The idea of having to pay a mortgage over decades can discourage homeowners as a homeowner’s dream is to own their home and be free of mortgage payments. Even more so, as homeowners get close to retirement, they want nothing more than to pay off their mortgage and use the extra money to travel and enjoy retirement.
But before you decide to put a large lump sum of money towards your mortgage payment, it is crucial to determine if it makes sense for you financially.
So, here are some tips on when and how to pay off your mortgage early to reduce the overall cost of homeownership.
How to Pay off Your Mortgage Early
There are many ways to pay off your mortgage early. However, it will depend on each homeowner’s financial situation and what works best.
#1 Pay an Extra House Payment Each Quarter
The extra money you put toward your monthly mortgage payment will begin to go toward your principal balance. Paying more each month could take years off of your mortgage as well as thousands of dollars.
One way to help determine how much more to pay is to divide your monthly payment by 12 and add that amount to each monthly payment. You can also pay half of your mortgage payment every two weeks. Bi-weekly payments add up to one extra payment each year, taking years and thousands off your mortgage payment.
If it is not in your financial budget to pay an extra payment, round up your mortgage payments so that you are at least paying a few dollars extra each month, alleviating you from paying more interest than you have to.
Related: Should You Be Making Weekly or Bi-weekly Mortgage Payments?
#2 Pack Your Lunch
While bringing your lunch to work, skipping out on take-out, or taking a break from your coffee shop stops is not always ideal, it can save you money to put toward mortgage payments.
Surprisingly, the money spent on lunch, take-out, or coffee shops can add up to or be more than a monthly mortgage payment. Adding that extra money to your mortgage payments can save thousands in interest and reduce your mortgage loan by several years.
#3 Refinance
One way to pay off your mortgage early is to refinance. For example, refinancing your 30-year mortgage into a 15-year fixed-rate mortgage will allow you to pay your mortgage in half the time and pay much less interest.
Remember that refinancing to a shorter-term mortgage will increase your monthly mortgage payment, so it is crucial to ensure you can financially cover the extra costs.
If you cannot refinance, pay more toward your mortgage as if you did refinance to a shorter-term mortgage.
#4 Use Bonuses or Refunds
Whenever you get a bonus from work or receive your income tax refund, you can put the extra money toward the principal on your mortgage payment.
#5 Make a Larger Down Payment
Most homebuyers stress about down payments and how much they can put down on a home. However, putting a minimum of 10% or as much as possible can help reduce the amount that must be refinanced.
A larger down payment can also reduce monthly mortgage payments, saving you even more money.
#6 Discuss with Your Mortgage Broker
Perhaps most importantly, discuss paying off your mortgage early with a mortgage broker who can discuss the strategies and options available to you.
Some options for paying your mortgage off early may not be allowed under the terms of your home loan or may have a prepayment penalty. Furthermore, some strategies, such as refinancing to lower your monthly payment, will have to be executed by a mortgage broker, so it’s best to talk with a mortgage broker about paying off your mortgage early in the process.
When to Pay Off Your Mortgage Early
The best time to pay your mortgage off early depends on your financial circumstances. Paying your mortgage off early requires larger or more frequent mortgage payments. For many homeowners, paying off their mortgage early requires saving and cutting expenses elsewhere to dedicate extra monthly money to their mortgage.
However, there are many great reasons for paying off your mortgage early.
#1 Expecting Extra Cash Flow
It may be a good time to pay off your mortgage if you expect a windfall soon, such as an inheritance or a business sale. An overabundance of extra cash will be beneficial and not cause financial stress when paying off your mortgage.
#2 Other Debts are Paid Off
It can be a great time to pay off your mortgage if you have paid off other debts, such as school loans or car loans. However, it is important to first focus on the obligations and loans with higher interest rates.
#3 Increase in Income
If you have gotten a promotion, a salary increase, or experience business growth that has caused an increase in cash flow, it can be the right time to pay off your mortgage loan.
#4 No Future Plans for Large Purchases
If you do not have any plans for large purchases, such as a new vehicle, a boat, or furniture, paying off your mortgage may be ideal.
#5 An influx of Disposable Income
If you have managed your finances well and surpassed your goal savings amount, paying off your mortgage would be beneficial.
Why You Should Pay Your Mortgage Off Early
There are many benefits to paying your mortgage off early.
#1 Save Money on Interest
Homeowners make a monthly mortgage payment, with some money going toward interest. The fewer payments you have, the less you will be paying in interest, which will save you thousands in interest alone.
#2 No More Monthly Mortgage Payments
Paying your mortgage early will free up cashflow that you can put toward other things, such as your child’s tuition, or use the extra money for investments.
#3 Peace of Mind
Finally, owning your home after paying a mortgage payment for years can instantly bring you peace of mind. Financial freedom can be motivating.
#4 Reduces Foreclosure Risk
If you owe money on your mortgage, you can lose your home to foreclosure if you default on your payments. However, knowing you no longer have a mortgage loan on your home can be relieving.
#5 Increases Cash Flow
Paying off your mortgage early creates more cash flow and frees up more income for other future goals.
Marimark Mortgage
Marimark Mortgage is based in Tampa, Florida and serves the mortgage needs of the luxury real estate market in Florida, Virginia, and Pennsylvania.
We specialize in conventional home mortgages, FHA, VA, and USDA mortgage options, refinance loans, and reverse mortgages. In addition, we’ve worked extensively with cash-out refinancing and help clients to lower their monthly mortgage payments.
To get started with a mortgage to buy your next home, please fill out our Quick Mortgage Application, or contact us directly.
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