How To Pay Off Your Mortgage Early

Want to know how to pay off your mortgage early? You’re in the right place.

Your mortgage might seem like an insurmountable debt, but there are steps you can take to pay off your mortgage fast.

But, since we have a lot of first-time homeowners (and aspiring homeowners) here, I wanted to explain what mortgage options you have.

Read also: Buying a home for the first time? Read this

15 vs 30 Year Mortgage, Which Is Better?

When applying for a new mortgage, one of the things you need to decide is the loan term. The most common mortgages are 15 and 30-year terms.

While a 30-year mortgage is considered the gold standard in this country, many homebuyers find that a 15-year mortgage is more advantageous for their needs.

Read on to learn the differences between a 15 year and 30 year mortgage to help you decide which one is right for you.

• Advantages Of A 15 Year Term

Obviously, the biggest advantage is that you’ll pay off the mortgage a lot quicker with a 15 year loan. If you plan on staying in your home and you don’t want to have to make mortgage payments for the rest of your life, the 15 year mortgage makes perfect sense.

With your mortgage paid off earlier, you’ll be able to plan for other things like retirement, college for your children or other expenses.

Another advantage of a 15 year loan is the interest. You’ll save significant money on interest with a shorter term. It’s not just that you’ll only be paying interest for a shorter amount of time, the rate itself is actually lower. Rates for a 15 year mortgage are typically 1 full percentage point less than its’ 30 year counterpart.

Most lenders offer lower rates on 15 year loans which helps create additional savings. You can expect to pay less than half as much in interest on a 15 year loan versus a 30 year loan.

Finally, you’ll build equity (the difference between the home’s value and what you owe) faster on a shorter mortgage. As the difference increases, so does your equity. 

With a traditional 30 year loan, equity grows slowly. With a 15 year loan it grows more rapidly, giving you more options should you need to borrow against the equity in the future.

• Advantages Of A 30 Year Term

The reason many lenders opt for a 30 year loan instead of a 15 year loan is that the payments are lower, significantly lower. Having a lower monthly mortgage payment can outweigh the many benefits of a shorter loan.

For many families, lower payments are a necessity to make homeownership a reality. In an uncertain economy, lower payments may also be preferred by those who aren’t 100 percent secure in their job.

With lower payments, you can increase your savings account or plan for retirement easier. It’s good for those that need to pay off credit card debt or who need to make improvements to their new home.

Once your other debts are paid off or your savings is sufficient, you can always funnel the extra money towards paying down the principal on your mortgage instead, which will help pay off your mortgage in less than 30 years.

• What’s the Payment Difference?

Many people ignore the 15 year option because they assume they either won’t qualify or can’t afford this type of loan. People oftentimes believe that the payments of 15 year loan costs twice as much as a 30 year loan.

But that’s simply not true.

It turns out that the monthly payment increases only moderately, making a 15 year loan an option for many buyers. Let me present an example to prove this point:

– A $300,000 30 year mortgage at 5% yields a payment of $1,610– A $300,000 15 year mortgage at 4% yields a payment of $2,219

As you can see, the payment did not double, but rather only went up a bit over $600. And over the course of the entire loan, the 15 year mortgage will accrue $99k in interest whereas you’ll pay $279k in interest on the 30 year mortgage.

Do the math and take into consideration the lower rates afforded to shorter loans to determine which one is the best option for you.

Is An Adjustable Rate Mortgage Ever A Good Idea?

Years ago, adjustable rate mortgages (ARM) were all the rage. Both loan officers and real estate agents would convince naive home buyers that ARM loans were not only affordable but their only option if they wanted to own a home.

Their reasoning was that home values would increase, the home would build equity and new homeowners would then be able to refinance their loans before the rate would adjust in 5 years.

But home values didn’t increase and thus homeowners were left with an underwater mortgage they were not able to refinance. When their payments went up, they couldn’t afford the loans they agreed to pay and countless homes went into foreclosure.

You might think an adjustable rate mortgage is a horrible idea for a new homeowner. But that’s not always the case. There are certain unique situations where ARM’s are not such a bad idea after all.

Here are 3 circumstances in which an adjustable rate mortgage isn’t such a bad idea:

• You’re Selling The House For Profit

If you’re purchasing a property for the sole purpose of flipping it for a profit, getting an adjustable rate mortgage may not be such a bad idea after all. You end up getting a lower mortgage payment due to the lower interest rate.

The downside is that you will need to sell the house before the 5 years are up, regardless of the current market, otherwise you’ll be hit with a higher monthly payment.

