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Everything You Need to Know About Paying Off Your Mortgage Early

Woman calculating numbers to see if she can pay off her mortgage early
Prostock-studio / Shutterstock

Paying off a mortgage early is often a much more achievable goal than many think. Making just one extra mortgage payment each year can shorten your loan’s term by four years and save you thousands of dollars. Clearing your mortgage debt early will also free up extra money for your other financial goals and reduce the overall strain on your budget.

But if your mortgage has prepayment penalties or a low interest rate, you may be better off investing your money in other assets that yield higher returns. Here’s a guide to help you decide if paying off a mortgage early is the right move for you.

Should you pay off your mortgage early?

Paying off your mortgage early can free up money for other financial goals and help you save on interest. But before you start aggressively paying off your mortgage, there are a few things you should consider.

If you have student loans or credit card debt with a higher interest rate than your home loan, it will likely make more sense to pay down that debt first. You should also make sure you’re in a good place financially before you tie up extra money in your mortgage. If you don’t have an emergency fund, for example, using your disposable income to pay down your mortgage may not be the best move. It can take over a month to get a loan and tap into the equity in your home, so you shouldn’t rely on it as an emergency fund.

It’s also worth noting that investing your money in other assets may yield a higher return than paying off your mortgage early. Because mortgages tend to have low interest rates under 5%, you may make more money by investing in the stock market, which has an average annual return of 10%.

You should also factor in the cost of prepayment penalties when you’re figuring out how much you can save by retiring your mortgage early. Sometimes penalties can outweigh the savings you’d get by paying off your mortgage, so make sure you add them to your calculations.

Plan your new amortization schedule using a mortgage early payoff calculator

If you’ve never seen an amortization schedule before, it shows the total amount you’ll pay over the life of your loan and breaks it down into principal and interest. When you first start paying off your loan, most of your payment will go toward interest. But if you make additional mortgage payments, they’ll go directly toward the principal and lower your loan balance.

Making extra principal payments not only helps you pay off your mortgage faster but also reduces the amount of interest you’ll pay over the life of the loan. The amount of interest you pay is a percentage of your remaining loan balance. If you pay down your mortgage faster and reduce your balance ahead of schedule, you’ll end up paying less interest — often thousands less.

To see how much you can save by making additional mortgage payments and changing your amortization schedule, skip the math and use one of these mortgage early payoff calculators.

  • AARP Mortgage Payoff Calculator: The AARP mortgage payoff calculator can help you see how much earlier you’ll pay off your loan by adding extra money to your monthly mortgage payment. It also shows you how much interest you’ll save by paying off your loan faster.
  • Extra Payments Calculator: This mortgage early payoff calculator allows you to add additional one-time, weekly, monthly, and yearly payments to see how they’ll affect your loan term. You can also specify how long you’d like to make each type of payment, whether that’s months or years.
  • U.S. Mortgage Calculator: This mortgage calculator helps you see how much money you’ll save by switching to biweekly mortgage payments. It also allows you to estimate the total cost of owning your home by including maintenance expenses, taxes, and insurance.

How to pay off your mortgage early

You’ve decided that paying off your mortgage early is the right step, but can you do it? You don’t need to have a good amount of disposable income to pay off your mortgage early. By making a few additional payments per year, you can save thousands and shave years off your mortgage. Here are a few strategies for paying off a mortgage early.

You can follow these methods

  • Method #1: Make additional payments. When you make additional mortgage payments, they can go directly toward the loan principal, which reduces the balance and the total amount of interest you’ll pay. Try to make extra mortgage payments whenever you can and use any extra money you get during the year to pay down your loan, such as your tax return.
  • Method #2: Make a larger monthly payment. Any extra money you contribute to your mortgage payment can also be applied directly to the loan’s principal. Even if you’re only able to add $50 or $100 to your monthly payment, you’ll still shorten your loan term and save on interest.
  • Method #3: Pay your mortgage biweekly. Instead of making monthly mortgage payments, some lenders will allow you to make biweekly payments. Because there are 52 weeks in a year, you’ll end up making 13 full mortgage payments instead of 12. Doing this can shave years off your mortgage.
  • Method #4: Refinance your mortgage. Refinancing into a shorter-term loan can help you get a lower interest rate and pay off your mortgage earlier. Your monthly payments will increase, so make sure you can afford higher housing costs.
  • Method #5: Recast your home loan. When you recast a mortgage, you make a large payment that goes directly toward the principal. This causes your loan to be re-amortized to reflect the lower balance, which reduces your monthly payment. If you continue making the same payment you’re used to, however, you can also pay off your mortgage ahead of schedule and save on interest.
  • Method #6: Consider downsizing. If you sell your house and use the proceeds to buy a smaller, less expensive home, you can reduce your mortgage debt and pay it off faster using the strategies above.

The bottom line

Although making a large, lump-sum payment on your mortgage can help you pay it off faster, you don’t need to have lots of money on hand to shave years off your loan. By making just a few additional payments each year or switching to a biweekly payment plan, you can save thousands and achieve your dream of becoming debt-free far ahead of schedule.

Frequently asked questions

How can I pay off my 30-year mortgage in 10 years? 

To pay off your loan two decades ahead of schedule, you’ll need to make much higher monthly mortgage payments than usual. For example, if you get a $250,000 mortgage with a 4.5% interest rate and put 20% down, your monthly payment will be $1,266.71. If you want to pay off the loan early, you’ll need to pay $2,072.77 each month. Use a mortgage calculator to determine your exact payment schedule.

How much do you save by making an extra mortgage payment? 

How much you’ll save by making an additional mortgage payment depends on your interest rate and mortgage amount. You can find out how much you’ll save by making an extra one-time payment using this mortgage early payoff calculator.

What happens if you make one extra mortgage payment a year? 

Making just one extra mortgage payment each year can shave four years off of your loan and save significantly. Going back to the $200,000 loan example above, you’ll pay $414,813 in total if you make monthly payments. But if you pay biweekly instead, your mortgage will cost you $386,779 — a difference of $28,034.

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