Tips on How to Payoff a Mortgage Early

by Sean Bryant on June 15, 2012

When buying a home there are several different types of mortgages available. Most home buyers will select a 30 year mortgage.  Thirty years is a long time to have a mortgage payment hanging over your head, especially when there are several different ways for you to payoff your mortgage early.

Early mortgage payoff is not the right choice for everyone. One of the biggest advantages to having a mortgage is that it allows you to deduct your mortgage interest on your income taxes. Once you payoff your mortgage you will lose these tax savings each year.

Throughout recent years several countries have experienced economic problems. Because of this, cash has become king more than ever. One of the biggest downsides to paying off your mortgage early is that you will have a large amount of money tied up in a illiquid asset.

If you have a large amount of cash in reserve and have your retirement accounts well funded, then beginning to pay off your mortgage quicker is a great option. Here are a few different steps that you can follow to become mortgage free.

1. Increase Monthly Mortgage Payment Amounts – You can select to pay an additional sum of money each month on top of your normal payment. You need to make sure your mortgage company understands that this is to go towards principal pay down otherwise they could apply it to your next months payments. My payment stubs have a box that is for additional principal payments.

2. Increase the Number of Payments – One of the easiest ways to reduce the timeframe it takes to payoff your mortgage is to increase the number of payments that you make. By changing to bi-weekly from monthly payments, you will speed up principal reduction and, in turn, pay less interest.

When you switch to bi-weekly payments you can pay off your mortgage as many as six to eight years early. Before you make the switch, make sure you talk to your mortgage lender because some companies can charge up to $400 to set up bi-weekly payments.

3. Refinance to a Lower Interest Rate – Over the past five years mortgage rates have fallen to levels that we haven’t seen for some time. This means it’s the perfect time to refinance a mortgage. Since your interest will be dropping, your overall monthly payments will decrease. Instead of paying the new low amount, you can continue to pay the same amount as before the refinance. The difference can then be applied to your principal balance.

4. Change to a Shorter Term Loan – Instead of having a 30 year loan you can opt to change to a 15 year loan. You will pay off your mortgage in half the time and save money on interest. The only downside is that you will need to be able to afford higher month payments.

Depending on your mortgage lender, taking advantage of these tips can be easy or hard. Most companies want you to continue paying on your loan for as long as possible because this increases their profits.

Have you begun to pay down your mortgage early?

 

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Sean Bryant

Sean Bryant created OneSmartDollar.com in 2011 to help pass along his knowledge of finance and economics to others. After graduating from the University of Iowa with a degree in economics he worked as a construction superintendent before jumping into the world of finance. Sean has worked on the trade desk for a commodities brokerage firm, he was a project manager for an investment research company and was a CDO analyst at a big bank. That being said he brings a good understanding of the finance field to the One Smart Dollar community. When not working Sean and he wife are avid world travelers. He enjoys spending time with his daughter Colette and dog Charlie.
  • We are currently looking for a place in a major city and we can only afford the cheapest places (co-ops—we can’t even afford a condo here) so our only option is a thirty-year mortgage. I worry about overpaying the mortgage, especially if this is just our starter home. We are still young and I wouldn’t mind moving out of the city in the future—so I do not plan on spending my life in this place. What do you think about overpaying in that case?

    • Your mortgage price is really going to come down to how much you are able to use as a down payment. Just make sure you stay within your budget and what you can truly afford.

  • We have a 25 yr term mortgage hoping to pay it off in 5 yrs and have been paying accelerated weekly with a monthly lump sum payment. We couldn’t have done this without budgeting our money and saving in our early years although we are still young. I understand that if we pay it off that we would have last the liquidity unless we sell but if one has a well padded emergency fund or TFSA that shouldn’t be a worry. How are you able to write off the interest on the mortgage? Could you please explain that further as I am only aware of one way. Thanks. Mr.CBB

  • All of the above! Haha. Well, actually, I don’t have a mortgage yet but when we do, it will be all of the above.

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  • A debt is a debt, period. If you can pay off your debt earlier, it is all the better. It frees up your imagination and opens up many other ways to improve your life and finances. This is how my wife and I see it and we just paid off our 30 years mortgage in 5+ years in April 2012. We are now completely debt free, and no we are not in our 60s but in 30s and no we don’t live a rural area but in NY. I think having a sound financial plan & a sound income (not just job, income) are the two starting points in order to pay off in advance. In addition, please note that you only get back about 1/3th of the interest you pay! I recently wrote about “Our Family’s Financial Practices” to give some perspective.

  • Yes! We aggressively pay down our mortgage. Had a friend over for dinner last night and it sounds like my spouse has convinced him of the benefits as well. This week we were presented with a unique investment opportunity and that lack of liquidity has really reared its head. We are going to struggle to come up with the cash we need.

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