The short answer is: it depends. Before you decide to accelerate your mortgage payments, take into account other factors, even though paying off your mortgage early can save you money on interest over time.
Understanding How Mortgages Work
To understand how early payments can impact your mortgage, it’s important to know how mortgages work When you take out a mortgage, you’re essentially borrowing money from a lender to purchase a home The lender charges you interest on the loan, which is the cost of borrowing the money. The interest is calculated based on the principal amount of the loan, the interest rate, and the loan term.
The principal amount is the amount of money you borrowed. The interest rate is a percentage of the principal that the lender charges you for the loan. The loan term is the length of time you have to repay the loan
Most mortgages are amortized, which means that the payments are spread out over the life of the loan. Each payment consists of both principal and interest. The amount of principal paid in each payment increases over time while the amount of interest paid decreases. This is because as you pay down the principal the amount of money you owe interest on decreases.
How Early Payments Can Save You Money
Making additional mortgage payments basically speeds up the principal repayment process. As a result, you will pay less interest overall on the loan. For instance, you will save more than $30,000 in interest and pay off your mortgage seven years early if you have a $200,000 mortgage with a 5% interest rate and you make an extra $1,000 payment each month.
Factors to Consider Before Making Early Payments
While early payments can save you money on interest, there are other factors to consider before you decide to accelerate your payments.
- Your financial goals: If you have other financial goals, such as saving for retirement or paying off high-interest debt, you may want to prioritize those goals before making extra payments on your mortgage.
- Your interest rate: If you have a low interest rate, the amount of money you’ll save by making early payments may not be significant.
- Prepayment penalties: Some mortgages have prepayment penalties, which means that you’ll be charged a fee if you pay off your loan early.
- Tax implications: If you itemize your deductions on your tax return, you may be able to deduct the interest you pay on your mortgage. However, if you pay off your mortgage early, you’ll no longer be able to deduct this interest.
How to Make Early Payments
There are several ways to pay off your mortgage early if you determine that’s the best course of action for you.
- Make extra payments each month: You can make extra payments each month in addition to your regular mortgage payment.
- Make a lump sum payment: You can make a lump sum payment towards your principal.
- Refinance your mortgage: You can refinance your mortgage to a shorter term, which will result in higher monthly payments but will also allow you to pay off your mortgage faster.
It is up to you whether or not to pay off your mortgage early. There are advantages and disadvantages to weigh, and the choice that is best for you will depend on your unique financial circumstances. Consult a financial advisor if you’re not sure if making early payments is the right decision for you.
Additional Resources
- Forbes Advisor: How to Pay Off Your Mortgage Early: 5 Simple Ways
- Reddit: Early Mortgage Payment Theory: Myth or Fact?
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A paid-off house and earlier financial independence are goals shared by many homeowners, but they are frequently unsure of how to get there. Homeowners typically make their normal monthly mortgage payments and expect to pay off their homes over 30 years. However, there are ways to pay it off even faster using three proven strategies.
The three early mortgage payoff strategies are discussed here, along with their benefits and drawbacks, and which is best for you.
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Refinance into a shorter term
You can pay off your house more quickly when you refinance by switching from a 30-year mortgage to a shorter one. You can choose to reduce the length of your loan with a mortgage refinance by choosing a 20, 15, or even 10-year loan.
By selecting a shorter term, your monthly payment may increase. However, many homeowners are earning more today than when they first bought their homes. With this higher income, you may be able to easily afford a small increase to your monthly payment.
Refinancing your mortgage may lower the interest rate or eliminate mortgage insurance premiums. These savings can balance the rise in your monthly payment by lowering interest rates and eliminating mortgage insurance premiums. Rocket Mortgage is among the greatest mortgage lenders for refinancing because of its quick approval process, flexible loan terms, and lowered credit score requirements.
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- Credit needed: Applicants with a 580 credit score may be considered provided they meet the other eligibility requirements. Generally, a 620 credit score is required.
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Getting the best interest rates and terms on a mortgage often requires excellent credit. If your credit score is lower, take steps to boost your credit before applying. For example, *Experian BoostTM, which enables you to receive credit for on-time phone, utility, and streaming service payments, may help you raise your credit score. Additionally, a mortgage broker can examine your credit report and provide advice on raising your credit score.
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Refinancing your mortgage can be costly and time-consuming. Making additional payments could be a simpler way for homeowners to pay off their mortgages more quickly and reduce interest costs. Paying extra each month, making a lump sum payment, or switching to bi-weekly payments are the three main ways to make extra payments.
- Paying extra each month. Add more money to your payments so that you can gradually reduce your balance. This shortens the loan term and lowers your interest costs in addition to lowering your total balance.
- Making lump sum payments. Some borrowers pay off their loans in large amounts by making lump sum payments. By receiving bonuses, tax returns, and other sizable sums of money, you’ll pay down your loan and lower the amount and interest paid.
- Converting to bi-weekly payments. While the first two methods entail additional manual payments, this one locks you into a faster mortgage payoff. For a small fee, borrowers can switch to bi-weekly payments with many banks. When payments are made every two weeks, one additional monthly payment is made annually.
All three options enable borrowers to repay their existing loans quicker without paying mortgage refinance costs. There are no fees for making extra payments manually, though you should watch out for potential prepayment penalties. Additionally, some banks charge a fee for converting payments to bi-weekly versus monthly. Do the math to ensure the benefits outweigh the costs.
Paying extra on your loan: The RIGHT way to do it! (Monthly vs Annually)
FAQ
Does paying your mortgage early reduce interest?
What happens if I make my mortgage payment early?
Are there disadvantages to paying off mortgage early?
Does paying your mortgage a month early help?
Should I pay off my mortgage early?
Each month that you make a mortgage payment, some money is going toward interest — so the fewer payments you have, the less you will pay in interest. Paying off your mortgage early could save you tens of thousands of dollars. (Just make sure to clarify with your lender that all extra payments will just be going toward your principal, not interest.)
Can I save interest on my mortgage if I pay early?
Since interest is precalculated in most mortgage loans, you will not save interest charges by paying before the due date. However, you could make an early mortgage payment in December and get an extra month’s interest deduction in that year. However, you’d only have 11 months of interest deductions in the following year.
Should I pay off my mortgage before its due date?
If you have the ability, paying off your mortgage in part or in full ahead of its due date will save you many dollars. While making your regular mortgage payment before its due date saves you nothing, paying off your mortgage before its maturity will save you thousands of dollars.
When should I pay my mortgage payments?
Most people probably know that mortgage payments are due on the 1st of the month, but many loan servicers (those who collect your payments) will allow you to pay 15 days “late” each month. So even though your mortgage payments are technically due on the first each month, you can pay as late as the 15th every month without any kind of penalty.