A strategy on how to pay off a mortgage early is something that you may want to act on sooner. This is especially true if making a mortgage payment causes you financial and/ or mental stress. Also, if your goal is to be mortgage free before you retire, by paying the mortgage faster, you also cut the number of years before retirement.
Here are a few ideas on how to payoff a mortgage early:
- change your mortgage payment frequency (i.e. bi-weekly payment vs. monthly payment).
- create new habits of saving more money to be able to make extra principal payment throughout the year.
- find new sources of extra income to make extra large principal payments.
- refinance your loan to a lower rate and/ or shorter period (i.e. 20 year, 15 year loan, etc) if the numbers make sense and you can qualify (good credit, debt to income ratio, loan to value, etc).
- sell your home then rent or buy another home in cash (if you have the equity) and permanently get rid of the mortgage.
- learn about alternative strategies on how to payoff your mortgage early (i.e. using a first position HELOC, All-in-one mortgage, etc.)
There are advantages and disadvantages to the decision and various methods of paying off a mortgage early. Please discuss this with a financial advisor, mortgage, and tax advisor to know what is right for you and your situation.
Now, let us discuss some of these actionable ideas to help you pay off your mortgage quicker.
To begin, here are a few notes on how a typical mortgage works:
- As you already know, mortgage payments in the United States are typically paid monthly.
- They are also customarily set up to be paid in arrears. This means that if your regular principal and interest mortgage payment is due on June 1st, you are really paying for the month of April. Your July payment is applied to the month of June, and so on and so forth.
- In the initial years of a mortgage, more of your monthly payments go toward the interest vs. the principal balance
How to pay off a mortgage early by changing your payment frequency
The way mortgages are amortized, making a payment that is worth one month of the regular mortgage payment can do wonders in paying it off faster.
Set up a bi-weekly regular mortgage payment
The simple act of changing your mortgage payment frequency from monthly to every 2 weeks makes for an extra month’s worth of mortgage payment paid automatically.
Every mortgage servicer/ lender is different.
To change your monthly payment to a bi-weekly, be sure to contact your lender/ bank / mortgage servicer beforehand to understand how they handle incoming bi-weekly payments.
The lender may need to specifically set you up for a bi-weekly payment. You want to avoid sending half month’s worth of a payment viewed by the lender as incomplete payment and cause a late payment penalty.
Make extra principal payments
To be effective, select the frequency of your extra principal mortgage payments to work for you based on your financial discipline and situation.
Let’s say that you have a $1,200 monthly mortgage payment. It could be simpler for you to make i.e. an extra $100 principal payment every month, $25 every week, or a $1,200 extra principal payment annually, or any combination in addition to your regular mortgage payments.
The key is to automate this extra principal payment and schedule it to consistently chip away at your mortgage.
Create new habits of saving money to payoff a mortgage early
There are many ways to save money to help payoff the mortgage early.
Look for recurring expenses like monthly subscription services.
If you use a debit card or credit card for purchases, take a look at your monthly statement for the following monthly subscriptions charges i.e.
- cable, digital entertainment subscription(s)
- membership(s) you don’t need, rarely, or never use
- premium services add-ons, etc.
Look for duplicate and unnecessary charges, add up charges that you can get rid of, then allocate that money saved for your extra mortgage principal payments.
Use any unexpected income and bonus money toward your mortgage
You might have a tax refund, sale proceeds from selling items online, from a garage sale, bonus from work, etc.
It’s tempting to spend this unexpected income elsewhere but if retiring your mortgage early is important to you, then consider making an extra principal payment toward your mortgage.
Payoff a mortgage early by finding new sources of extra income for principal payment
You might have a hobby, spare time, or other passions and interests that may allow you to create an extra income.
If you have extra time, you could house-sit, pet-sit, baby-sit, drive for others, etc. for extra income.
Other options to make extra money could be buying and selling items for profit, selling unused items, etc. You could also start your own small business, be an independent contractor, or work as a consultant.
Be sure to use this new source of income to payoff your mortgage early if this is truly a serious goal for you.
Read Article: How to afford to retire in California
Refinance to a shorter-term mortgage to pay off your mortgage early
If you have a 30 year fixed mortgage, consider refinancing to:
- a 25 year
- 20 year
- 15 year
- 10 year mortgage.
Work with a mortgage loan officer to find out which loan scenario will work the best in your scenario.
A refinance will re-set the time you have paid into a mortgage. Compare the current amortization of your loan vs. the new proposed refinance to see if it makes sense.
Note that a shorter term could make your payments go higher unless refinance mortgage rates are so much lower than your current rate to compensate for the shorter amortization period.
The good news is that lower term loans i.e. 10 year or 15 year mortgage typically have lower rates than a 30 year mortgage.
Pretend as if you had refinanced to a lower term mortgage to payoff your mortgage faster
First, check out what your mortgage payments would be like on a desired refinance loan term i.e. a 10 year, 15 year, 20 year, or 25 year loan term here.
Then what you could do is keep your mortgage as is, but make mortgage payments as if you refinanced to a shorter term mortgage.
This way, you will avoid closing costs and any hurdles of qualifying by refinancing and still chip away at your mortgage.
Sell your home then rent or buy another home in cash to get rid of the mortgage.
If the house that you are in no longer suits your lifestyle and financial situation, then perhaps it is time to sell it.
For some people, selling a home and renting afterwards may be more advantageous than buying another house.
For others, selling a large home, then downsizing to a smaller house paid in cash from the sale of the prior home could be the answer to having a zero mortgage.
Other creative strategies on how to payoff a mortgage early
There are other alternative ways to payoff a mortgage early if you are open-minded and savvy.
For example, qualified individuals who are highly disciplined and have steady and high monthly income stream may want to use strategies involving:
- a line of credit
- first position Home Equity Line of Credit (HELOC)
- all in one mortgage
- lower rate adjustable mortgage vs. fixed rate mortgage
as possible alternative ideas on how to pay off a mortgage early.
Please thoroughly research these strategies on how to payoff the mortgage faster.
There are specific nuances on why these alternative strategies could work or NOT depending on:
- your own personal financial situation (credit, income and spending)
- understanding of all risks involved
- money habits and personal discipline.
Note that you could choose one or two methods that may work for you, or even combine the more commonly accepted ideas + creative solutions to pay it off much quicker.
The key is to do something now – pick the method(s) that will work best for you; then take action.
Time goes fast, before you know it, do the right thing now, and you will reap the reward of having your own sweet, free and clear home!