• You’re Paying The House Off Before Your Rate Adjusts

If you plan to pay the entire balance of the loan off before your rate adjusts, an adjustable rate loan may not be a bad idea.

This way, you’ll take advantage of a lower payment while you gather up the money necessary to pay off the entire loan.

This could be useful for those who are expecting to get a lump sum payment within a few years. This could be a trust fund, a settlement from a lawsuit or a pension.

• If The Current Interest Rate Is High

If you’re young, willing to take a risk and plan to stay in the home for a long time, you could get an ARM if interest rates are high.

If home prices are going up and interest rates are high (rare combination), then when your 3 or 5 year period is up, you’ll need to refinance your loan.

There are two risks with this method, the home must have equity so you’re able to refinance and interest rates should be lower than when you first bought the house.

Talk to a broker or agent you trust, as they will be able to give you personalized pros and cons of taking on this risky kind of loan, including any possible worst-case scenarios.

While owning a home is part of the American dream, it’s better to wait until you can give a 20% down payment and afford the monthly payments of a fixed rate mortgage.

Should Homeowners Even Prepay Their Mortgages?

Paying off a home mortgage is a wonderful milestone of adulthood. It allows homeowners to rid themselves of one of life’s biggest debts.

It’s natural to think about doing this ahead of schedule to save on interest payments and reduce debt. Why wait 10, 20, or 30 years for the financial and emotional freedom that mortgage-free living could bring? Paying off mortgages early is absolutely the right decision for some homeowners, but not for everyone. Before taking the plunge, examine existing debt, savings, and future living expenses.

Living debt-free is not the most important factor in a well-lived life. Step back to look at the big picture before deciding to prepay your mortgage.

• Scrutinize Your Savings

No matter a person’s age or station in life, a nest egg is a valuable asset. It can cushion a job layoff or pay for a wedding, health care costs, or a long-awaited trip. It’s there for emergencies or luxuries.

Savings provides both financial and emotional security.

Anyone considering paying off a mortgage should look at his or her savings first. Is there enough in the bank to get through a lean time or a family crisis?

That nest egg is a necessity while living mortgage-free is a luxury. If paying off the mortgage eliminates savings, don’t bother. Rather than putting money toward a house, think about increasing retirement savings. Many employers match a percentage of 401K contributions which can yield high returns.

Conversely, pulling money out of a 401K to pay off a mortgage can bring stiff penalties that probably aren’t worth it.

• Examine Your Emotions

In addition to financial factors, homeowners should examine their own emotions and priorities. Living without a mortgage can be liberating.

Eliminating debt reduces concerns about money or might motivate a career change. By evaluating emotions, homeowners may realize they’re using the mortgage to put off pleasures they could enjoy today. They might be able to take that desired trip or buy new furniture without being completely debt-free.

Homeowners should picture themselves in 10 years. Maybe their current homes aren’t even the best houses for long-term living, and therefore not worth prepaying.

• Consider Your Spending

Sometimes homeowners need to spend money to improve their quality of life. Before scrounging up funds and committing them to pay off a mortgage early, consider alternative expenses.

Professional training could boost a person’s career and earning power. Money spent on yoga classes, fitness memberships, or gardening tools may provide life-enhancing pleasure, more valuable than a prepaid mortgage.

While the cost of everything from food and cable service to travel and entertainment seems to rise, a fixed mortgage payment is fortunately stable.

So, it might make sense to spend money enjoying other things today and paying only the required amount on the predictable mortgage.

• Look At Your Debt

Paying off credit card debt is much more urgent than clearing a mortgage because of interest rates. While mortgage rates typically hover in the 4% to 6% range, credit cards often carry interest rates of 18 percent, which adds up fast.

Likewise, homeowners should pay off car and college loans before looking at advanced mortgage payments.

Paying off a mortgage can be liberating, but it’s not always the right choice. Homeowners need to examine their own lifestyles, priorities, savings, and spending to make the right decision for their own circumstances.

One of the ways to pay off your mortgage early is to refinance. But there are other advantages to refinancing your mortgage other than paying off your mortgage early.

5 Advantages Of Refinancing Your Mortgage

If done correctly and at the right time, refinancing your existing home loan is an excellent way of reducing your total debt load and can provide you with significant monthly savings on your mortgage payments.

It’s important to note that refinancing isn’t free. It’s going to cost you between 3-6% of your current outstanding mortgage principal due to closing costs. In rare cases, there are even prepayment penalties to be concerned about.

While refinancing isn’t a good idea for everyone, it might just be perfect for your situation.

