Paying off your mortgage early offers not only peace of mind but also many financial benefits. By eliminating your monthly mortgage payment, you can redirect funds toward other financial goals, whether it’s growing a nest egg, planning for your retirement or simply enjoying a luxury you’ve long postponed. By taking proactive steps, you may be able to save money in the long run and finish paying off your house years sooner.
1. Make Extra Payments Work for You
One of the simplest and most effective ways to pay off your mortgage early is by making extra payments. This can be as straightforward as making one extra payment each year. If you receive a bonus, tax refund, or any extra money, consider putting it toward your mortgage principal. Even small amounts can make a big difference over time. Let’s take a look at an example to explore this idea further.
The image below shows the power of making one large extra payment:
The two amortization schedules above are based on a $500,000 loan, at a 5% fixed rate, with a 30 year term. The principal and interest payment would be $2,684.
You may be asking, what is an amortization schedule?
An amortization schedule is a table that provides more detailed information about how each monthly loan payment is divided. It tells you how much of your payment goes towards paying off the loan’s principal, how much goes towards interest, and what your remaining loan balance is after each payment.
Looking at our example above, the amortization schedule on the left shows the breakdown of your mortgage if you solely made your minimum monthly payment, and no additional principal payments were applied to your mortgage.
But… now let’s consider the following…
What would a $10,000, one-time principal payment do to your mortgage?
Let’s say you made this extra $10,000 payment toward the end of the first year. The amortization schedule on the right illustrates the impact this would make on your mortgage. Making this additional $10,000 pre-payment at the end of Year One would shorten your loan term by 15 months, and save you $31,000 in interest.
As noted by the red arrows, your 12th payment (with the extra $10,000) would be equivalent to where you would have had to make 25 payments normally (without the extra $10,000) to be at the same loan balance. You are moving yourself faster down the amortization schedule. You can think of it as skipping 13 payments at the cost of approximately 4. If your payment is $2,684, then four payments would total $10,736. For this investment of $10,000, you effectively cover what would normally have required 13 more payments.
Also notice that, after applying the $10,000 pre-payment, each subsequent payment has a larger portion going toward principal. This is powerful because not only are you applying $10,000 directly to your mortgage, but you’re also benefiting from a compounding effect. With every subsequent payment, an increasing amount is applied to reduce your principal.
If you’d like to learn more about this topic, watch our brief mortgage reel—under 40 seconds—on how to pay off your mortgage 7 years faster.
2. Refinancing Your Mortgage: Is It Right for You?
Refinancing your mortgage is another powerful way to pay off your mortgage faster. A refinance doesn’t always have to focus on reducing your monthly payment; instead, you can choose to shorten your loan term rather than resetting to a new 30-year mortgage. Strategize on reducing years, rather than monthly payment, to pay off your home loan faster and reduce the amount of interest you pay over the life of your loan.
That’s not to say you must opt against lowering your monthly payments. Taking advantage of favorable interest rates for reduced payments is perfectly acceptable if it suits your needs. Ultimately, it depends on your personal goals.
Our mortgage company focuses on helping homeowners refinance their mortgage loans to align with their financial goals. You can watch one of our refinance videos—less than 60 seconds—where you can learn different ways to refinance your mortgage, whether its to pay off your mortgage ahead of schedule, reduce your monthly payment or do a combination of both.
3. How about a Biweekly Payment Plan?
Using the structure of a biweekly payment plan would allow you to pay off your mortgage early.
How does this payment plan work?
Instead of making one full monthly payment, you make half a payment every two weeks.
However, you don’t necessarily need to have your mortgage set up on a biweekly payment schedule to pay it off sooner. In reality, you can make your own biweekly payment plan. Let’s break this down further…
What does a biweekly payment plan do? It splits your mortgage payment in half, and then you make that half-payment every two weeks. If there are 52 weeks in a year and you make payments every other week, you’ll be making 26 payments that are each half of a normal payment. Ultimately, this means you are making 13 full payments a year instead of 12.
26 half payments = 13 full payments
So, if you want to create your own bi-weekly payment plan, simply make one extra payment per year. This replicates the effect of a bi-weekly payment schedule. Making this adjustment will help you pay your mortgage faster and pay less interest over the life of the loan.
4. Tapping into Home Equity Wisely
Your home’s equity can be a valuable asset when devising strategies to pay down your mortgage faster.
If you find yourself needing to borrow money, tapping into your home equity—such as through a Home Equity Line of Credit—can be a smarter choice compared to using high-interest credit cards. This option can lower your borrowing costs, help you repay the loan faster, maintain a strong financial position, and keep you on track to achieving your financial goals.
If you already have existing credit card debt, you may consider using your home equity to pay off the high-interest balances. After clearing the debt, you can re-apply the money you save toward paying down your mortgage. You can watch our Debt Payoff Reel—less than 50 seconds—which further explains this concept.
Keep in mind, while using your home equity can provide access to money, it’s important to proceed with caution. Borrowing against the value of your home will still add to your overall debt. Therefore, it’s important to have a clear plan for how the funds will be used and a strategy for repaying them responsibly.
5. Smart Budgeting for Mortgage Prepayment
Creating a budget that prioritizes mortgage prepayment is a practical way to pay off your mortgage early. Start by reviewing your monthly and annual expenses to identify areas where you can cut back:
- Review subscriptions and services. Cancel any unused ones.
- Consider cooking at home more often to save on dining expenses.
- Allocate windfalls, such as bonuses or gifts, directly to the principal.
While some of these might seem a bit clichéd, the focus is on the underlying concept. Small wins can add up over time, helping you achieve larger results. By making small adjustments to your spending habits, you’ll be able to pay toward your mortgage more aggressively. As we saw earlier, making extra payments toward your principal balance will have a compounding effect that you benefit from in the long run.
Here are two great tutorials that guide you on how to create your own budget planner in Excel:
- Simpler Tutorial: https://www.youtube.com/watch?v=UAM1Ia5ZIp8&t=363s
- Longer Tutorial: https://www.youtube.com/watch?v=eKyAOjH3Crk&list=PLMCVMXQFhbkm1U0a15e29VDp-OfgB3YP2
6. Peace of Mind With Paying Off Your Mortgage Early
Achieving the peace of mind that comes with paying off a mortgage is an obtainable goal for homeowners who take consistent action. By making extra mortgage payments or putting payment to your principal, you’ll save hundreds or thousands of dollars in interest and build equity faster, opening up financial opportunities for future endeavors.
Whether you choose large pre-payments, extra monthly payments, refinance strategies, home equity strategies, or a combination of methods, the impact on the term of your mortgage can be significant. While it requires commitment, the freedom of having your mortgage off early is worth the effort.
And consider the following – if you’d like a mortgage payoff strategy designed specifically for you, please reach out to us! Here at US Capital, our goal is to be more than just a lender. We wish to serve every client as a trusted partner throughout their journey of homeownership.