Tips to Pay Off Your Mortgage Faster
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There are benefits to paying off your mortgage early. You’ll save money by making fewer interest payments, and you’ll free up some of your paycheck by eliminating a major monthly expense.
While paying off your mortgage early can save you money in the long run, you also need to keep your financial life in balance by paying off high-interest debt, saving for retirement and other major goals and being ready for emergencies.
Here are some strategies for building your equity and paying off your mortgage faster.
Refinance your mortgage
If mortgage rates have dropped since you initially got your loan, you can refinance to pay less interest. You could also refinance to a shorter term, cutting down the repayment timeline. By paying off the loan faster, you’ll eliminate years of interest payments. While you could pay off your loan sooner without refinancing by simply making extra (or larger) payments, you may be missing out on a lower interest rate.
Bear in mind, however, that refinancing comes with closing costs just like the initial mortgage. You can expect to pay between 2% and 6% of the total loan amount in closing costs, so the overall savings will have to outweigh these fees. You’ll also have to calculate how this additional expense affects the new planned payoff timeline.
Make larger mortgage payments
Paying more can be a good option. If you decide to do this, make sure the extra money is applied to your mortgage principal. Ask your mortgage servicer (you can find the contact information on your monthly statement) how to do it, and watch your monthly statements to be sure the money is credited correctly.
Pick an amount big enough to make a difference but not so big that it crimps your budget.
Make one extra payment each year
One bonus payment could make a big difference over time. You can do this by making 13 lump-sum payments, or by increasing each monthly payment payment by one twelfth. By the year’s end, you’ll have made an extra payment.
Switch to biweekly mortgage payments,
Rather than saving up to make one extra payment, you can also pay down your mortgage faster by switching to biweekly payments. This would mean paying half the mortgage payment every two weeks instead of a lump sum once a month. This way you'll make 26 half payments over the course of the year, amounting to 13 full payments — equivalent to an extra month's mortgage payment.
Use gifts, bonuses and windfalls
If you don't want the commitment that comes with a 15-year mortgage or increasing the size of your payment, look for cash that dribbles in here and there. Dedicate overtime pay, bonuses or every other bonus to building equity. Cash gifts? Ditto.
If you’re in a position to inherit money, use at least part of it to pay down the mortgage. Your mortgage servicer can tell you how to add dribs and drabs or a big windfall to your equity. Again, make certain the money goes toward the principal, not interest.
