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Here’s how to pay off your mortgage faster (But should you?)

Craig Berry
The Mortgage Reports contributor

Want to pay off your mortgage faster than 30 years?

For some homeowners, a 30-year mortgage can make it feel like you’ll never be without the burden of debt.

Fortunately, there are a number of effective ways to pay off your mortgage faster and save big on interest payments.

Even better, not all methods require spending a lot of extra money.

But consider your options carefully. If you have extra cash to spend on your mortgage, it may generate more value elsewhere.

Here’s what you should know.

Find out if you can shorten your mortgage term (Oct 30th, 2020)

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Why pay off your mortgage faster?

Few people keep their 30-year mortgage for its full term. In fact, homeowners stay put just 13 years on average — and their loans might have an even shorter lifespan if they refinance at some point.

For homeowners who don’t plan to pay off their 30-year loan in full, paying it off early is less of a concern.

But what about homeowners who stay put for the long haul? Those 30 years of interest payments can start to feel like a burden.

You may find yourself wondering how to pay your mortgage off faster so you can live debt-free and have full ownership over your home.

Here are five strategies you can use to meet those goals.

Five ways to pay off your mortgage faster

There are a number of ways to shorten your loan term and save a ton of money in interest on your mortgage.

1. Refinance to a shorter term

While the 30-year home loan is most popular, some homeowners may not be aware there are several different terms offered by lenders. Many offer 10, 15, 20, 25 and 30-year terms.

Let’s compare a 20-year term to a 30-year term.

First, most 20-year mortgages carry slightly lower rates than 30-year terms. Typically, 20-year rates can be anywhere from one eighth to a quarter percent lower.

  • Let’s say you’re financing a $250,000 loan on a 30-year term at 3.75%. Your principal and interest payments would be about $1,150 per month
  • Using the same loan amount, but with a 20-year term at 3.625%, your monthly payment would be $1,450
  • You’d pay a few hundred more per month, but you would be mortgage-free in ten years less time

The best part? The savings on that 20-year mortgage would be over $65,000 if you kept it until it was paid off.

Another benefit of refinancing to a shorter term is that you don’t have to start over with 30 more years.

For many homeowners who are well into their original mortgage term, starting over with another 30 years might not make sense.

But with a 15-year refinance, you could lock in a low interest rate and a shorter loan term to pay off your mortgage faster. Just note: the shorter your mortgage term, the higher your monthly payments will be.

Verify your 15-year refinance eligibility (Oct 30th, 2020)

2. Make extra principal payments

Unlike the era pre-housing crisis, when early payoff penalties were common, most mortgages don’t carry pre-payment penalties anymore.

This means you can pay additional smaller payments each month, or you could pay larger sums like some homeowners do each year after receiving their tax refund.

Here’s an example.

  • Let’s say you took out a home loan for $300,000 on a 30-year term and rate of 4%
  • That’s a principal and interest payment of $1,370
  • 360 payments of $1,370 per month means you’ll have paid $492,500 over the life of the loan

Using the same numbers for the loan amount and interest rate:

  • If you paid extra principal payments of just $250 per month, you’d shave seven years and four months off your term
  • Moreover, you’d save more than $59,000 total in interest payments

Let’s say you sent your $1,370 per month to an investment account for seven years after you pay off your loan (the amount of time by which you reduced your loan term.)

With a 5% return, your redirected mortgage payments would equal a nest egg of $135,000. Not only did you save $59,000 in interest, but you have an additional stash of cash after your original 30-year loan term.

3. Make one extra mortgage payment per year

Many homeowners choose to make one extra payment per year to pay down their mortgage faster.

One way to do this is to contact your mortgage servicer about making bi-weekly payments.

When you pay every two weeks instead of every month, you end up adding one extra payment each year.

Whether it’s done through bi-weekly payments, tax refund money, or maybe a yearly bonus, this is another great way to reduce your term.

As an example, if you took out a mortgage for $200,000 on a 30-year term at 4.5%, your principal and interest payment would be about $1,000 per month.

Paying one extra payment of $1,000 per year would shave 4 ½ years off your 30-year term. That saves you over $28,500 if you see the loan through to the end.

4. Recast your mortgage instead of refinancing

Mortgage recasting is different than refinancing because you get to keep your existing loan.

You just pay a lump sum toward the principal, and the bank will adjust your payoff schedule to reflect the new balance. This will result in a shorter loan term.

One major benefit to recasting is that the fees are significantly lower than refinancing.

Typically, mortgage recasting fees are just a few hundred dollars. Refinancing fees, by comparison, are usually a few thousand.

Plus, if you have a low interest rate, you get to keep it when you recast your mortgage.

Alternatively, if you have a high interest rate, refinancing might be a better option.

But check with your lender or servicer. Not all companies will allow a mortgage recast.

>> Related: Mortgage refinance calculator: Calculate your savings

5. Reduce your balance with a lump-sum payment

An alternative to recasting is to make lump-sum payments to your principal when you can.

Some homeowners may come into money via an inheritance, large bonus or commission checks, or even selling something valuable. These moneys can then be applied towards the outstanding principal balance on your mortgage.

Since VA and FHA loans cannot be recast, lump-sum payments might be the next best thing. Also, you’ll save yourself the bank fee for recasting.

With some mortgage servicers, you must specify when extra money is to be put toward principal.

Check with your servicer if you are unsure how additional payments will be applied

Find out if you can shorten your mortgage term (Oct 30th, 2020)

Downsides to paying off your mortgage early

Most financial experts encourage people to put any extra money into their retirement accounts rather than pay off their mortgages early.

The reason? The stock market has earned an average annual return of 10% for nearly 88 years.

Homeowners could potentially earn more by investing extra funds in the bull market than they saved by paying down their mortgage.

Besides, however much they spent on mortgage interest, they’d get some of that money back at tax time.

And there are other potential drawbacks to consider before paying off your mortgage early, too:

  • Using all your extra funds to pay down your mortgage may tie up a good chunk of your liquidity and net worth in your home. It may be harder to access it later
  • You may miss out on the potentially higher returns from other investments
  • If the real estate market dips just when you’re thinking of selling, you may not receive as much as you had hoped

Is paying off your mortgage early the best move for you and your family? It depends on your situation and goals.

If your main objective is to be debt-free as soon as possible, then look into one of the five strategies above to pay off your mortgage faster.

This can be especially appealing if you’re close to your mortgage finish-line, and starting over with a refinance wouldn’t make sense.

Should you pay off your mortgage early or refinance?

Do you want to pay off your mortgage faster because you’re worried about how much you’re spending on interest?

If you’re simply concerned about how much interest you’re paying, it might be worth refinancing to a lower rate — and maybe a shorter term — instead of making extra payments toward your mortgage.

There’s a potential to earn more by investing that money than you’d save by paying off the mortgage early.

Of course, the right move depends on how long you plan to stay in the home, how much extra money you’re working with, and how low of a refinance rate you’d qualify for.

Verify your refinance eligibility (Oct 30th, 2020)

Recap of ways to pay off your mortgage faster

If you decide you want to pay off your mortgage early, ask your mortgage lender about:

  1. Refinancing to a shorter mortgage term
  2. Making extra principal payments
  3. Making one extra mortgage payment per year
  4. Recasting your mortgage
  5. Making a lump-sum payment

Whatever you choose, make sure you’ve weighed all your options to find the best use for your hard-earned cash.

Verify your new rate (Oct 30th, 2020)