Paying Off Your Mortgage Early: When and How to Do It

When you take out a mortgage, you might feel uneasy at the thought of carrying debt and paying high interest costs over time. Paying off your mortgage early, however, could help you save money and rid yourself of some financial stress.

Before you make extra mortgage payments or zero out the debt entirely, you should consider whether it’s the best move for you. It may make sense in some circumstances, but not all.

Can you pay off your mortgage early?

Yes, you can pay off your mortgage early. In most cases, you can pay extra to lower your balance faster. Whether you want to pay an extra $20 every month or make a big lump payment, you have multiple strategies to pay off a mortgage faster.

Some lenders charge extra should you decide to pay early. However, prepayment penalties are only allowed in the first three years and don’t exceed more than 3% of the loan balance.

Should you pay off your mortgage early?

Paying off a home loan early comes with both financial benefits and opportunity costs, so it’s a good idea to consider the benefits and drawbacks first.

Learn More: Early Mortgage Payoff Calculator

When to pay off your mortgage early

Paying down your mortgage balance early can remove some financial stress and allow you to focus on other financial goals. You might consider doing this if:

• You’re financially secure in other areas. If you’ve maxed out your retirement contributions, your emergency fund is well stocked, and you’ve paid down other debts, then paying down your mortgage could be the next logical step.
• You have a plan for the extra money in your budget. It’s a good idea to make a plan for what you’ll do with the extra money when you no longer have a monthly mortgage payment. This can help ensure you don’t spend the extra money on frivolous purchases. For instance, you might decide to invest the extra cash.
• You want to gain peace of mind. Some homeowners pay down their mortgages simply because they no longer want a large monthly payment hanging over their heads. This can be especially helpful if you’re about to retire or you live on a fixed income.
• You don’t mind if your assets are less liquid. When you pay off your mortgage, you own the entire house, and your net worth climbs. But if you ever need to tap your equity, you’ll need to either sell the home or take out a home equity loan. Both steps take time and come with extra costs.

Refinance to a Smaller Loan: 10-Year Fixed Refinance Rates

When to pay off your mortgage on time

It’s not always a good idea to put extra money toward your mortgage. Ask yourself these questions to figure out if you should pay your mortgage on time instead of early:

• Do I have other debts to pay off? Credit cards and loans typically have higher interest rates than mortgages, so they accrue interest faster. You’ll save more money if you pay down high-interest debts first.
• Do I have other financial obligations to consider? Contributing money to your retirement account and emergency savings account are important financial goals. If these financial goals are lacking, consider funding these before putting extra money toward your mortgage.
• Do I have other big expenses coming up? If you need to save up for something big, like your child’s college tuition or a new car, then you might want to focus on these goals before paying down your mortgage.
• Does my lender charge a prepayment penalty? If you’re not sure whether your mortgage comes with this fee, call the lender and ask. You’ll need to calculate the penalty and figure out if you still come out ahead.

7 ways to pay off your mortgage early

If you’ve decided that paying off your mortgage early is the right move, there are many ways to go about it. You don’t have to throw your entire savings account at the debt. Instead, consider these options for paying off your mortgage early:

1. Refinance your mortgage

When you use a mortgage refinance to shorten a loan’s term, you can chop years off of your repayment period while paying a smaller amount of interest.

Despite a higher monthly payment, you would save more than $56,700 over the life of the loan with a shorter term, assuming you pay the minimum every month.

Refinancing isn’t free, so weigh the costs of refinancing and whether you want to refinance to an adjustable-rate mortgage or fixed-rate loan.

2. Make biweekly payments

With a typical mortgage, you’ll make a payment once every month for the life of the loan. Some mortgage lenders and services allow you to convert to biweekly payments, which can accelerate your payoff by taking advantage of how interest is calculated and paid on a mortgage.

Good to know: With most mortgages, your interest accumulates a little bit every day. When you make a monthly payment, your interest is paid off first, and any additional payment lowers the principal balance.

When you pay biweekly, your interest doesn’t accumulate as much, so you can pay off the mortgage faster. It also leads to an extra payment every year, as there are 26 biweekly payments every year compared to 12 monthly payments.

Here’s an example using the same $200,000, 30-year fixed mortgage above at 3.3% APR.

With this early payoff method, the loan could be paid off around three years early with a savings of over $13,500.

3. Make extra payments regularly

If you don’t have the funds to commit to additional payments every month, you can always pay extra when you can afford to. Let’s say you can afford to pay an extra $400 every year. That could lead to big savings over time.

With an extra $400 per year, about $7,500 in interest costs fall off of a $200,000 mortgage and it will be paid off about two years ahead of schedule.

4. Recast your mortgage

Recasting is a way to refresh your mortgage without a full refinance. When you recast your mortgage, you make a large, one-time payment toward your loan and the lender creates a new amortization schedule for your loan’s payments.

The new payment schedule will have a lower monthly payment, but that large lump sum you paid in also lowers how much interest is accrued each month. This isn’t all that common, but it’s a good option for some borrowers. Check with your lender to find out if it’s an option with your loan.

5. Make lump-sum payments toward mortgage principal

In the example above, we looked at what would happen if you paid an extra $400 toward your mortgage every year. You don’t have to stick to a regular schedule for extra payments, however.

Any month you have additional funds to put toward your loan, you can make an extra principal payment to help pay off your mortgage early and save on interest charges along the way.

6. Rent out extra space in your house

If you want to make extra payments but don’t know where to find the money in your budget, consider putting your house to work.

Some examples of what you could do include:

• Renting out an extra room
• Turning an accessory dwelling unit (ADU) into an Airbnb
• Renting out space in your garage for storage
• Renting out a parking spot
• Renting your pool or backyard out to someone for an event

7. Put all unexpected windfalls toward your mortgage

You also might receive unexpected funds throughout the year, which you can put toward your mortgage. Any amount can help you save on interest and speed up the debt payoff timeline.

Windfalls may come from:

• Income tax refund
• Inheritance money
• Cash-back rewards on your credit cards
• Stimulus paychecks from the government
• Bonuses at work

Kim Porter contributed to the reporting for this article.