Paying off a mortgage early can save a lot of interest and free up money later. It is not right for everyone, and it works best when your emergency savings and higher-interest debts are already handled. Here are common ways to do it.
First, check your loan terms. Most mortgages let you make extra payments without a penalty, but some loans do charge one. Also tell your servicer that extra money should go to principal.
1. Make one extra payment a year
Splitting your payment in half and paying every two weeks gives you 26 half payments, which equals 13 full payments in a year instead of 12. You can get the same effect by adding one-twelfth of your payment each month. Some servicers hold biweekly payments until they have a full month, so check how yours handles it.
2. Round up your payment
If your payment is $1,798, paying $1,900 sends the extra amount straight to principal. Small amounts add up over time.
3. Use windfalls
A tax refund, bonus or other lump sum can go toward the principal balance.
4. Refinance to a shorter term, if it fits
Moving from a 30-year to a 15- or 20-year loan raises the monthly payment, but the total interest is usually much lower. Compare closing costs and make sure you can handle the higher payment.
5. Keep your payment the same after a refinance
If you refinance to a lower rate, continuing to pay the old amount sends the difference to principal.
An example
The numbers below are for illustration only. They are not an offer, a quote or a promise of any rate or payment.
Take a $300,000 loan at a 6% fixed rate for 30 years. The monthly principal-and-interest payment is about $1,799, and total interest over 30 years is about $347,500. Adding $200 each month would pay the loan off in about 23 years and cut interest by roughly $91,000. Paying one extra payment per year (the equivalent of 13 payments) would shorten the loan to about 24.5 years and save roughly $74,000 in interest.
Before you decide
Extra payments are not the only good use of money. If you have credit card debt, no emergency fund or a retirement match you are not using, those may come first.
Every borrower is different. If you would like to talk through your own situation, the MonaLending team is happy to help.
