If you are looking to shorten the length of your mortgage or decrease the total interest you will pay on it, working to pay off your mortgage early can be hugely beneficial.
Mortgage payments are one of the largest regular monthly payments we make and are usually a recurring expense for an average of 30 years (the average mortgage term, without extensions or refinancing).
So, it makes sense to want to shorten the length of time you will be making these payments and reduce the total amount you will pay over the full term of your loan.
Fortunately, this doesn’t have to involve any huge changes to your mortgage terms or your lifestyle. There are a number of ways to work toward paying off your mortgage early, depending on your financial standing.
Regardless of the current mortgage interest rates available, paying off your mortgage early is always a good option considering the uncertain and unpredictable nature of today’s economy.
Should I Pay Off Mortgage Early or Invest?
Before investigating the various methods of paying off your mortgage early, you should first consider whether it is the best choice for you based on your current finances and situation in life.
While it is natural for anyone with a little extra cash to instinctively want to put it towards mortgage payments, it may be more beneficial to you in the long run to instead invest in something else.
Consider the long-term benefits of investing your money in a pension plan or into a high-rate savings account, in order to set yourself up for a greater return later on in life.
By the time you retire, you may have also fully paid off your mortgage, so you will be even more financially secure and flexible in your retirement.
You should also fully assess all of your outstanding debt before paying extra money into your mortgage.
Credit cards and personal loans typically have much higher interest rates than mortgages, so it may be much more sensible to prioritize these payments over early mortgage payments.
How Can I Pay Down My Mortgage Faster?
There are a range of options available to you when it comes to paying off your mortgage faster, minimizing the total amount you spend on interest, and allow you more freedom with your income.
It can be as simple as making additional payments when you have the spare cash, overpaying each month or year, refinancing your mortgage loan, paying down your principal, or exploring other avenues for extra payments such as credit cards and HELOC.
Another method for paying off your loan faster is to offset your mortgage. This involves linking your savings account to your mortgage, so that any money held in your savings account is offset against your outstanding mortgage balance.
Your savings are not actually used to make any payments into your mortgage, they simply remain in a separate savings account without collecting interest. You mortgage lender can then deduct the amount that you have in savings from your mortgage balance.
Consequently, you are only charged interest on your mortgage balance minus your savings account balance, which ends up saving you money in your mortgage interest, without having to make any additional payments.
For example, if you have a mortgage balance of $100,000 and $15,000 in savings, you will only be charged interest on your mortgage balance as if it were $85,000. There are plenty of offset mortgage calculators available online if this is a viable option for you.
Benefits of Paying Off Mortgage Early
If you are currently on a 30 year repayment mortgage plan – as the majority of those with mortgage loans do – and you have never lengthened the term of your loan, you will be set up to be mortgage free by the end of this period.
However, paying even just a little extra per month could end up shortening the full term of your mortgage by a few months, or even a few years, depending on the size of your loan and the amount you are able to overpay.
Doing so will also save you a considerable sum of money over the course of your mortgage term, as you will be decreasing the length of time for which interest can be accrued on your mortgage.
In doing so, you will significantly reduce the total amount you will pay over the full length of your mortgage.
How to Pay Off Mortgage Early With HELOC
HELOC, or a home equity line of credit, is an emerging new strategy for paying off your mortgage faster. It is quite a complex method to wrap your head around, but it essentially comes down to the following steps:
- To start, you will need to have a positive cash flow (i.e. your income exceeds your expenses).
- For one select month, you set aside your entire paycheck to go toward paying off your mortgage.
- Then, you pay for your living expenses on a credit card for this month – one with a good grace period.
- Add a HELOC to your home.
- Next, you transfer your outstanding credit card balance to your HELOC at the end of the grace period.
- The following month, you use your paycheck to pay off your HELOC balance rather than to make your usual mortgage payment.
- So, now your credit card has no outstanding balance, your mortgage has reduced considerably, and you simply have to pay off the remaining amount due to the HELOC.
- Repeat this cycle.
In theory, if you repeat this over 3-month cycle, for example, you will be paying decidedly more into your mortgage every year without having to have any extra money for overpayments.
How to Pay Off Mortgage Early with Credit Card
While paying mortgage payments on a credit card may seem like an appealing alternative if money is a little tighter than usual, it is something that needs careful consideration.
For one thing, many mortgage companies will not allow loan holders to pay towards their loans with other types of debt. Similarly, not all credit card companies will support mortgage payments either, while those that do also sometimes charge an additional fee.
On option for circumventing these issues is to go through a third-party that can process your credit card payment and then make a direct payment to your mortgage lender.
Again, these companies may also charge an additional servicing fee for processing your payments.
As mentioned earlier, credit cards usually come with much higher interest rates than mortgages do, so paying off your mortgage loan with a credit card can end up costing you a lot more in the long run if you are not able to repay the outstanding balance quickly.
If the cashflow problem you are experiencing is only temporary, however, this may be a perfectly viable option.
How to Pay Off Mortgage Early Without Refinancing
If your financial standing has changed dramatically since you created your mortgage terms, you may need to consider refinancing your loan. However, this is not always an option available to you, depending on your situation.
For example, if you have recently become self-employed, you may not be able to seek out a new mortgage loan with better rates.
For this reason, exploring other methods of paying off your mortgage faster without refinancing may be worth considering.
Making a yearly extra payment is a good option if you can save a lump sum to set aside for this purpose, or plan on using a bonus you know is coming later in the year as a prepayment.
By doing this, you can shave years off of your total loan term. Alternatively, you can simply increase your monthly payments by a small amount to more gradually chip away at your mortgage.
Is It A Good Idea to Pay Off Your Mortgage Early?
Deciding whether to pay off your mortgage early entirely depends on your financial situation.
If you have the capability to make over-payments towards your mortgage loan without compromising your financial stability or future plans, it can be an effective way to save yourself a lot of money in interest payments and get you mortgage-free that much sooner.
Check with your lender before you decide to do this, however, as some mortgage loan agreements stipulate a specific overpayment limit, so you may be charged if you make a payment that exceeds this without consulting your lender.
What Happens When You Pay Extra Principal on Mortgage?
Any mortgage is designed to gather as much interest over the term of the loan as is possible under the conditions of the agreement.
This means that the interest you pay each month is calculated based on principal loan balance of your mortgage – so, if you can reduce the principal balance of your loan, you will be paying less interest over the lifetime of your mortgage.
By making these prepayments, you can save yourself thousands of dollars in interest payments.
Best Way to Pay Off Mortgage Early
The best way for you to pay off your mortgage early will completely depend on the terms of your loan and your current financial standing.
Unless you have access to a large sum of extra cash to make a more substantial prepayment on your mortgage, making incremental over-payments on a monthly basis is probably the most feasible option.
Using HELOC or credit cards can be fantastic options when used correctly but can also be quite risky if you aren’t careful.
If you care considering using a credit card or HELOC to help pay off your mortgage early, make sure you do your research first and talk to your lender before proceeding.
Mortgage Pay Extra Calculator
There are plenty of resources out there offering advice on the best ways to pay off your mortgage loans, including calculators designed to help you work out how much extra you should be paying.