Save thousands of dollars when you pay off your loan early.
Paying off your mortgage faster could save you an enormous amount of money in interest — but you could end up on the hook for a prepayment penalty.
1. Make extra payments
Setting aside just $100 a month for extra mortgage payments will save you quite a lot in interest over a 30-year loan period. Say you borrowed $500,000 over 30 years with an interest rate of 3.56%. Your monthly payments would be $2,262. But if you add an extra $100 on top of that from the beginning of your mortgage you’d end up saving $25,845.58 in interest over 30 years.
You can use the calculator below to see how much interest you’ll save by making extra payments. Enter your mortgage amount, interest rate, loan period and then the extra amount you can pay on top.
2. Choose a shorter loan term
Most borrowers opt for a 30-year mortgage. This reduces the size of your monthly payments but you end up paying more over time than if you’d chosen a 25-year term because you’re paying interest for five more years. The longer you borrow money from the bank, the more they make in interest.
This is a smart option for borrowers who can afford higher monthly payments. If you can’t, then stick with a 30-year loan term and work out other ways to pay off your mortgage faster.
3. Refinance to a lower rate but keep your payments the same
Signing a new mortgage agreement is called refinancing. It’s an excellent way to lower your payments and spend less on your mortgage. But refinancing could help you get debt-free faster. The trick is to switch to a lower interest rate but keep your monthly payments the same as they were before.
It will feel like nothing has changed but you’re actually making extra payments, so you’ll pay your debt down faster.
4. Make your payments as early as possible
Make biweekly instead of monthly mortgage repayments. Because there are a little over four weeks in a month, you’ll end up making two extra payments a year.
But there’s an even better trick: take care of your mortgage on payday. Unless you have a lot of cash in the bank you’re probably waiting on your next pay check to cover your next mortgage payment. If you get paid a week before your next mortgage payment is due, why wait? Make the payment the next day.
5. Start with a larger down payment
It’s not a realistic option for every borrower, but scraping together a bigger down payment means borrowing less. This might mean keeping to a tighter budget, asking for a pay raise, selling off investments or even borrowing from your parents and paying them back (depending on the interest rate set by “Bank of Mom and Dad.”
Is there anything to be wary of when rushing to pay off my mortgage?
The above tips are useful but you do need to watch out for a few possible problems when rushing to repay your mortgage.
Does your loan penalize your for making extra payments?
Some mortgages charge you a fee for making extra payments or for paying off your loan early. This can be an expensive punishment for trying to get out of debt faster. Check the fine print of your mortgage, speak to your lender and consider refinancing to a more accommodating loan.
Check your equity before refinancing
The two assumptions we make when talking about refinancing are that you’ve been paying off your mortgage and your property has risen in value. These two facts increase the equity you have in your home, making it easier to refinance.
But if your property has fallen in value or you haven’t paid off much of the mortgage you might not have much equity. In this case, refinancing could hurt you. If your loan-to-value ratio is below 80% you might have to pay lenders’ mortgage insurance.
Compare mortgage refinancing options
If your mortgage is penalty-free, you can save a lot of money by paying it off early. If you do have a prepayment penalty in your fine print, calculate whether or not the penalty is smaller than the amount you’d save in interest. And if you’re still shopping around for a new home, get a mortgage with a competitive rate to save the most.