Paying off your mortgage early can become more than a dream.
There are pros and cons associated with paying a mortgage off early. On one hand, if your interest rate is very low and you can earn a higher APY on investments than the APR you're paying your mortgage lender, paying the loan off may not be a priority. However, if you're paying a higher interest rate, preparing to retire, or simply can't stand a mortgage hanging over your head, here are six ways to pay it off early.
1. Refinance
Refinancing a home means taking out a new mortgage to pay off the old one. The cost to refinance a mortgage ranges from 2% to 6% of your loan amount. Unless you pay those refinance fees upfront, they'll be rolled into your new mortgage. For example, if you owe $300,000 and refinancing fees total $12,000, if that's rolled over into your new loan, that means you'll finance a total of $312,000.
If you have a 30-year mortgage, refinancing is the perfect time to trade it for a 15-year fixed mortgage -- one of the easiest ways to pay your property off fast.
2. Pay extra each month
Let's say you have a 30-year mortgage at 5.5% and owe $300,000 on your home. Your principal and interest payment runs around $1,700 per month. By applying an extra $250 per month toward the principal, you'll shave seven years and nine months from the time it takes to pay the loan in full. Better yet, you'll save $93,300 in interest.
If you're going to make extra payments, remember to inform your lender that you want them applied to the loan principal, not interest. Otherwise, you may find that your lender applies the extra payments toward future scheduled payments.
3. Round your payment up
If you want to keep it simple, pay more than is due each month by rounding up. For example, if you have a principal and interest payment of $1,580, round up to an even $1,600. Anything extra you pay cuts down on the time it takes you to retire the mortgage.
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4. Make one extra mortgage payment per year
Let's say you receive an annual bonus from work or routinely receive a tax refund. Applying it to your mortgage can make a huge difference. For example, using the scenario from above, let's imagine you owe $300,000 on a home with a 30-year fixed rate of 5.5%. Applying $4,000 to the principal once a year cuts nine years and two months from the time it will take you to pay the mortgage off, and it saves you more than $108,600 in interest.
5. Pay biweekly
Using the same scenario once again, simply making half payments twice a month will slash the time it takes to have a mortgage-burning party. For example, instead of paying $1,700 per month, you would pay $850 every two weeks. Adopting biweekly payments means the loan will be paid off five years earlier and save more than $60,500 in interest since you'll end up making a full extra payment each year.
6. Add $1 per month
The $1-extra-per-month plan is easy to implement and works well if you expect your income to increase over time. As the name implies, you simply increase your monthly mortgage payment by $1 each month. So, if your mortgage payment starts out at $1,700, the next month, you'll pay $1,701, and so on. The first year you'll only pay an extra $66, but that's a good start. As long as you keep adding one dollar each month, you'll cut years from the time it takes to retire your mortgage.
If paying your mortgage off early is a goal, you can always mix and match ideas to speed the process up even more. For example, you could make biweekly payments and add $1 extra to each payment. Just make sure your mortgage company knows that all extra payments should be credited to the loan principal.
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