woman excited to pay off her mortgage

Getting Ahead: Should I Pay Off My Mortgage Early?

Have you thought about paying off your home sooner? You could save thousands over the life of your loan.

Repayment Options for Your Mortgage

For some homeowners, simply having been approved for a mortgage is a sign of success and a source of pride. For others, it may feel like a liability that impedes true financial freedom. The good news: every mortgage has an end date; the bad news: it may be decades in the future. For those in a hurry to ditch monthly mortgage payments and own their home outright, there are a few ways you can go about paying the loan off early – and a few things you should be aware of before you do.

Borrowers typically sign into a 15 or 30-year loan term. This means that the loan amount and its associated costs are divided evenly into 180 or 360 monthly payments. Shorter loan terms mean a larger payment, but the earlier payoff date can save thousands of dollars in interest. Not everyone has the means to pay the higher monthly rate on a shorter-term loan, however.

Aside from adjusting the loan term for an early pay-off, the average homeowner has more options when it comes to reducing or eliminating a mortgage. A few options we’ll discuss in this article include:

    ● Making additional payments
    ● Refinancing your mortgage
    ● Recasting your mortgage (for conventional loans only)
    ● Downsizing your home

Making the final payment on a mortgage and obtaining complete ownership of your home is an amazing accomplishment. It comes with a huge sigh of relief, and lower monthly expenses free up more of your income for other needs. Before you start dreaming about what to do with that boost in your bank account – like college savings for the kids, planning a dream vacation, or buying a boat – there are a few important things to consider.

Important Considerations

Few people would argue that paying a mortgage off early is a bad thing, but you want to make sure you look at all the angles and possible implications. For starters, some non-QM loan programs may penalize you for paying off your mortgage early. (QM stands for quality mortgages, like FNMA, FHLMC, FHA, USDA, and VA. These loan types cannot charge any penalty fees for pre-payment.)

For those with non-QM loans, keep in mind that mortgage lenders earn their profits from consumer interest payments. Reducing the length of time it takes to pay your loan off means you are paying less in interest and cutting into their profits. A penalty fee is one way they may try to recoup that income. For other loan types, there may be a contractual requirement to follow the established payment schedule.

It’s easy to see that not all loan programs are created equal. It’s best to connect with your loan servicer for specific information about your mortgage. Before you do, keep reading about the pros and cons of an early pay-off.

Pros for Paying Off Your Mortgage Early

You Own Your Home Outright

Owning your home comes with several benefits. For starters, there is the incredible satisfaction of knowing that the house is your home. Its value becomes your equity, meaning you can borrow against it for repairs or improvements and likely pay less interest than you would on a mortgage. If you choose to sell your home later on, you’ll get to keep all of the profit.

You Could Save Thousands

Depending on how much time is left in your loan term and your current rate, paying off early could save you a lot of cash in interest payments, especially if you have an ARM. Check out our amortization calculator to see how much you could save.

Financial Independence

Paying your mortgage off sooner frees up some potentially disposable income that can be put towards other uses. Without that significant monthly withdrawal from your bank account, you can pay down other debts, put more into retirement funds, or treat yourself to a new car.

Cons for Paying Off Your Mortgage Early

Equity Jail or Non-Liquidity

You may have heard the expression “house rich, cash poor”. This is it! We caution against pouring all of your money into reducing housing debt at the expense of your savings account. If your entire net worth is tied up in equity, you may find yourself in trouble if faced with unexpected expenses, job loss, or an inability to work. Plan thoughtfully and budget for emergencies so that your savings are not completely tied up in what we call “equity jail”.

Paying Higher Interest Debt

Credit card bills and other types of debt often come with higher interest rates than a mortgage. Any financial advisor would advise you to pay those debts off first, as the high interest will only cost you more in the long run. As tempting as it is to eliminate your mortgage payment, it’s wiser to off-load those pesky high-interest loans first and focus on your home loan second.

