How To Pay Off Your Mortgage Early In 9 Easy Steps (2024)

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How to pay off your mortgage early

Although paying off your mortgage early may seem like an impossible task, it's achievable with a plan and a budget to help you reach your goal.

If paying off your mortgage is within reach, you can pay it off early by making a lump-sum payment. If you still have five to 10 years of payments, paying a little more each month toward the principal amount will add up to an early payoff. The disadvantage of paying off your mortgage early is that it could leave you with less cash available for other expenses.

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Read on to learn more about how to pay your mortgage off early.

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Can you pay off your mortgage early?

Yes, it's possible to pay a mortgage off early. However, some lenders will charge a prepayment penalty if the loan is paid off ahead of its scheduled term. Before you make a payoff, ask your lender or loan servicing company if your loan has a prepayment penalty.

Before deciding to pay off your mortgage early

If you have other debt, such as student loans, auto loans, credit cards, etc., it makes more financial sense to use any extra money you have to pay off the debt, especially credit cards which can charge high interest rates on outstanding balances.

Although it may sound enticing to own your home outright, it might make more sense to invest extra funds into the stock market since the stock market typically has higher returns. Learn more about whether to pay off your mortgage or invest

Paying off your mortgage fast

If you have no debt or low debt, secure income and want to pay off your mortgage fast, here are some strategies to get you there:

1. Make extra monthly payments. Paying a little more each month can help you stay on track to pay off your mortgage sooner. During the first few years of a mortgage, most of the payment you make will go toward paying the interest on the loan vs. the principal loan amount. A CU SoCal loan representative can help you calculate the best time to add money toward principal, so you can build equity quicker and pay off your mortgage sooner.

2. Make one large payment per year. Rather than make small extra payments each month, make one large payment at the end of the year. This way you won’t have to stress about getting your other monthly bills paid. Just use any extra money you can to safely afford to spend on your mortgage.

3. Reduce unnecessary spending. When you own a home it’s important to keep track of your spending, so you always have money to maintain your home. Reducing unnecessary expenses, such as dining out or over-buying home décor items, can help increase your annual savings and add to the money you can use to pay down your mortgage.

4. Refinance your mortgage. Refinancing to a lower interest rate and/or shorter loan term can save you money.

5. Consider selling and buying a smaller home. The real estate market is still hot, and it could be a good time to sell and downsize to a smaller or less expensive home. A fresh start with a new mortgage (or even no mortgage) may be possible.

6. Round up your mortgage payments. A little extra can go a long way. Rounding up your monthly payments can really add up.

7. Recast your mortgage. A mortgage recast may be requested from your lender, and there may be a fee charged. In a recast your lender will recalculate your monthly payment. If you have been paying extra money into your mortgage payments the recast will reflect this and your payments may be lower simply based on the principal and interest you’ve already paid. You can also put a lump sum of money into reducing your loan amount as part of the recast, to bring your payments down further. The main advantage is that you’ll pay less interest on the remaining principal loan amount. A recast doesn't lower your interest rate or change the remaining loan term or affect the equity you have.

8. Get a home loan modification. Homeowners who are in financial distress may request a home loan modification from their lender or loan servicing company. In a modification the lender may agree to change the loan terms to make the loan easier to pay so that the homeowner avoids foreclosure. You will need to show tax returns, proof of income and assets, and provide a hardship letter.

9. Rent out extra space in your house. If you have extra space, consider creating an apartment to rent. It’s a great way to add to your monthly income, as long as it doesn’t cost too much to do the necessary renovations and permitting that may be required.

Is paying off your home early worth it?

Pros:

Home ownership. The quickest path to full homeownership is to pay off your mortgage. You’ll have the benefit of equity, so if you do need to borrow money in the future getting a home equity loan is an easy option.

No more mortgage payments. Eliminating mortgage payments frees up money that can be used for other expenses, such as home renovations, paying down high-interest debt, or building up your retirement account.

Save money on interest. Each monthly mortgage payment includes interest on the loan, which can add up to thousands of dollars a year that you could be saving.

Peace of mind. Not having to make mortgage payments and the ability to put money toward other uses gives many people a sense of comfort and peace of mind.

Cons:

1. Other investments may offer a greater return. Depending on your mortgage loan interest rate and the economic climate, growing your money in investments could be a better financial move than paying off your mortgage.

2.Mortgage prepayment penalty. Some lenders and loan servicing companies may charge a pre-payment penalty (i.e., fee) if the mortgage is paid off before the end of the specific loan term. According to the IRS, if you pay off your home mortgage early, you may have to pay a penalty. You can deduct that penalty as home mortgage interest provided the penalty isn't for a specific service performed or cost incurred in connection with your mortgage loan.

3. No longer qualify for mortgage tax deduction. According to the IRS, if you paid $600 or more of mortgage interest (including certain points and mortgage insurance premiums) during the year on any one mortgage, you will generally receive a Form 1098 or a similar statement from the mortgage holder. In most cases this mortgage interest should be reported and is tax deductible. Once a mortgage is paid off there is no longer any mortgage interest to deduct. Before deciding to pay off your mortgage we recommend speaking to a tax professional to see how eliminating this deduction would affect your financial situation.

4. Credit score may go down. In creating a person’s credit score, FICO, the most widely used credit score takes into consideration the types of credit (e.g., loans and debt), you have. Having a diverse mix of credit types can actually increase your score. Once the mortgage is paid off, you could see a small decrease in credit score. Of course, this would depend on your unique credit profile.

5. Harder to save for retirement. Using your available funds to pay off the mortgage could leave you with less money to save and invest in a retirement account. If your employer matches retirement funds, it could be better to assign more of your paycheck to retirement savings.

6. Can't save for an emergency or other unexpected expense. Have extra money in your bank account for emergencies and general living expenses should always be a priority before paying off a mortgage.

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