Buying a home is one of the biggest financial milestones, and for many people, monthly mortgage payments quickly become another line of your budget. If you’ve ever wondered whether it’s possible to pay off your mortgage early, the answer is yes, and it could be a wise way to save interest and feel at ease.
In this Redfin article, we will analyse what early mortgage payout really means when it makes the most sense, and analyse strategies you can use to pay your loan faster, such as making additional payments. Whether you’re building your life in a Los Angeles, California home or settling in a Dallas, Texas home, understanding your options can help you make the best financial decisions for your future.
Can I pay off my mortgage quickly?
Yes, most lenders can pay off their mortgage earlier than their schedule by making additional payments, increasing monthly payments, or paying the full loan. In the US, most mortgages do not have advance penalties, but some mortgages should check with your lender before moving forward.
How to pay off your mortgage early
If you decide that early repayment is right for you, here are some practical ways to do it:
Make additional principal payments: Add a little extra to the principal each month or make an extra payment to one or two times a year. Round your payments: Instead of paying $1,250, close it down to $1,300. These small amounts add up over time. Switch to biweekly payments: 26 half payments you pay every two weeks instead of monthly results, which amounts to 13 full payments each year rather than 12. Apply windfalls: Use tax refunds, bonuses, or side hustle income to repay your mortgage balance. Refinance for a short term: A 15-year mortgage will have a higher monthly payment, but will result in significantly less interest over the life of the loan.
>> Read again: How to lower your mortgage payments
Example: How much can you save with additional payments?
Let’s say you have a 30 year loan with a 6% interest rate of $300,000. Here’s how quickly you can pay it off by making additional payments, and how much interest you can save.
Additional Payment Strategic Loans pay with interest payments paid in interest Total interest savings Additional payments 30 years $347,515 $0 $100 $100 $100 $100 $100 $296,301 $296,301 $51,214 $250 $250 years $248,210 $99,305 $500 additional
*bieekly = half price of 26 times a year. This is equivalent to a full payment of 13 instead of 12. This brings about the same savings as making an extra payment every year.
>> Also Read: How much does interest rate affect your monthly payments?
When do you pay off your mortgage early?
Early repayment of your mortgage is most beneficial when:
You have a high interest rate and refinance is not an option. You are approaching retirement and want to eliminate monthly housing costs. With a stable income and strong emergency savings, you won’t be cash strapped after paying extra fees. You value peace of mind and financial security in maximizing your potential investment returns.
On the other hand, mortgages have low interest rates and if you can earn more by investing your money elsewhere, it may make sense to stick to regular payments while building wealth in other ways.
The advantages of paying off your mortgage early
Save on Interest: The faster you pay off your loan, the less interest you pay over time. Peace of mind: Owning your home completely can give you financial security and stability. Monthly expenses reduction: If you don’t have a mortgage payment, you’ll free up cash flow for retirement savings, travel, or other priorities. Build wealth faster: No mortgages and much of your income will be directed towards investments and other financial goals.
>> Also Read: When it makes sense to buy interest rates on your mortgage
Cons of paying off your mortgage early
It’s appealing to be mortgage-free, but it’s not always the best financial decision for everyone.
Possible advance penalties: Some lenders will charge you a fee to pay your loan early. Loss of tax credits: Itemizing helps reduce the interest tax credits on mortgages by paying off the mortgage. However, this is only important if your itemized deduction exceeds the standard deduction. This may not affect you as many homeowners already use the standard deduction. Bound Cash: When you pay back your home, your money will be tied to your property. There may be low liquidity for emergencies, investments, or other financial needs.
Mistakes to avoid when paying off your mortgage early
It’s wise to pay off your mortgage earlier than planned, but only if you avoid common pitfalls. Here are some mistakes to be aware of:
Forget to specify “Principal only.” When making additional payments, you must instruct the lender to apply to the loan principal. Otherwise, they may apply to future profits or future payments, but that won’t reduce your balance so quickly. Do not check advance penalties: Some lenders will charge you if you pay your mortgage early. Check your loan document or ask the lender before asking the lender. Overlooking high profits: When carrying credit card or personal loan balances, focus on them first. They usually have higher interest rates than mortgages, so paying them off will save you more in the long run. Ignore your emergency funds: Don’t pour all your extra dollars into your mortgage, even if you leave you without savings. Unexpected expenses such as medical costs, car repairs, or job changes can create financial stress if you don’t have cash on hand. Reducing retirement savings: You may feel like you’re not in debt, but pulling money away from your retirement account (especially those with employer matches) may cost more long-term growth than you’re interested in and saving. It is important to reward yourself too aggressively without considering other goals. Homeownership security is important, but funding for education, travel, or other investments is also important. Make sure your early pay-off plans fit your overall financial strategy.
FAQs about paying your mortgage early
1. Is it a good idea to pay off your mortgage early?
It depends on your financial goals. Early repayment of your mortgage can save money and provide peace of mind with interest, but it is not necessarily the best option if you can earn a higher return by investing additional funds elsewhere. Consider your long-term priorities before making a decision.
2. How can I repay my mortgage early without penalty?
Start by reviewing your loan agreement and checking whether the lender will charge you a prepaid penalty. If not, you can either pay an additional fee to the principal each month, make a biweekly payment, or apply a bonus and tax refund directly to your loan balance. Even a small extra payment can help shorten the loan duration.
3. Will mortgage repayments affect your credit score early?
Although not important, your mortgage contributes to the length of your credit mix and credit history. You may get a slight soak in your score when your loan closes, but you will still have a record of your time payments. Over time, being mortgage-free is usually net positive.
4. Does a small extra payment really make a difference?
yes. Rounding up your monthly payments or adding $100 a month can shorten the term of your loan by several years and reduce your total interest costs.
5. Can I pay off my 30-year mortgage in 15 years?
Yes, many homeowners choose to pay off their 30-year mortgage faster by making additional payments or refinancing to a 15-year loan. In the short term, monthly payments are often higher, but the interest paid over the lifespan of the loan is significantly lower.
6. When should I pay off my mortgage early?
If you have a higher interest rate, want to retire without paying a mortgage, or have already strong emergency funds and other debts to a minimum, that often makes sense. If your mortgage fees are low, you may benefit more from investing extra money elsewhere.
7. Can I repay my mortgage quickly in one lump sum?
yes. You can quickly reduce your loan balance by making temporary payments directly to the principal. Make sure that additional payments to the lender are applied to the principal and no advance penalty is applied.
8. What is the fastest way to pay off your mortgage early?
Fastest strategies include biweekly payments, refinancing for a shorter period, bonuses to loan principals, inheritance, or applying large amounts of lumps from side income.
