Paying off your mortgage faster may not be your goal when you first buy a house, but after a few years your financial situation may change. If you have more income now than you did when you first bought the house, you might consider making extra mortgage payments.
The first thing you should do is check with your lender to see whether you’ll be charged a penalty for early mortgage repayment. If your lender allows early repayment without a fee, you may be able to save money on interest while reducing the term of your loan.
Refinance your mortgage
One of the most effective ways to pay off your mortgage early is to refinance your loan. You can find low mortgage refinance rates to help you pay off your mortgage loan faster at lower interest rates. Homeowners with a 30-year mortgage who refinance to a 15-year loan will not only reduce the loan term significantly, they’ll also reduce the amount paid toward interest. There are fees associated with refinancing. Be sure to factor them into your decision.
Prepay in the beginning of the loan term when interest is the highest
You may not realize it, but the majority of your monthly payment for the first few years goes toward interest, not the loan principal. Paying extra on a mortgage during these first few years can build equity more quickly.
If you do pay more on your monthly mortgage bill, be sure to communicate to your lender that the extra funds should be put toward the principal. Some lenders will apply the payments toward future scheduled monthly payments, which won’t save you any money.
Pay a little extra every month
Every bit counts when you’re trying to pay off a mortgage early. Interest on your mortgage is compounded, which means that each month’s interest is determined by the total amount owed (the principal plus outstanding interest).
Again, remember to inform your lender that your extra payments should be applied to the principal, not the interest.
Use unexpected income
Send any unexpected windfalls straight to your mortgage company. This includes holiday bonuses, tax returns and credit card rewards. Using this money as payment for your mortgage can reduce the term of your loan without cutting into your regular monthly budget.
Make one extra mortgage payment each year
Making an extra mortgage payment each year (totaling 13 payments in a 12-month period) could reduce a 30-year mortgage loan to approximately 22 years.1
The most budget-friendly way to do this is to pay 1/12 extra each month. For example, by paying $975 each month on a $900 mortgage payment, you’ll have paid the equivalent of an extra payment by the end of the year.
Rounding up is an easy pay-off trick that can add up fast. When budgeting for your mortgage payment, round up to the next highest $100 amount. Pay $800 instead of $743, or $900 rather than $860. The extra amount you pay each month can help reduce the term of your mortgage significantly over a 20- or 30-year period.
Try the dollar-a-month plan
The dollar-a-month strategy should be financially feasible if your income increases slightly but consistently over time.
Each month, increase your payment by $1. Simply pay $900 the first month, $901 the second month, and so on. For a 30-year, $900 per month mortgage with a 6% fixed interest rate on a loan of $150,000, you could reduce the term of the mortgage by eight years.