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When And How to Payoff Mortgage Early

It doesn't always make sense to prepay

July 16, 2018

The Pantagraph (Tribune News Service)

With the average 30-year fixed mortgage rates now climbing over 4.7 percent, it's no surprise that many homeowners are looking for ways to pay their mortgage off early -- and save themselves thousands of dollars in the process.

There are several ways to go about this. Below is an explanation of each of them.

Should you pay your mortgage off early?
Sticking to your fixed-rate 30-year mortgage will cost you a lot more in interest than paying it off early, but there are times when it is the smarter play. If you have a lot of high-interest debt, like credit card debt, you're better off putting any extra funds toward that instead of your mortgage.

You may also want to stick to your standard mortgage payments if you don't have any sort of emergency fund in place. Most experts recommend keeping at least three to six months' worth of living expenses in a savings account in case of job loss or an unexpected emergency.

But assuming your finances are in good shape, isn't it a good idea to pay off your mortgage early?


There are a couple of questions you need to ask yourself first. First, will your lender allow you to pay your mortgage off early without penalty? And second, is there a better place to put that extra cash?

Check with your lender to see what its policies are on extra mortgage payments. Some lenders only allow you to make extra payments at specific times of the year, so you'll need to plan accordingly. There may also be prepayment penalties if you pay off your mortgage within a specific number of years. In that case, you'll have to decide if the fees are worth what you're saving in interest.

It's a good idea to explore other options for your spare cash before you go making an extra mortgage payment each year. If you have investment accounts, you may prefer to put your money there instead. It's not uncommon for these accounts to yield an average rate of return of about 8 percent, provided you know what you're doing. Over the lifetime of your mortgage, that can help make up for the 4 percent you're paying in interest on your home.

Strategies for Paying Your mortgage Off Early
If you've evaluated all of your options and you still want to pay your mortgage off early, there are a few different ways you can go about this.

First, you can refinance your 30-year mortgage for a 15-year mortgage. Say you have a $200,000 mortgage with a 4.25 percent interest rate. Over 30 years, you'll pay $354,197. But let's say after five years, you switch to a 15-year mortgage at a 4 percent interest rate. You'll save $52,372, and you'll pay off the mortgage 10 years ahead of schedule. You will have to pay closing costs, so this is only a smart option if you can score a lower interest rate than the one on your existing mortgage.

If this isn't the case, then rather than refinancing, you can pay your 30-year mortgage off in 15 years by simply doubling the payments you make each month.

If you can't afford to do that, you may feel more comfortable paying just 1/12 extra each month. In our example above, your monthly payment would be $984. Add 1/12 to that, and you get $1,066 per month. That extra cost would be pretty easy for most people to absorb, and over the course of each year it'll add up to one extra mortgage payment. You'll save $24,885 over the lifetime of your loan, and you'll pay it off four years and three months early.

You can achieve the same effect by making a single extra payment each year or by setting up biweekly payments, if your lender allows this. You'll pay half of your monthly mortgage payment every other week, so it won't feel like you're paying that much more. But because there are 52 weeks in a year, and you're paying every other one, that adds up to 26 half-payments, or 13 full payments, each year. Whichever method you choose, be sure to note on the check or elsewhere that the money is to be applied to the loan principal rather than your next month's payment.

Another way to pay your mortgage off early is to put all of your unexpected or extra income toward your mortgage. This includes tax returns, bonuses, and any financial gifts you receive from friends or family. The advantage of this strategy is that you don't have to set aside any money in your monthly budget for an extra mortgage payment. The disadvantage is that this makes it much harder to predict when you'll pay the loan off. Still, every little bit counts, and if you're contributing extra money whenever you can, you'll probably be able to knock a few thousand dollars off your mortgage.

Paying your mortgage off early is pretty simple once you have a strategy in place. By following one of the methods listed above, you can save yourself a lot of money without putting a huge strain on your monthly budget.

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Copyright (c) 2018, The Pantagraph, Bloomington, Illinois

Distributed by Tribune News Service.

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