall financial burden of the loan will be diminished.
Here’s the Bottom Line:
What have we learned? Paying off your mortgage early can save you a lot of money in the long run. Even a small extra monthly payment can allow you to own your home sooner. Make sure you have an emergency fund before you put your money toward your loan. Also, it’s good to save for retirement and pay down your other sources of debt before you add more to what you’re currently paying on your mortgage. Making extra payments, refinancing, or switching your repayment schedule are all strategies that you can use to pay off your mortgage early. As always, consulting with a financial planner is recommended before making any big decisions. If you’re ready to pay down your mortgage, get started on the refinance process today with Gold Financial Services.
