According to the National Association of REALTORSâ, 86% of home buyers used a mortgage to finance their home in 2019. But mortgages can be daunting to take on, considering that they’re often 30-year commitments.
You may need to take out a loan to purchase your home, but do you want to be in debt for the next 3 decades? The good news is that in many cases, you can pay off your mortgage early. But before you decide to do that, there are some things you should know about the proper procedure.
Why Should You Pay Off Your Mortgage Early?
Several benefits come with paying off your mortgage early. The faster you pay off your mortgage, the sooner you can gain full ownership of your home. Meaning, you’ll eliminate the risk of foreclosure and gain equity that you can borrow against. By paying off your mortgage early, you’ll also reduce the amount of interest you have to pay on your loan, free up funds to pay off other debts, be able to save money for retirement and gain the ability to invest.
To Own Your Home Outright
Paying off your mortgage early can provide you with a sense of security. Should your financial circumstances change in the future, you won’t have to worry about foreclosure because you’ll already own your home outright. Furthermore, you’ll have equity in your home that you can use to borrow funds for other potential needs, such as making improvements or repairs.
To Reduce The Amount Of Debt You Have
Mortgage debt is a significant undertaking, especially if you have additional debt from student loans, credit cards, etc. By paying off your mortgage early, you’ll reduce a substantial portion of your debt and free up more funds to make your other monthly payments. The faster you pay off all your debts, the sooner you’ll achieve financial freedom.
To Reduce Your Interest Payments
As you pay off your mortgage, the first payments you make primarily go towards paying off the interest on your loan. However, as you chip away at your mortgage principal, you continue to pay interest on the balance remaining. That means that the faster you pay off your mortgage, the less interest you ultimately have to pay on it.
To Increase Your Cash Flow
Since your mortgage is a major monthly expense, paying it off will provide you with a considerable amount of money that you can put to use. With the increase in cash flow, you can grow your savings, make improvements on your home, travel to new parts of the world or invest in the stock market. Paying off your mortgage early affords you the freedom to do what you wish with your money.
Questions To Ask Before Paying Off Your Mortgage Faster
Now that you understand the benefits of paying your mortgage off faster, you may be convinced that it’s the right move for you. But don’t get ahead of yourself –there are some questions that you must ask your lender to ensure this is a viable option.
What Are The Current Terms Of Your Mortgage?
Before you attempt to pay off your mortgage early, it’s important to gain a concrete sense of the conditions you established with your mortgage lender. Knowing the length of your loan term will help you determine how long it will take you to pay off your mortgage if you continue to make the minimum payment each month. Being aware of your interest rate will tell you how much interest you’re currently paying on the remaining balance of your mortgage principal.
You should also check to see whether you agreed to a fixed- or adjustable rate mortgage. If you have an ARM loan, you’ll want to know how market rates have changed since you first obtained your mortgage. If market rates are higher, paying off your mortgage early may be the right move.
Will Your Mortgage Company Let You Pay It Off Early?
When you pay off your mortgage faster, you pay less interest, and your mortgage company makes less money off of your loan. For this reason, not all mortgage companies permit their clients to pay off their loans earlier than stipulated in their contract. So, before you make any grand plans, double-check that your lender will, in fact, allow you to pay off your mortgage faster.
Is There A Penalty For Paying Off Your Mortgage Early?
Some mortgage companies penalize their clients for paying off their mortgage before their contract is set to end. Prepayment penalties are used to discourage individuals from making extra payments on their loans or refinancing at a lower interest rate. Companies that have payoff penalties typically charge clients a percentage of the principal balance that would’ve remained or the amount of interest that would’ve been paid.
5 Ways To Pay Off Your Mortgage Faster
Assuming your lender allows you to pay off your mortgage faster, make sure that any potential prepayment penalties are reasonable enough to make an early payoff financially worthwhile. Once you’ve assessed whether it’s a good idea, determine what the most realistic course of action will be based on your finances.
1. Make Extra Payments
Making extra payments toward your mortgage can help pay it off faster. While some people choose to make additional payments on a consistent basis, others do so whenever they come across some extra cash. The specific way that you choose to make extra payments should be based on what’s most manageable for your budget.
Just make sure that if you make extra payments, you tell your lender that you want the money to go toward lowering your mortgage principal. If you fail to make this clear, your lender could instead use the additional funds to pay off the interest.
2. Make Biweekly Payments
Dividing your monthly mortgage payments into biweekly payments is another way you can pay off your mortgage faster. Through this method, you can shave months off your mortgage term and save thousands of dollars on interest without having to make a significant change to your monthly expenses. If you’re paid biweekly, making payments twice per month may be more feasible for you anyway, as you can schedule your payments around your paydays.
3. Consider Mortgage Recasting
Instead of using extra or biweekly payments to chip away at your loan, you can make a more significant, lump sum payment to help you pay off your mortgage faster. This method is known as a mortgage recast because once you pay the lump sum towards your principal, your lender reamortizes, or recalculates, your mortgage to reflect the payment. Although your term and interest rate remain the same, your monthly payments and the amount of interest you have to pay on the remaining balance of your loan is reduced.
4. Refinance Your Mortgage
Refinancing your mortgage enables you to trade in your current loan, so you can benefit from different terms –maybe a lower interest rate or a different term length. Shorter-term loans usually have lower interest. So, even if interest rates haven’t dropped since you obtained your loan, you can still usually secure a lower interest rate when you refinance by choosing a shorter-term loan. While you will have to pay closing costs on your refinance, they are typically cheaper than those you pay when obtaining a loan to purchase a home. If you’re choosing to refinance, make sure to ask how much the closing costs will be and whether your lender charges prepayment penalties.
5. Cut Back On Personal Spending
The most effective way to gain the funds to pay off your mortgage early is to reduce your number of nonessential expenses. Eliminating vacations, unnecessary purchases and dinners out can go a long way in helping you to reduce your personal spending. When deciding to pay off your mortgage early, make sure you begin by developing a budget for all of your spending. A personal budget can go a long way in helping you monitor your finances and become more intentional about what you do spend.
Paying off your mortgage faster can be tempting, as it enables you to finally own your home outright, get ahead of your debts and start investing your money. However, you don’t want to use all your available funds on your mortgage only to find that you’ve left yourself without enough money to make it through any emergencies that may arise. To avoid such pitfalls, it’s crucial that you educate yourself on your options before deciding to pay off your mortgage early.
If you think paying off your mortgage early is right for you, check out Quicken Loans®’ Amortization Calculator to see how much money you’ll save by making extra payments or a lump sum payment.
If you’d like to refinance your loan, apply online or speak to one of our Home Loan Experts by calling (800) 785-4788. We’re always happy to discuss your options to help you determine what’s best for you!