If you’re like the majority of American homeowners, the most expensive bill on your table is your mortgage payment. Every time you make a monthly payment, you get just a little bit closer to the goal of owning your home outright. But of course, you also pay a big chunk of your monthly income to your bank by way of your interest payments.
And over the span of a traditional 30 year mortgage loan term, those interest payments will cost you tens or hundreds of thousands of dollars on top of your initial loan. But what if you could pay off your mortgage early?
For most Americans, this would be a major financial boost. Paying off your mortgage early can save you thousands in interest payments. And completing your loan term early could significantly improve your spending flexibility, enhance your saving power, and secure your overall financial freedom.
Of course, we recognize that this is easier said than done. Many Americans are living paycheck to paycheck, which means any additional spending would be difficult to sustain. But what if we told you that there are all kinds of ways to repay your mortgage faster without feeling a big pinch in your everyday budget? We’ve outlined a few strategies to help you.
But first, if you are just beginning your search for a home and you’re concerned about qualifying for a mortgage, we’ve got all kinds of awesome resources to help you along the way. Check out our index of The Best Financial Calculators For Homeowners Including Mortgage, Refinance, Affordability, and More.
If you’re already preapproved for a mortgage, or you’re already in the midst of loan repayment, read on…
8 Ways to Pay Off Your Mortgage Faster
The traditional mortgage loan term is 30 years. But that doesn’t mean you have to use that full repayment period to knock out your loan. If you can pay off your mortgage sooner, it could be worth tens of thousands to you, or even more!
As you consider the early mortgage payoff strategies listed below, think about how each one may or may not fit into your personal budget and financial outlook. Some of these strategies may strain your budget while others may be a perfect fit. Some of these strategies work best when combined with one another.
As you review, think about building an early payoff strategy that makes the most sense for you.
1. Start With a Bigger Down Payment
If you are just at the beginning of your home ownership journey, one big preemptive step you can take toward early mortgage payoff is to maximize your down payment. The more you can put down now, the lower your monthly payments will be, and the easier it will be to incorporate any number of the other early mortgage payoff strategies listed here below.
You actually have a number of options when it comes to making your down payment. So how you approach this step can have a significant impact on the length of your loan repayment term. The traditional down payment for a mortgage loan is often cited as 20% of the sale price for the home. However, this is not necessarily required.
In fact, says an article from U.S. Bank, home buyers in the U.S. paid a median rate of 6% for their down payment in 2021. And, according to U.S. Bank, “A Federal Housing Administration (FHA) Mortgage has a minimum down payment of only 3.5%. It’s available to all qualified buyers, regardless of income level. Also, you can buy a home with no down payment if you meet the specific restrictions of a United States Department of Agriculture (USDA) loan or a Veteran Affairs (VA) loan.”
Of course, while you may save money upfront with an FHA mortgage, you will still have to repay that money over the life of the loan. And depending on interest rates, this could mean tens or even hundreds of thousands more. So the more you can pay off your mortgage ahead of time, the lower your loan principal balance will be. In addition to lowering your money payments, this strategy will inevitably reduce the amount of extra money spent over time on interest.
And over time, that lower payment amount may give you the financial flexibility to more easily make extra mortgage payments. More on that below…
2. Make Extra Mortgage Payments
Making extra payments periodically can shave years off of your mortgage loan term, as well as taking many thousands of dollars off of your overall debt. Ramsey Solutions offers a hypothetical in which “you have a $220,000, 30-year mortgage with a 4% interest rate. Our mortgage payoff calculator can show you how making an extra house payment ($1,050) every quarter will get your mortgage paid off 11 years early and save you more than $65,000 in interest.”
Even just making one extra mortgage payment a year could make a substantial difference in what you owe over the long haul. Try putting aside just a few extra dollars in an automatic savings account every week. By the end of the year, you should have enough to make a single extra payment toward your mortgage. Making 13 payments each year on your mortgage instead of 12 will ultimately reduce the length of your repayment period by several years.
Another way to do this is to make bi-weekly loan repayments throughout the year. By essentially paying your mortgage every four weeks, instead of every month, you will ultimately make 26 separate payments, amounting to 13 full mortgage payments in a single year. Not every bank accepts biweekly payments. Be sure that your bank allows you to pay according to your own schedule before attempting to make this extra monthly payment.
Generally speaking, before you attempt any of these strategies, it’s important that you reach out to your bank to find out what your options are. Some mortgage lenders may not allow you to make extra payments, or may even impose a prepayment penalty should you attempt to do so.
Find out what kind of repayment flexibility you have before you choose the best route for you. However, if both your bank and budget allow, getting in just one extra mortgage payment per year could go a long way toward improving the pursuit of your long term financial goals.
For more on this strategy, check out our article advising on whether or not you should be making biweekly mortgage payments.
3. Round Up Your Monthly Mortgage Payments
One of the easiest ways to speed up your repayment period without feeling the pinch on your everyday finances is to round up your monthly payment to the nearest $100. If your mortgage payment is $1015 each month, try to pay $1100. By paying an additional $85 each month, you will automatically make one full additional mortgage payment over the course of the year without ever making an additional payment.
Obviously, the amount of your monthly mortgage payment will vary. The math may not work out quite as succinctly as in the example above. However, if your goal is to round up enough to make that extra annual payment, simply divide your monthly mortgage rate by 12 and add that number to each monthly payment.
At a cost of less than $100 dollars per month, you can take years off of your mortgage.
4. Add a Dollar a Month
Not ready to pay an extra $80 to $90 a month? How about $1?
This is a great strategy if you are looking for a way to pay off your mortgage that accelerates as your finances improve. This plan works exactly the way it sounds. Add one more dollar to your mortgage payment every month. In the first year, that’s just $78 additional dollars that you’ve paid toward your mortgage.
