Whether you signed up for a 10-, 20- or 30-year mortgage, the monthly payment continues for the life of the loan. The only way to escape that fact is to pay off your mortgage early. You'll incur higher monthly bills, but you'll own your home faster and build equity quicker.
How to Pay Off a Mortgage Early With Increased Regular Payments
The best way to pay off a mortgage early is to increase your monthly payment by a specific margin or pay more often each month, such as every two weeks, according to finance guru Dave Ramsey. You'll create a financial habit that makes it easy to structure your finances.
Determine how much extra you can afford to pay on your mortgage, and then merge that money into your monthly budget. You can send the extra money at the same time as your regular mortgage payment or send it separately, depending on your income schedule.
How to Use Windfalls to Pay Off a Mortgage Early
You can also try paying off your mortgage early by using extra income you receive during the year. A tax refund is a common example. When you get the check, deposit it in your bank immediately, and then write a separate check to your mortgage lender.
Other windfalls include lottery winnings, bonuses at work, commissions and unexpected inheritances. Just make sure a mortgage prepayment is the best use of the money in light of your overall financial picture.
How to Refinance Your Home for Mortgage Prepayment
If you qualify, you might want to refinance your home to get a lower interest rate. If you continue to pay off your mortgage at the original payment amount, you'll satisfy the loan early and save money on interest. When you apply for refinancing, decide whether you want to shorten the term of the loan.
A shorter mortgage means less interest, but it can also put you in a financial bind if your income situation changes. For example, should you lose your job, you might have to revert to a smaller mortgage payment until you find work again.
Benefits & Drawbacks to Early Repayment
Before you put any of these strategies to use, ask yourself if you really should pay off your mortgage early. In most cases, if you have the cash, you'll benefit from mortgage prepayment. Consider your income source and frequency when deciding which method to use. For example, if you earn commissions through work, the windfall scenario might work best. When you receive a large chunk of money, just put it toward your mortgage. Conversely, if you receive predictable income, increasing your monthly payment might work better.
There are a few situations in which mortgage prepayment could harm you. Some lenders, for instance, charge prepayment penalties. If yours does, weigh the amount of interest you'll save against the penalty amount to decide which makes better fiscal sense. Otherwise, prepayment makes sense unless you can't handle the extra costs financially. If you want to own your house as soon as possible, consider paying off your mortgage early.