Here are 5 advantages of refinancing your mortgage.

• 1. You Can Pay Less Interest

For most homeowners, the goal of refinancing is to obtain a mortgage with a lower interest rate in order to save money on future repayments.

If you purchased your home before 2008, when interest rates were high, refinancing can save you a large amount of money.

If your credit rating has improved since your first mortgage, you’re also more likely to secure a better rate.

What does a better rate get you? Sure, it gets you a lower payment, but it also saves you tons in interest charges.

For example, on a $300,000 loan at 6% for 30 years, you will pay $347,514.57 in interest. But with the same loan at 4%, you end up paying $215,608.52. Yeah, I’ll take saving over a hundred grand any day of the week!

• 2. You Can Reduce Your Loan Term

Wait, if you’re getting a new mortgage, aren’t you extending your loan term? Well not if you switch to a 15-year mortgage instead!

Refinancing can save you thousands of dollars in interest in the long run if your second mortgage has a shorter term than the first.

But doesn’t that mean that your payments will go up with a shorter loan? Not necessarily. Interest rates on 15-year mortgages are ridiculously low (currently about 3.25%).

For example, a $300,000 loan at 6% for 30 years equals a $1,800 monthly payment. If you now owe $250,000 and are 10 years in, you can get a 3.25% 15 year mortgage at payments of only $1,757 a month.

You will thus shave off 5 years of your original mortgage and get a lower payment for the next 15 years.

• 3. You Can Get Cold Hard Cash

I know you work hard, but did you know your house has been hard at work too? For all the years you’ve been paying your mortgage, your house has been creeping up in value.

While you shouldn’t use your home’s equity as your personal piggy bank, there are times when it may make sense to cash in.

When you do what’s called a “cash out refinance” you are getting a new 30 year loan on what you owe, plus you’re taking money out on top of that. This means that your new loan is even bigger.

Cashing out some equity is only a good idea when the homeowner plans to use that received cash to add value to their home, either through remodeling or building onto the property.

• 4. You Can Get Out Of An Adjustable Rate Mortgage

Maybe your credit wasn’t that good and all you could afford was an adjustable rate mortgage. With rates surely to creep up in the next few years, it makes sense to get out of an ARM.

Another good reason to refinance out of an ARM is in a situation where you originally bought your home with the intention of moving within a few years, but have since decided to stay for the long term.

Sticking with an adjustable rate mortgage is risky in the long run, and it is often more prudent to switch to a fixed rate mortgage if you plan to keep the property.

• 5. You Can Lower Your Monthly Payment

By far the best reason to refinance your house is to decrease your monthly mortgage payment.

When you stretch the loan to 30 years all over again, your payment will certainly go down.

If you’re a good 20 years into a mortgage, it’s probably not a good idea to start all over. But if you can’t afford the payments and don’t want to move, refinancing is your best bet to keeping your home.

Be sure to only do this if you plan to be living in your home long enough for the costs of refinancing to be recouped by the savings you make on your new mortgage payments.

How To Pay Off Your Mortgage Early

The earlier you pay off your mortgage, the earlier you can become debt-free and truly reach financial independence.

Here are 4 tips to pay off your mortgage early.

• 1. Refinance your current mortgage

If you want to pay off your mortgage faster, look into refinancing your mortgage.

You can get a 15 year mortgage at a low interest rate. If you think your payment might go up a lot – you’d be surprised.

The payment on a 5% 30 year mortgage is $1,342.The payment on a 3% 15 year mortgage is $1,726.

For less than $400 more per month you can shave off possibly 10+ years and pay off your mortgage faster.

• 2. Make additional mortgage payments

One of the best ways to pay off your mortgage early is to make additional mortgage payments, if you can.

When you do this, you not only bring the principal owed down, but you reduce the amount of interest you’ll pay over the life of the loan.

• 3. Keep your spending in check

This one sucks. You need to make sacrifices if you want to pay off your mortgage fast.

This means cutting back on unnecessary expenses and eliminating impulse buying and getting control of your bad spending habits.

• 4. Make extra money

If you truly want to pay off your mortgage early you need to attack this thing with ferocity.

Start a blog, offer your services, do whatever it takes to bring in some extra money.

Put in your earnings from your side gigs directly into your mortgage.

• 5. Make a lump sum payment

Every time you get a large amount of money, put it toward your mortgage payment right away.

This could be payment for a large project (from your freelancing side hustle), a tax refund or a bonus from your job.

Depending on the amount, you can trim off a month or two off your mortgage every time you make a lump sum payment.

Hope this helps. Thanks for reading!