How to Pay Off Your Mortgage Early

Another bonus? You'll save thousands of dollars in interest.

Text reads "Five ways to pay off your mortgage early: make one extra payment each year, refinance to get a better rate, round your balance up, get a 15-year mortgage, pay it off with "unexpected" money"

Image by Daniel Fishel © The Balance 2019

A large mortgage payment—one that accounts for 30% of your take-home pay or even more—can be a huge drain on the budget. It can prevent you from reaching other long-term financial goals, like an investment portfolio or saving for retirement. And that's not to mention the interest you'll pay over the life of the loan.

Paying off your mortgage early might be a worthy goal if you're planning to live there for a long period of time, but there might be better uses for your extra cash if you're planning to move on in a handful of years. That said, you have at several options for paying your loan off early if you're determined to live mortgage-free, from making an extra payment now and again to refinancing.

Make One Extra Payment Each Year

Making an extra month's payment each year will help you pay off your mortgage faster, and you might not even miss that extra payment. You can try to schedule it for a month when you know you won't be stressed by other expenses, such as the winter holidays, or try one of a couple other options.

Save Up the Payment

This approach will require discipline if you have to save up the payment. Try automatically transferring a small amount each month into a savings sub-account earmarked as "extra mortgage payment."

Use the Bi-Weekly Payment Trick

You might use the bi-weekly payment trick instead if discipline isn't your strong suit and your lender permits it. Do the math. There are 52 weeks in a year, so paying half your monthly payment every two weeks works out to 26 half payments or 13 monthly payments. Voila—there's one extra mortgage payment in 12 months' time.

Refinance to Get a Better Rate

Another way to pay off your loan early is to refinance your loan to get a better interest rate. You'll save tons of money throughout the life of the loan. Plus, your monthly payments will be less overall if you're able to pay less in interest, which will allow you to sock away more cash toward the principal of your loan.

You'll need to a stellar credit score in order to refinance.

Round Your Balance Up

Mortgage payments are usually an amount to the penny, like $1,476.82 a month. You'll shave years off your balance if you round those payments up to $1,480—less than $4 extra per month—or even up to $1,500, and you likely won't miss the money.

Check with your lender to make sure that your extra contribution applies to your principal, not to interest or to next month's payment.

Pay Just $1 Extra Each Month

A similar option is to pay an extra dollar each month. For example, remit $1,401 the first month, $1,402 the second month, and so on if your loan payment is $1,400. It doesn't sound like much, but it will add up over time and your budget probably won't even feel the increase.

Check with your lender first, however. Make sure that the extra money you pay is whittling away at the principal of your loan, especially if you've taken out the mortgage recently and amortization hasn't yet begun to set in.

The mortgage payments you make in the first years of a typical fixed-rate loan are mostly interest because the balance of what you borrowed is greater at this time—you haven't paid it down yet. Toward the end of a loan, payments are lopsided on the side of principal because you owe less interest—you've been paying on the loan for a while.

This is amortization, and it means that extra payments made late in the loan term are going mostly toward whittling away your principal, even if your lender won't designate the extra as principal-only.

Throw "Extra" Money at Your Mortgage

Think of the times you've received "surprise" money, such as a bonus, commission, tax refund, or inheritance. You didn't expect this income, so you'd already budgeted to live without it.

You might be tempted to fritter it away on extras such as a weekend getaway or dining out, but why not apply the entire lump-sum to your mortgage instead? It could potentially shave years off your loan.

Other Tips

Assuming you intend that the property will be your home-sweet-home for many years to come, you might also want to consider:

  • Selling your home and downsizing. Your loan will be smaller, and paying it off will be much easier.
  • Take on a side gig or rent out a room in your home, then put that money toward your mortgage.

Watch Out for Prepayment Penalties

Some lenders charge prepayment penalties. You'll be hit with an extra fee if you pay some or all of your mortgage off early.

It should be mentioned somewhere in your loan documents if your agreement includes a prepayment penalty, so drag out the paperwork and check the fine print. 

The good news is that these penalties don't always apply throughout the entire term of your loan, but usually just the first handful of years. And they're sometimes only charged if you pay off your entire loan in one lump sum, such as through refinancing, not if you make incremental extra principal payments. Check your loan documents to be sure.

Get a 15-Year Mortgage Instead

Standard mortgages last for 30 years, but you can opt for a 15- or 20-year loan instead. Your monthly payments will be higher, but your interest rate will be a bit lower. This will save you money because you'll pay a lower interest rate for a shorter period of time, as long as you can swing the higher monthly payment.

Or you could take out a 30-year mortgage and simply make hefty extra payments on it as though you had a 15-year mortgage. Your interest rate will be slightly more, but you'll have more flexibility in your payment obligations.

Article Sources

  1. American Financing. "Should You Make Extra Mortgage Principal Payments?" Accessed March 17, 2020.

  2. Debt.org. "How to Pay Off a 30-Year Mortgage in 15 Years: Tips & Tricks." Accessed March 17, 2020.

  3. Nationwide Mutual Insurance Company. "6 Ways to Pay Off Your Mortgage Early." Accessed March 17, 2020.

  4. Consumer Financial Protection Bureau. "How Does Paying Down a Mortgage Work?" Accessed March 17, 2020.

  5. Consumer Financial Protection Bureau. "What Is a Prepayment Penalty?" Accessed March 17, 2020.