How to Pay Off Your Mortgage Early

How to Pay Off Your Mortgage Early article image.

You can work to pay off your mortgage early in a few different ways, so the key is choosing which—if any—is right for your situation. The answer may depend on whether you have extra money in your monthly budget, can qualify for a lower-interest refinance, suddenly come into a windfall and other factors.

Here are six strategies that may help you pay off your mortgage early and start living the mortgage-free life.

Increase Your Regular Payments

If you can justify it in your budget, consider increasing your monthly mortgage payments by an affordable amount. The key here is to ensure your extra contributions go towards your principal, not your interest or next month's bill—so check your loan terms and chat with your mortgage servicer to be certain.

A regular payment increase that adds up to even just one additional full mortgage payment per year can save you thousands of dollars in interest over the life of a 30-year mortgage, and higher payments can save you even more. You can make extra payments manually when your budget allows, or add an ongoing principal-only amount to your regular payment. Many lenders allow you to adjust your payment to include the extra amount, whether you're paying by check or checking account debit.

You can also start making your payments biweekly if your lender allows it; if they don't, try to put aside the cash to do it yourself. This way, you pay half your monthly mortgage bill every other week—since it adds up to an extra payment per year, this will also save you interest money over time.

Put "Bonus Cash" Toward Your Mortgage

If you receive a windfall (such as an inheritance or work bonus, or perhaps a government-issued stimulus check you haven't spent yet), consider putting some or all of it toward your mortgage principal. Occasional payments of this sort might not accelerate your loan payoff as rapidly as increasing regular payments would, depending on the overall amounts. However, they can still significantly lower your long-term interest costs—particularly if you combine extra payments with the other methods in this article.

Refinance Your Mortgage

Replacing your current mortgage with a new one through a mortgage refinance could land you a shorter repayment period and ideally a lower interest rate, depending on factors like your home's market value, current loan terms and your credit score. You'll be responsible for extras like closing costs and origination fees, which could cancel out your interest savings if you move out of your house before breaking even. But if you plan to be in your home for many years, reducing your loan term from 30 years to 15 or 20 years may save a significant sum.

Recast Your Mortgage

Essentially, a mortgage recast is a recalculation of your mortgage after you make a sizable lump-sum payment—perhaps with "bonus" money you've received, as mentioned above. In a recast, your lender adjusts the monthly payment and interest rate to match your lower balance for the remainder of the loan. While your loan's term length and interest rate stay the same, the recast will reduce the amount of interest you'll pay on the loan as well as your monthly payment. A loan recast will typically cost around $200 to $250, which is significantly less than a typical refinance.

Another plus: You may be eligible for this option even if you don't qualify for refinancing or the current prevailing interest rates don't make refinancing worthwhile. What if you don't need lower payments? Go back to step 1 and add more principal to your payments—there's your strategy for a quicker payoff.

Request a Mortgage Loan Modification

Rather than replacing your mortgage with another one, loan modifications do exactly what the name suggests: modify your existing mortgage loan. Typically, you'll hear about mortgage modifications in relation to financial hardship: The homeowner gets behind on payments and negotiates a change to the loan length or interest rates so they can get back on track and avoid potential foreclosure. If you can prove you're in a genuine bind regarding your mortgage payments, you can discuss this option with your lender.

The big picture is that a mortgage modification could help you to pay off your loan earlier than you would if you stuck with your original terms, should they become unaffordable. If it helps you avoid foreclosure, it's worth considering even if the end result is not reducing your payoff time.

When your financial situation improves, a modification may allow you to begin putting more toward your payments to help achieve an earlier payoff date. A modification could damage your credit, however, so consider this option carefully. Rather than a primary strategy for early payoff, it could be best used when you're experiencing difficult times but plan to get back on track—and even get ahead on your payments—down the road.

How Paying Off Your Mortgage Early Can Affect Your Credit

If you're wondering how much paying off your mortgage early affects your credit score, the answer is: not much. Unlike the potential credit ramifications of closing a credit card account, finishing off your mortgage payments is more akin to closing student or auto loans, with only a minor effect, if any, on your credit.

Once your mortgage is paid in full (congratulations, homeowner!), it shows up on your credit report as a closed account in good standing—assuming you've been making on-time payments. There it will remain for the next 10 years. After that decade concludes, you may see a slight drop in your credit score because your credit mix (or the blend of different loan types you have) no longer includes a mortgage. However, keeping your credit card balances low and paying all your bills on time will be a far more significant factor for your credit score. Monitor your credit score regularly to see how these actions can play a part in your credit picture.

The Bottom Line

You may want to focus on paying off any debt with higher interest rates before you work on paying off your mortgage early—credit cards tend to fall into this category. Having a solid emergency fund in place as well as a plan for retirement savings are also important pieces of the financial puzzle. Other things to look out for: Prepayment penalties and restrictions on your mortgage payments that could present obstacles on your path to mortgage freedom. Get information from your lender and then spend time crunching the numbers with our mortgage calculator to find out if an early payoff will fit into your overall financial plan.