Obviously, that number will grow over time. But so does the monthly income for many American households. The idea is that the size of your monthly mortgage payment grows as your household income grows.
Adding an additional dollar each month may not sound like a lot, but it can shave years off of your mortgage repayment period. Nationwide offers an example based on a mortgage payment of $900 per month. The home insurance company advises, “Simply pay $900 the first month, $901 the second month, and so on. For a 30-year, $900-per-month mortgage with a 6% fixed interest rate on a loan of $150,000, you could reduce the term of your mortgage by eight years.”
5. Refinance At a Lower Interest Rate
Depending on a number of circumstances, it may be beneficial to refinance your mortgage. Under the right circumstances, refinancing through a lender could significantly lower your interest rate.
As Equifax explains, “One of the primary benefits of refinancing is the ability to reduce your interest rate. A lower interest rate may mean lower mortgage payments each month. Plus, saving on interest means you end up paying less for your house overall and build equity in your home at a quicker rate.”
That said, refinancing may not be the right move for everybody. Moreover, some moments are more optimal for refinancing than others. Indeed, Equifax warns that the interest rates established by the Federal Reserve dictate current interest rates for aspiring homeowners and borrowers.
If the current federal interest rate is higher than the federal interest rate was at the time you signed your original mortgage agreement, refinancing could actually result in a higher interest rate on monthly payments. Naturally, this would not be an ideal set of conditions under which to refinance.
If federal interest rates have gone down since you signed your mortgage, refinancing could be beneficial. It could also be beneficial to refinance if your credit score has increased significantly since the time of your original mortgage agreement. The improvements on your credit report, combined with optimal federal interest rates, could result in significantly lower interest charges.
And in the event that refinancing does lower your monthly payments by cutting into your interest rate, you may consider continuing to repay your loan on the original monthly payment schedule. Now, the additional money will go toward the principal balance rather than toward interest. This, of course, would ultimately help advance the goal of repaying your mortgage early.
6. Refinance With a Shorter Term Loan
There are other options when it comes to refinancing. While the option above would likely lower your monthly payment, you would have to take the initiative toward paying off your mortgage early by continuing to pay the higher monthly minimum from before refinancing. By contrast, you may be able to significantly reduce the length of your mortgage loan term if you’re willing and able to refinance with a higher monthly minimum.
An article from Wells Fargo advises, “if you find that you’ve paid off about 10 years on a 30-year mortgage, you could refinance to a 15-year mortgage to get you closer to the end date.”
You might assume that cutting the length of your loan repayment term by half would basically double your monthly payment. But it doesn’t work that way. While your monthly payment would go up, it might not be exactly as much as you at first assume.
According to an article from U.S. News & World Report, “the monthly principal and interest payment on a 30-year mortgage for $200,000 at 7% interest would be approximately $1,331. A 15-year mortgage under the same terms would have a $1,798 monthly principal and interest payment.”
The takeaway here is that you shouldn’t allow yourself to be deterred by fear of a higher monthly payment. If your household does have a few hundred dollars worth of monthly flexibility, it could be well worth your while to refinance with a shorter loan term. This would push you more aggressively toward the goal of early loan repayment.
7. Make Lump Sum Payments
This is a good strategy even if you are making other gains on repaying your loan. You may come into unexpected money from any number of sources. From holiday bonuses and big sales commissions at work to generous personal gifts or a sizable tax refund, use that surprise income to make extra payments on your principal balance. You may even consider re-allocating the exact sum you’ve received for your mortgage interest tax deduction back into your mortgage.
While it can be tempting to use that bonus money for other spending objectives, each lump sum payment you make toward reducing your debt moves you closer to repaying your mortgage early and gaining greater long term financial freedom.
And if you come into a major sum of money by way of inheritance, sale of valuable items, or profits from investments, you may be able to knock out a major portion of your principal balance in one fell swoop.
If you succeed in doing so, this might also be a good time to refinance based on the lower balance. You may be able to secure a shorter mortgage term, lower monthly payments, and lower interest rates after making a substantial lump sum payment. All of these steps would, of course, move you toward early repayment.
8. Downsize To a More Affordable Home
If your primary goal is to be relieved of having to make monthly mortgage payments, one of the fastest pathways is to downsize your home. This may seem like one of the more extreme solutions, but if you’re willing to sacrifice a bit of space, some amenities, or a highly desirable location in exchange for a substantially smaller mortgage payment, you could dramatically accelerate the path to repaying your mortgage early.
According to Ramsey Solutions, you might consider selling your current home and setting your sights on a more modest space. Ramsey Solutions notes that “With the profits from selling your bigger house, you may be able to pay 100% cash for your new home. But even if you have to get a small mortgage, you’ve still succeeded in reducing your debt. Now your goal is to get rid of that debt as quickly as possible. The smaller the balance, the quicker you can make it happen.”
Again, while relocating to a new home altogether is a big step, making this sacrifice today could buy you a great deal of financial freedom in the future. By taking on a mortgage that can be repaid far faster, you can consequently own your home outright sooner. As a consequence, you may be able to save money more aggressively toward your dream home in the future.
At this point, the sale price on your current home combined with your savings should amount to a pretty hefty down payment. And as Ramsey Solutions notes “the more cash you put down on the front end, the less money you’ll need to finance. That adds up to a lower mortgage payment each month, making it easier to pay off your house early.”
In short, if you’re willing to be patient, and to make some sacrifices regarding your living situation in the short term, you could secure a brighter long term future, one without a lifetime of mortgage payments.
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Not sure you can get together the 20% required for a traditional mortgage? You may be a good candidate for an FHA mortgage. Learn more about the FHA mortgage and find out if this option is right for you.