What to know before you pay off your mortgage early

Paying off your mortgage early can help save thousands of dollars in interest. But before you start throwing a lot of money in that direction, you’ll need to consider a few factors.

In this article, we’ll share some of the pros and cons of paying off your mortgage early and give you a few tips you can use to reduce the interest you’ll pay on your loan.

How paying off your mortgage faster works

Every time you make a mortgage payment, it’s split between your principal and interest. Most of your payment goes toward interest during the first few years of your loan. You owe less in interest as you pay down your principal, which is the amount of money you originally borrowed. At the end of your loan, a much larger percentage of your payment goes toward principal.

You can apply extra payments directly to the principal balance of your mortgage. Making additional principal payments reduces the amount of money you’ll pay interest on – before it can accrue. This can knock years off your mortgage term and save you thousands of dollars.

Why it makes sense to pay off your mortgage early

Let’s say you borrow $150,000 to buy a home at 6% interest with a 30-year term. By the time you pay off your loan, you’ll have paid a whopping $173,757.28 in interest. This is in addition to the $150,000 you initially borrowed.

Now, let’s say that you pay an extra $100 every month toward a loan with the exact same term, principal and interest rate. At the end of the term, you’ll have paid $128,170.57 total in interest. That’s $45,586.71 less than you would have paid if you didn’t make any extra payments. You’ll also pay your loan off 81 months earlier than you would if you only paid your premium each month.

How to pay off your mortgage early: 4 essential tips

Think that paying off your mortgage early is right for you? Use these tricks tips to own your home sooner.

1. Switch to a biweekly payment schedule

One easy way to pay off your mortgage sooner is to pay your loan on a biweekly basis instead of monthly. For example, if your monthly mortgage payment is $1,000, you’d pay $500 every 2 weeks instead of $1,000 at the end of the month.

Because there are 52 weeks in a year, following this schedule allows you to make 13 payments on your loan instead of the standard 12. This reduces your debt faster without making you feel strapped for cash.

2. Contribute what you can

You might assume that you need to shell out hundreds of extra dollars each month to pay off your mortgage early. The truth is, a small monthly amount or a single annual payment can make a major difference over the course of your loan.

Contributing just $50 extra each month can help you pay off your mortgage years ahead of schedule. You don’t need to find a way to earn an extra $10,000 a year to pay off your mortgage.

If you’re looking for a tool that can help you understand amortization and estimate what paying off your mortgage early would cost you, try using our Rocket Mortgage^® amortization calculator. It’ll help you see for yourself how a small amount can impact your loan.

3. Commit to making at least one extra payment a year

One option is to use your tax refund to make an extra mortgage payment each year if you’re financially able. You could potentially end up paying off your mortgage several years earlier than your original payoff date, and you’d be saving yourself a lot of money in interest. If your tax refund is enough to make this extra payment once a year, it could help you financially in the long run.

4. Refinance to a shorter loan

Have you built up a significant amount of equity in your home? If so, you may want to consider refinancing to a shorter term. Refinancing your mortgage allows you to save money on interest without worrying about penalties or scheduling extra payments. It also allows you to fully own your home much faster. However, if the current interest rate is, say, below 3%, and you choose to refinance, it could very well double due to current rates. Keep this in mind before making this decision.

Keep in mind that refinancing your mortgage to a shorter term will increase your monthly payments. Do the math and make sure you can cover the extra financial burden before you decide to refinance.

How to prevent issues to pay off your mortgage faster

The decision to pay off your mortgage early is a personal one that depends heavily upon your individual circumstances. Here’s what you should know if you want to pay off your mortgage faster without issues.

Make sure you have savings

The best candidates for early mortgage payoffs are those who already have enough money to cover an emergency. You’ll want at least 3 – 6 months’ worth of household expenses in liquid cash before you focus on paying off your mortgage. This is because it’s much more difficult to take money out of your home than it is to withdraw money from a savings account.

Pay off debt with high interest

Credit card debt, student loan debt and other types of loans often have higher interest rates than most mortgages. This means they accrue interest faster.

By paying these debts down, you’ll save more than you would if you put all your money toward your mortgage. It’s best to review your financial paperwork and compare the interest rates of your other debts to your mortgage interest rate. If your other debts have a higher interest rate, you should pay them down first.

See if there are prepayment penalties

You also may want to avoid paying your loan off early if it carries a prepayment penalty. While Rocket Mortgage doesn’t charge prepayment penalties, there are some lenders that will charge this fee if you make payments on your mortgage prematurely. Prepayment penalties are noted in your mortgage contract, usually equal to a certain percentage you would have paid in interest and typically expire a few years into the loan.

Consult your mortgage lender and ask about any prepayment penalties on your loan before you make a large extra payment.

Is it a good idea to pay off your mortgage early?

Paying down your mortgage early reduces the amount that you’ll pay over time, but finance experts vary on whether it’s a good idea.

Some believe that people should concentrate on investing rather than paying off their mortgage early. Others believe it’s better to use the money that would have gone to extra payments to pay down other sources of debt.

The decision to pay off your mortgage early is a personal one that depends heavily upon your individual circumstances. If you’re looking for a tool that can help you understand amortization and estimate what paying off your mortgage early would cost you, try using our Rocket Mortgage^® amortization calculator.

When paying off your mortgage early works

The best candidates for early mortgage payoffs are those who already have enough money to cover an emergency, have already paid off other high-interest debt, and don’t have a prepayment penalty on their mortgage.

FAQs about paying off your mortgage faster

Let’s go over some of the most frequently asked questions regarding paying off a mortgage early.

Should I pay off my mortgage early?

Take time to assess your financial plans and decide whether making extra payments on your mortgage loan will still help you reach those financial goals.

Paying down your mortgage early reduces the amount that you’ll pay over time, but many finance experts agree that you shouldn’t always focus on paying off your loan as soon as possible. Others think it’s best to invest, pay down other debt, or add to your savings.

How do I know if I’ll be charged a prepayment penalty for paying off my principal early?

You can find out if your mortgage loan carries a prepayment penalty by looking at your mortgage note or asking your lender. However, it’s important to know that not every mortgage has this penalty. Rocket Mortgage doesn’t have any prepayment penalties.

What if I make two extra mortgage payments a year?

If making an additional payment on top of the extra payment you’d make through a biweekly schedule or by committing to one annual extra payment is a feasible financial option for you, doing so can be a great way to gain full ownership of your home even faster.

However, you should consider this option only if it won’t negatively affect your other financial responsibilities.

Is paying off my mortgage early with lump-sum payments a good idea?

Deciding to reduce the amount you owe on your mortgage using a large lump-sum payment will depend on your personal situation. While your loan term will technically remain the same and you won’t necessarily pay off your mortgage any earlier, your monthly payments will go down, and the overall financial burden of the loan will be diminished.

The bottom line: It’s possible to pay your mortgage off faster

Paying off your mortgage early can save you a lot of money in the long run. Even a small extra monthly payment can allow you to own your home sooner. Make sure you have an emergency fund, have enough savings, and you pay off high-interest debt before you put your money toward your mortgage.

Making extra payments, refinancing, or switching your repayment schedule are all strategies you can use to pay off your mortgage early. As always, consulting with a financial planner is recommended before making any big decisions.

If you’re ready to pay down your mortgage, get started on the refinance process today with Rocket Mortgage.