Achieving financial freedom is a goal for many individuals, and one of the best ways to do this is to pay off your mortgage early. While it may seem like a daunting task, there are simple tips that can help you reach this goal. From using windfalls and lump sum payments to making extra payments and refinancing your loan, these tips will help you get closer to paying off your mortgage early and achieving financial freedom. With dedication and commitment, you can be mortgage-free sooner than you think.
1.) Refinance Your Mortgage
One of the most commonly discussed methods of paying off a mortgage early is to refinance an existing mortgage. Refinancing your loan can lower your interest rate, reducing the amount you’ll pay. You can also significantly reduce the loan term, also reducing the amount you’ll pay. If you want to refinance your mortgage, start by talking to a mortgage broker to find your best options.
2.) Make Extra Payments
Mortgages require at least one payment every month. If you make more than one payment per month, you can reduce your mortgage much more quickly. The key to this is informing your lender to apply your extra payments to the principal of your loan rather than the interest. It’s also more effective when the interest is highest at the beginning of your mortgage, although you can do it anytime during your mortgage. By paying down the principal more quickly, you reduce the interest charged, reducing your overall mortgage.
You can make biweekly payments, splitting the monthly payment in half for each payment. (Technically, this means 26 payments in a year instead of 12 because most months are a little more than four weeks long.) You can also make your regular monthly payment, then make an additional payment of whatever amount you can afford. This even works if you make just one extra payment per year.
3.) Round Up Your Payments
When paying bills, most people pay the amount of the bill precisely as listed. While this may make sense for some bills, such as your cell phone or gas bill, it may not be the best option if you’re interested in paying off your mortgage. Instead, to pay off your mortgage early, try rounding your mortgage payment up to the nearest $100. For example, if your mortgage payment is $756, round it up to $800. Ask your lender to apply the extra to your loan principal and watch how quickly you can reduce your mortgage.
4.) Add a Dollar a Month
A dollar a month sounds like nothing, but it can add up quickly. For example, if you have a 30-year mortgage with 6% fixed interest on $150,000, adding a single dollar each month to your $900 payment can reduce your loan’s payments by eight years. The trick is to add that dollar each month. This means paying $901 this month, $902 next month, and so on for the life of your mortgage. This trick can also be beneficial if you have an income that will increase over time.
5.) Use Windfalls Wisely
Your holiday bonus, the tax refund you get each year, and other cash windfalls can all be applied to pay off your mortgage. These windfalls don’t take anything out of your monthly budget, so you don’t have to worry whether you can pay more on the mortgage and still afford groceries. Because this “found money” isn’t part of your income, it also won’t be missed. You can apply it directly to your mortgage, making a nice dent in what you owe.
6.) Make a Lump-Sum Payment
If you get a large inheritance or another one-time large sum of money, making a lump-sum payment can be an ideal way to use the money and progress toward your goal of paying off your mortgage early. While you can make a lump-sum payment whenever you like, it can be especially beneficial if you can recast the loan when you make the payment. Not all mortgages can be recast, such as FHA and VA loans. If you plan to make a lump-sum payment, talk with your mortgage broker or lender to discuss your options for recasting before making the payment.
7.) Earn Side Income Just for Your Mortgage
If you have the desire and a plan, a side hustle can help you pay off your mortgage early. Whether you make and sell a product or service, drive for a ride or delivery service, or do something else, if your main job pays all your bills, a side income can be put entirely toward your mortgage. The bonus of a side income is if it goes well, you may even be able to make it your primary source of income someday!
8.) Get an Adjustable Rate Mortgage
Adjustable-rate mortgages got a bad rap several years ago, but they have some benefits. The low interest rate at the loan’s start helps you build equity faster and can free up more money to go toward the principal. An adjustable-rate mortgage means the interest rate will change with time — increasing or decreasing — so it’s worth discussing with a mortgage broker whether this is a good choice for you based on your income and circumstances.
Frequently Asked Questions
- Is it a good idea to pay off your mortgage early?
- It is, if you can afford to. You’ll save significantly more of your total funds paid in the long term, and lessen the immediate impact of interest fees by paying off your mortgage principal ahead of schedule.
- Are there cons of paying off your mortgage early?
- There are possible Mortgage Prepayment Penalty fees in the terms of your mortgage. Consider these fees against your interest rate and long term funds before choosing to pay ahead of schedule.
- Your mortgage interest tax deduction rates will decrease faster than they usually would as your total mortgage principal is paid off.
- It can marginally affect your overall credit score- your total FICO credit score can decrease by around 10 points once your mortgage is paid off.
- Should you make extra payments at the start, or towards the end of your mortgage?
- If you have the available extra funds early in paying off your mortgage, this is when it’s most effective to make early and extra payments. You’ll make the most impact on interest rates by paying off the principal loan amount when it’s at its largest amount.
If your goal is to pay off your mortgage early, it will require change, dedication, and occasionally even a little financial sacrifice. The rewards are worth it, though. Owning your home, knowing that you can pay off your mortgage and no one can take your home away from you, can give you peace of mind like nothing else. Whether you have an existing mortgage that you want to pay off or you’re getting ready to buy a home and thinking ahead, find a local mortgage broker in your community to help you.