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Paying off your mortgage may seem like an enormous task — but it doesn’t have to be.
Small changes to your budget and payment strategy each month can shave years off the loan, saving you thousands of dollars. And at the end of your mortgage, you’ll own your house outright.
Everyone has different priorities and savings goals, so whether it’s worth paying off your mortgage early will depend on your personal financial situation. “If you do decide to go this route, make sure your mortgage doesn’t have prepayment penalties,” says Lisa Phillips, real estate investor and author of Investing in Rental Properties for Beginners.
Prepayment penalties are fees lenders charge you for paying off your loan early. Though they have been largely phased out of the industry since the Great Recession, some lenders still charge them. Prepayment penalties are typically disclosed at closing alongside the amortization table. Before making any drastic moves to your mortgage, Phillips suggests calling your lender to confirm if you’re subject to a prepayment penalty. “You cannot assume it isn’t there,” she says.
Once you’ve verified you don’t have to pay a prepayment penalty, check out the four main ways you can pay off your mortgage ahead of schedule.
1. Change Your Payment Schedule From Monthly to Biweekly
Making biweekly, instead of monthly, payments is a way to pay down your mortgage faster without having to make a big payment. It’s simple math: A monthly payment schedule is 12 months of payments per year. A year has 52 weeks, so a bi-weekly schedule would be 26 payments (or 13 months of payments) per year. That’s one extra payment a year.
Let’s assume you have a $200,000 mortgage with a 30-year term and a 4% interest rate. Your monthly payment would be about $955, resulting in $11,460 paid toward your mortgage over the course of a year. A bi-weekly payment of $477.50 may seem like the same thing (and most months, it is), but multiplied by 26, that’s $12,415 toward your mortgage (an 8% increase). That extra payment goes purely toward the principal — meaning you’ll pay off the loan four years faster and save $22,366 in interest.
Many lenders will allow you to make the switch, but some don’t offer the option and some charge fees, which isn’t worth it, says Ilyce Glink, CEO of Best Money Moves and author of 100 Questions Every First-Time Home Buyer Should Ask. “Every month, you can do the same thing by taking the cost of one or two extra payments, divide by 12, and add that amount to your monthly mortgage payments,” Glink says.
2. Refinance Your Mortgage
Now is a great time to refinance if you have a good credit score. Mortgage refinance rates are at historic lows because of emergency moves intended to stimulate the economy. With an excellent credit score, you could get your mortgage refinanced to as low as 2% APR. “It’s almost like free money,” says Glink. You can also refinance a 30-year mortgage to a 15-year mortgage, which may increase your monthly bill but would ensure you pay less in interest over time.
Keep in mind that refinancing will require replacing your existing mortgage. By refinancing, you will have to pay closing costs that could account for 1 to 2% of the amount of your loan. Make sure you do the math to confirm what you save over time exceeds the closing costs.
3. Recast Your Mortgage
If you have a low interest rate already, you may want to consider recasting your mortgage. Recasting is when the lender recalculates your remaining monthly payments after you make a lump-sum payment (typically $5,000 or more) on the principal. It’s an adjustment to your existing mortgage, whereas refinancing requires getting a new mortgage.
Recasting won’t decrease your interest rate, so refinancing is ideal if you want a lower rate. But recasting is a cheaper process (costing $200 to $400) and won’t be dependent on your credit score.
Let’s use the previous example to illustrate the benefits of recasting. Say you have a $200,000 mortgage with a 30-year term and a 4% interest rate. Five years in, you decide you want to recast your mortgage with a lump sum of $10,000, which incurs a one-time $300 fee. Over the next 20 years, your monthly payment would decrease from $957 to $925, and you would save a total of $6,359 in interest over the remaining lifetime of the loan.
4. Make a One-Time Payment Toward the Principal
You don’t have to stop at making your regular payments. If you receive extra cash, whether through a side hustle, inheritance, or selling an item, you can put it toward the principal on your mortgage. Homeowners with VA and FHA loans may find this option appealing, since those loans can’t be recast. Extra payments can shed months off your loan — just make sure your lender is crediting the payments toward the principal and not interest.