Paying Off Your Mortgage Early

Buying a home is a major financial milestone. Paying off a mortgage in full is another one. Some borrowers are content to make the exact payment required and ride their mortgage out for the full term or until they refinance it.

Others want to pay more and pay off their mortgage as early as possible. Several strategies can speed up the process for those who find the benefits of early payoff more attractive.

Making Extra Payments: This is the most direct method.

Bi-weekly Payments: Instead of one monthly payment, make half a payment every two weeks. This equals 26 half-payments, or 13 full monthly payments, per year. The extra payment is applied to the principal balance. This can shorten the loan term but doubl check with your lender that extra payments are correctly applied to the principal.

Adding a Set Amount Monthly: Adding even a modest sum to each monthly payment, clearly designated for "principal reduction," can make a difference over time. For example, rounding up your payment or adding an extra $100 or $200 can be effective.

One Extra Payment Annually: Making one additional mortgage payment each year, perhaps from a tax refund or bonus, has a similar effect to bi-weekly payments.

Lump-Sum Payments: Applying larger, occasional amounts, such as an inheritance or a significant bonus, directly to the principal can greatly reduce the loan balance and speed up the payoff.

Refinancing to a Shorter-Term Loan: If your finances allow for higher monthly payments, refinancing from a 30-year mortgage to a 15-year or 10-year loan is an effective strategy.
Shorter-term loans typically have lower interest rates than 30-year loans, meaning more of each payment reduces principal from the start.

Monthly payments will be higher than those on a 30-year note, but the total interest paid will be much lower, and you will own the home free and clear much sooner.

Mortgage Recasting (or Re-amortization): This is a less common option for those who can make a large lump-sum payment. After the payment reduces the principal, the lender adjusts the monthly payments based on the new balance and the original remaining loan term. 

This leads to lower monthly payments, improving cash flow, while keeping the original payoff date (though you can continue to pay the previous, higher amount to pay it off sooner). Some lenders offer to keep the payment the same and shorten the term. Not all lenders offer 
recasting, and there might be a small fee.

The Prepayment Penalty: A Critical Consideration: Does your loan include a prepayment penalty? FHA mortgages do NOT feature these costs. The penalty is a fee some conventional lenders charge if you pay off all or a significant portion of your mortgage ahead of schedule.

It is worth noting that FHA mortgages do not permit the lender to add a prepayment penalty, so if you have an FHA loan or refinance into one, you won’t be charged extra for the privilege of paying off the loan ahead of schedule.