5 Simple Ways To Pay Off Your Mortgage Early (Review)

You’ve got big dreams, and all of those dreams require that you aren’t having to stress about making a mortgage payment each month. Whether you’re looking to free up cash flow for your retirement years or stash as much as you can into savings, you can take small steps today that will make a big difference toward paying off your mortgage early.

By paying off your mortgage early, you won’t just increase your available funds each month—you’ll also reduce the amount of interest you pay over the life of the loan. That’s more money you’ll have later down the line to put toward those big dreams.

Whatever your reasons for wanting to rid yourself of your home loan sooner, use the five tips below to put your payments on a faster track

Cut Your Expenses

When it comes to finding extra money to put toward your mortgage, expenses are a smart place to start. By reducing your expenses, you just might find some wiggle room in your monthly budget that can go toward paying down your mortgage faster.

For example, paying an extra $100 each month could help you pay off your mortgage four years early and save you $23,000 in interest, assuming you took out a 30-year $250,000 loan at 3.5% APR. Just make sure your lender knows you want the extra payment to go toward the loan principal.

When reviewing your expenses for places to save, start with your debit and credit card expenditures for impulse purchases. If you can forgo one fancy coffee a week, that’s an extra $20 per month toward your mortgage. One less night of takeout could mean anywhere from $60 to $160 more for your mortgage.

When cutting expenses, however, be sure to not stretch yourself too thin. While putting some extra bucks toward your mortgage payoff can feel great, you don’t want to drain your life of all its little luxuries. It might take a few months, but, through trial and error, you can find a healthy balance of cutting expenses and still enjoying life.

Make Scheduled Extra Payments

If refinancing to a shorter-term loan looks attractive but you feel unsure about committing to a higher monthly payment, making a scheduled extra payment could net you similar results.

First, you’ll want to figure out how many extra payments you want to make each year—whether it’s an extra payment each quarter or one extra payment a year, there’s no wrong answer. Once you figure out the total dollar amount you want to spend annually on extra payments, you can set up an automatic savings plan at your bank to sweep some cash each month into a special savings account. Your funds will be waiting for you when you’re ready to make your scheduled extra payments.

What kind of early payoff and savings could a few extra payments yield you each year? On a $250,000 loan with a monthly payment of $1,123, making two extra principal and interest payments each year could shave about seven years off your loan and save you $38,000 in interest.

Be sure to check with your bank that these extra payments will be credited toward the loan principal. If you don’t tell your lender directly, some banks will apply your extra payments to prepay interest owed on your mortgage. A simple phone call can let you know what you need to do in order to have the funds properly credited to your loan principal.

Convert to Biweekly Payments

While this might seem the same as making additional payments, the mechanics are a bit different. Many lenders offer borrowers the opportunity to make biweekly payments instead of one full monthly payment. The upside? You’ll pay off your loan faster by saving on overall interest costs. The downside? Not all lenders offer biweekly payment options.

First, you’ll want to explore if biweekly payments are available with your current lender. As a note, you should never have to pay a fee to set up a biweekly payment option. If your lender charges one, you’re better off making an additional principal payment each month along with your regular monthly payment.

If biweekly payments are available, you’ll next want to reorganize your budget to account for mortgage payments coming out of your account twice per month.

How much faster could you pay off your mortgage with biweekly payments? On a $250,000 30-year fixed-rate mortgage at 3.5%, you’ll pay off your mortgage four years early and save more than $20,000 in interest.

Refinance Into a 15-Year Mortgage

Many borrowers initially opt for the lower monthly payments that come with a 30-year fixed-rate mortgage in order to free up more cash flow. As incomes and lifestyles change, however, you may find that you’re able to put more toward your mortgage each month. While making the leap from a 30-year to a 15-year mortgage does involve a substantial payment increase, you’ll also pay off your mortgage in roughly half the time.

For example, here’s a comparison between a $250,000 loan calculated using a 30-year fixed-rate term and a 15-year fixed-rate term:

30-year fixed at 3.8%

• Monthly payment: $1,164
• Interest paid over life of loan: $169,362

15-year fixed at 3.2%

• Monthly payment: $1,751
• Interest paid over life of loan: $65,109

You could save $104,253 in interest and pay off your mortgage in half the time by paying $587 more each month.

Before you decide to refinance, be sure to speak with your lender about closing costs. According to Freddie Mac, closing costs are typically 2-3% of the amount of the loan you want to refinance. Depending on the price tag, you may find that it makes more sense to increase your monthly payment on your existing mortgage and not refinance.

You may come across lenders that offer “no closing costs” refinancing options. While those look appealing on the surface, there’s simply no such thing as a free loan. Compare interest rates and other fees, and you’ll find where the lender makes its money.