Buying a home is a major purchase, maybe even the biggest one you’ll make in your lifetime. Many people see homeownership as a rite of passage into adulthood while others see it as an investment. Whatever buying a home means to you, it’s a big financial decision that carries a considerable amount of debt that can live with you for decades. However, you can reduce the life of the loan by learning how to pay a mortgage off fast!
Fortunately, paying off your mortgage early is an achievable goal if you know what to do. In fact, did you know you can do this just by paying one extra mortgage payment a year? It's true!
So, today we are going to teach you how to pay off your house faster! But before we dive into our top tips, let's discuss if you should pay off your mortgage and what to consider before you do.
Should you pay your mortgage off fast?
In recent years mortgage rates have been considerably low. Fortunately, gone are the days of 18% interest rates. Some homeowners today are enjoying rates as low as 2 or 3% depending on when they purchased (lucky!). Sounds like a steal. However, interest really does add up over time.
According to an Experian report, the average U.S. mortgage debt was $202,284 in 2019. Even with a low mortgage rate of 3.5% and a 30-year term, you’d pay $124,720.40 in interest, plus the principal balance over the life of the loan.
That’s a lot of money that could be going into other things, like an emergency fund, tuition funds, investing in the stock market, and other investments.
But everyone’s situation is different. If you have a long list of debt that you’re knocking out, maybe you are focused on other financial goals at the moment. Prioritize your debt and make a plan that fits you and your timeline.
Things to consider before you pay a mortgage off fast
Who wouldn't want to know how to pay a mortgage off fast? Although, it's a fantastic goal to have there are a couple of things to consider before you do. You want to make sure it's the right decision for you and your long-term financial goals!
1. Beware of prepayment penalties
It may sound crazy, but it’s true. Some mortgage issuers may charge a prepayment penalty for paying off the loan early.
According to Nolo, “a prepayment penalty is a charge that the lender imposes on the borrower if the borrower pays all or part of the loan principal before its due date." For example, if you pay off your loan, refinance, or sell your home before a certain date, you could be subject to a prepayment penalty.”
Fortunately, federal laws have been enacted laws that limit this practice. The good news is that if you have a newer loan, it is unlikely that you would be subject to these loan terms and extra fees. But it doesn’t hurt to check your statements or other notices to double-check.
2. Make sure your extra payment goes toward the principal balance
Make sure the payment is applied toward the principal and not just toward the next month’s payment. Otherwise, you’ll just end up with a credit on your statement, and interest will continue to compound on that principal balance.
You also want to make sure that your extra payment is not going towards future interest. This also varies by the lender so check with them. You may see an option to make a principal-only payment on your issuer’s website or a checkbox on your monthly bill.
How to pay a mortgage off fast: 7 Top tips
So, have you decided paying off your home quickly is best for you? Are you ready to learn how to pay a mortgage off fast? Here are some key tips to get you on the right track!
1. Make additional payments
Making extra mortgage payments is one of the best ways how to pay off your house faster. You can also opt to make biweekly payments. This is where you make exactly half of a monthly payment every two weeks.
By paying half-payments like this, at the end of one year, you'd have made 13 full payments instead of 12! Even paying one extra mortgage payment a year can still help you pay off your house faster.
2. Save for a significant down payment
20% is the recommended amount to put down on a home. But why stop at 20%? The more money you put down initially, the less you have to pay back later. So it's always wise to pay as much as you can upfront.
This will greatly reduce your original loan amount which in turn helps you pay your house off faster because you won't owe as much. Plus, it saves you a ton of money in interest too.
Set a goal for 25%, 30%, or much higher; the sky is your limit. It may take you a couple more months or years to save this higher down payment. Nonetheless, you won’t regret it when you see how much you'll save on interest payments.
Putting off buying a home until you can put down a significant amount will save you a lot of money in the long run!
3. Stay under budget
Of course, the bank would like to make a significant profit. Giving you a mortgage that you will not be able to pay off soon, is in their best interest (literally).
There is no need to buy a home that is well above your means. Otherwise, the mortgage will be a significant sum you will have to come up with every month. This can leave you "house poor."
Owning a home comes with a different set of expenses than renting. At first glance, the mortgage might appear to be affordable. But once you take into account the upkeep and furnishing of your home, a lower mortgage is the more reasonable choice.
That way you are not in a situation where you have to choose between the upkeep of your home or paying off the mortgage.
4. Try house-hacking
House-hacking is one of the easiest ways how to pay a mortgage off fast! For example, you can rent out parts of your home to other people. This is a house-hacking method that can be used as a means of paying off your mortgage early.