Pre-Payment Penalties

As we mentioned earlier, some loan programs have pre-payment penalties built-in should you choose to pay your mortgage off early. This may not apply to your specific loan, but it’s best to check with your servicer directly for guidance. That information will help you make an informed decision, because a penalty may outweigh the expected savings.

Early Payment Options

Make Additional Payments

If the funds are available, you can easily chip away at your mortgage by making extra payments in any amount you choose and at any time. As long as your particular servicer allows it, that extra mortgage payment is completely up to you. Some mortgages have an optional bi-weekly (instead of monthly) payment plan, which is a fairly painless way to contribute one extra month’s worth of payments each year.

In most cases, you can control whether your additional payment is applied towards the principal or the interest. Paying the additional amount at the same time as the monthly payment will ensure those funds pay down the principal.

Even small additions to each of your monthly mortgage payments can result in massive savings over time. As an example, let’s consider a 30-year mortgage for $250,000 with a 4% interest rate. Increasing each payment by just $100 per month would shave four years off the end date. The borrower would also see a total savings of $27,957 over the life of the loan!

To make an additional mortgage payment, you must determine your budget. Not everyone has the ability to make extra payments, but it may be possible – and worthwhile – to reduce some discretionary expenses in order to pay a mortgage off early. Remember that those additional payments don’t require a fixed amount. If you wind up with extra cash one month, it’s a great idea to invest it in paying down your mortgage.

Recast

A mortgage recast, also called a mortgage re-amortization, allows a homeowner to put a one-time lump sum toward the principal balance, thereby lowering the amount of each monthly payment. Using this strategy means that the term of the loan and the interest rate remain unchanged. This can be helpful for those who would like to pay less each month while saving on interest over the life of the loan.

Another lesser-known option is a mortgage recast that allows the borrower to recalculate their mortgage amortization schedule without changing the monthly payment amount. In this case, after the one-time lump sum payment is paid towards the principal, the lender will adjust the loan schedule to account for the reduced balance.

In short, recasting is significantly less costly than refinancing (see below) and keeps you in control of how large of a payment you wish to make.

Refinance Your Mortgage

When interest rates drop, it’s time to consider whether refinancing is right for you. Locking in a lower interest rate (and switching to a shorter-term loan if you can) can result in significant savings. It’s possible your monthly payment will remain the same or go even lower and you’ll be paid off years in advance of your original pay-off date. Just be sure to factor in the closing costs.

Is refinancing or recasting right for you? The best way to find out is to talk to the experts. On Q Financial Mortgage Consultants are here and ready to help. Reach out today and we’ll walk you through each of your options. You’ll have all the information you need to make an educated decision.

Downsize Your Home

This doesn’t exactly pay the current mortgage off early, but it can be an excellent way to eliminate the debt. If you have enough equity in your home and are open to making a move, you can sell your house, then put the profit towards a smaller or less expensive home that you can afford to buy outright.

It’s not the right option for everyone, but if the kids are grown and flown or if you’d prefer a smaller yard with less upkeep, downsizing may be a win-win.

The Bottom Line

With so many options available, each homeowner can choose the route to financial freedom that is best for their situation. Take into consideration your current interest rate, the time left on your loan, risk factors, and service requirements. We also recommend paying off higher interest debts first and budgeting for emergencies to avoid “equity jail”.

On Q Financial knows there is no one-size-fits-all mortgage program. That’s why we’ve gathered a diverse range of financial products to help you find an option that’s right for you. Find the mortgage perfectly tailored to meet your needs with the assistance of an expert On Q Financial Mortgage Consultant. And when you’re ready, our Mortgages Simplified™ journey means less stress and more ways to say yes!

Check out our easy-to-use calculators to determine how much you can afford to spend on a home or reach out to an On Q Financial Mortgage Consultant today for expert personalized guidance.

Determine Your Home's Worth!

Of course, not everyone stays in their first home forever. When it comes time to sell your home, make sure you know your home’s Fair Market Value.

Read About Fair Market Value