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You can take several different approaches to paying off your mortgage early, each with pros and cons that depend on your financial situation and goals. This overview can help you decide which strategy works best for you.
Ways to Pay Off Your Mortgage Early
Reducing how long it takes to pay off your mortgage can mean big savings in interest charges over the life of the loan. Once you've determined that doing so makes sense for you, you can take a variety of approaches, maybe even combining them to help shorten your mortgage repayment timeline, and save interest costs in the process:
- Increase your regular payments. If you've got cash left over in your budget after attending to your retirement savings and household emergency fund, consider increasing your monthly mortgage payments by an affordable amount. An incremental payment increase that adds up to even just one additional full mortgage payment per year can save you thousands of dollars over the life of a 30-year-mortgage, and higher payments can save you even more.
If you can't afford to increase every monthly payment, consider making an extra payment (or partial payment) every other month, quarterly or even twice-yearly. The more frequently you make your payments, the better, but finding a schedule you can stick to may be the key to making steady progress toward early mortgage repayment.
Review your mortgage contract or ask someone at your mortgage servicer to make sure you're directing the additional payments toward loan principal, not interest. Reducing principal increases your equity the fastest and, since interest charges are based on your outstanding (unpaid) principal, also lowers future interest charges. The benefits of these savings are so significant that you may want to consider a dedicated savings campaign that can help you make extra mortgage payments on a regular basis.
- Put "bonus cash" toward your mortgage. If you receive some windfall money (an inheritance, work bonus, tax refund or lottery prize, for example), consider putting some or all of it toward your mortgage principal. Sporadic payments might not reduce loan principal as rapidly as increasing steady regular payments would, but they can nevertheless help lower your long-term interest costs.
- Refinance to a shorter-term mortgage. Getting a new mortgage with a shorter repayment period (and, ideally, a lower interest rate) may be feasible, depending on the terms of your original mortgage, how much of that mortgage you've paid off, and the current market value of your home. A shorter repayment period may mean an increase in your monthly payments—you can think of that as a formalized version of the "making extra payments" suggestion above. Of course the new payments won't be optional (and failing to make them could damage your credit and even cost you your home).
When considering a mortgage refinance, you can search online for a mortgage refinance calculator to determine the potential savings you'll receive with a shorter repayment period. Be sure to take the full cost of the new loan, including applicable origination fees, into account when comparing it with the original mortgage. If your original loan has a prepayment penalty—a mandatory payment requirement in case you pay off the mortgage ahead of schedule—you should factor that into the comparison as well.
How Paying Off Your Mortgage Early Can Affect Your Credit
Paying off your mortgage early isn't likely to bring about major changes in your credit scores. The original mortgage, paid in full in the course of refinancing or completing your payments ahead of schedule, will appear on your credit reports at the national credit bureaus (Experian, Equifax and TransUnion) for 10 years as a closed account in good standing.
At the end of those 10 years, the closed account will drop off your credit report and, if you haven't established any new mortgage accounts, your credit scores may drop slightly due to a reduction in credit mix—the blend of different loan types credit scoring models consider a trait of experienced credit users
But as long as you keep paying your other loans on time, and avoid running up high credit card balances, your credit scores may have increased over those 10 years, reflecting your accumulated expertise as a credit manager. In other words, paying off your mortgage early should neither benefit nor hurt your credit scores significantly.
The upshot of completing your mortgage payments early can be major savings in interest costs and more quickly gaining freedom from those monthly payments. If you follow these steps, you'll find the results most rewarding.