Airbnb or Apartment.com are great places to advertise your available space. Word of mouth and Facebook are other great ways to advertise your space without having to spend additional money on advertising. You can house-hack to earn more money. This cash can then be put towards making extra mortgage payments!
5. Automate your mortgage payments
According to Brian Davis, co-founder of SparkRental, managing your payments efficiently is the best way how to pay a mortgage off fast. Setting up automatic bi-weekly payments is a great way to manage your mortgage.
The logic behind this is that instead of making a payment twice a month or 24 times a year, on a bi-weekly schedule you make 26 payments. So, why not make life easier and schedule payments automatically so you can pay off your house faster!
6. Round up your payments
In addition to automating your payments, Davis also recommends that you should round up your monthly mortgage payment to the nearest hundred if you're wondering how to pay off your house faster.
If that’s too much, add a flat amount like $30 or $40 to your mortgage payment every month. Over time, these extra payments will result in you paying off your mortgage much sooner. So, don't just pay the minimum payments each month. Make it a goal to pay even just a little bit more every month.
7. Use extra income to pay additional payments
Do you receive regular bonuses or tax refunds? These are great to put toward your mortgage. Refund checks and bonuses seem to be spent up quickly, so why not put them to good use? Use these lump sums to make a one-time payment to the principal to knock down your loan balance.
If you can wing it, at the end of every quarter make an additional payment. Using that extra money to pay down your home loan will save you a considerable amount of interest.
You can use a mortgage calculator to help you determine how much money you can save over the life of your loan. Here are a few additional mortgage payment calculators to check out:
Bankrate additional mortgage payment calculator
U.S. Bank additional mortgage payment calculator
Chase additional mortgage payment calculator
You won't believe how many tens of thousands of dollars you will save by making extra mortgage payments!
8. Refinance your home
Refinancing is another way how to pay a mortgage off fast. Refinancing is a process that could result in a lower mortgage payment and potentially save you thousands of dollars. For instance, Sara of Gathering Dreams has refinanced three times in the last eight years.
What really helped her with this process were the additions she made to her home. They increased the value of her home, which then made it possible for her to get a lower mortgage, and save almost $4,000 in a year!
Here's how refinancing your mortgage can help you save money and pay off your house faster:
Refinance into a shorter-term loan
You could refinance your 30-year mortgage into a 15-year mortgage. If you can comfortably afford the payments. So, rather than paying on a 30-year mortgage, you cut the loan time in half. This is one way refinancing will help you pay your house off faster.
A lower interest rate
If the rates have dropped, refinancing into a lower mortgage interest rate can save you a bundle and you can utilize that money to pay off your house faster. For instance, if you refinance into a lower rate your payment would be less, but you could use the amount you are saving in interest to pay extra towards your principal every month.
However, the rate has to be worth what you will pay in closing costs for the refinance. Of course, some lenders may offer no closing cost refinances so that's something to keep in mind as well.
Some say unless it's at least a 1% drop from your current rate, it's not worth it. However, it depends on several factors, such as how long you plan on staying in your home, your current loan terms, etc. You can use a mortgage refinance calculator to help you see if it will save you money or not.
Drop private mortgage insurance
Private mortgage insurance is common with first-time buyer FHA loans. Many first-time buyers will take out these types of loans because they don't require a 20% down payment. In fact, you can attain a home loan with just a 3.5% down payment.
However, these loans then require what is called private mortgage insurance. This type of insurance is to protect the lender in case you were to default on the loan. (Not to be confused with a homeowners’ insurance policy, which protects you from a loss.)
The cost of PMI can range from .58%-1.86% of the original loan amount per year. This can get quite costly. PMI has to be paid until you have paid your balance down below the 80% loan-to-value ratio. The good news is if the value of your home has increased you could refinance into a conventional mortgage (if it's a lower rate!) and drop private mortgage insurance.
If you do, you could use the money you were paying for PMI to start paying extra payments to pay your home off quicker!
Whether you are considering refinancing into a shorter term, lower rate, or to drop PMI, be sure you understand if you should refinance your mortgage or not based on the various pros and cons.
These key tips are how to pay a mortgage off fast!
These top tips are how to pay off your house faster! As you can see even just paying one extra mortgage payment a year can shave years off your loan and save you money. Of course, you can get there much faster if you truly want to with these additional tips.
Find ways to reduce expenses and bring in extra cash, so you can own your home free and clear quicker!