Getting Ahead: Should I Pay Off My Mortgage Early?

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.

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.

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, LLC 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.