Why pay off your mortgage early?
Wondering "should I pay off my mortgage sooner?" If you're financially able to, the answer is usually a big yes. Getting rid of debt always feels good, but paying off a mortgage early can give you more than just peace of mind.
- Build equity and own your home sooner
You can leverage home equity to buy a second home or secure a Home Equity Line of Credit (HELOC). If you currently pay for private mortgage insurance, you can request that PMI be taken off your mortgage bill once you reach 20% equity. - Save on interest
By shortening the loan term and reducing the amount of interest you accrue, you could potentially save tens of thousands of dollars. - Spend or invest funds elsewhere
Diversify your investments, explore entrepreneurial ventures or change careers without the burden of big monthly expenses.
9 strategies to pay off your mortgage faster
1. Refinance to a lower rate or shorter term
Maybe you had to buy when rates were high. Fortunately, you can consider refinancing your current mortgage to save money down the line. By snagging a lower interest rate or switching to a shorter term, like a 15-year mortgage, you should be able to save on interest and tackle that principal more quickly. Just be sure to account for prepayment penalties, closing costs and other potential fees to see if it’s worth the effort. Explore other loan options or test out potential new interest rates and loan terms with our Refinance Calculator to see how much you could save.
PRO TIP
Before you jump into refinancing, do the math to make sure your savings will outweigh the fees from appraisals, closing costs and application charges. You have to stay in your home past the break-even point, which is when the savings from refinancing start to outweigh the costs.
2. Make extra payments toward principal
Okay, here’s a simple trick: Make extra mortgage payments. When these payments go directly towards your principal balance, they can reduce your loan term. Even small payments can add up over time. This helps reduce the total interest you’ll pay and gets you to the finish line faster.
Set aside a small portion of your monthly budget for extra mortgage payments. You could even start giving your mortgage a "yearly bonus" to chip away at the principal. Believe it or not, making just one extra annual mortgage payment on a standard 30-year mortgage could cut up to seven years off your loan term. Just be sure to tell your lender to apply it toward the principal rather than future payments or interest.
3. Round up your monthly payments
Still wondering how small changes can make big waves? Try rounding up your mortgage payments each month to the nearest $100. For example, if your mortgage is $2,531.57, you'd round up to $2,600. That extra $68.43 toward the principal every month could save you over $7,000 on a 15-year loan at 6.0% interest. Again, be sure those extra payments are put toward the principal.
4. Use windfalls to make lump-sum payments
Anytime a big chunk of change hits your account—like a tax refund, bonus or even an unexpected inheritance—consider funneling it toward your mortgage. These windfalls can make a huge dent in your principal and help you pay off your loan faster.
5. Try the dollar-a-month challenge
Have you heard of the dollar-a-month plan? The idea is to increase your mortgage payment by one dollar each month—yup, just a dollar. So, if you're paying $1,000, next month, you'd pay $1,001, then $1,002 the following month and so on. This gradual, but steady increase can make a substantial impact without overwhelming your budget.
6. Set up automated extra payments
Set it and forget it. Automate your extra payments to ensure you stay on track without having to remember to make manual payments each month. Chat with your lender about setting up automatic payments that go directly towards your principal.
7. Make 30-year payments on a 15-year schedule
If you qualify for a 15-year mortgage but like the lower payments of a 30-year term, why not get the best of both worlds? Go for a 30-year mortgage, but make payments like it's a 15-year plan. This way, you've got a safety net if finances get tight—you can just switch back to the lower payments until things smooth out.
8. Recast your mortgage after extra payments
Ever heard of mortgage recasting? If you throw some extra cash at your mortgage, ask your lender to recast it. This recalculates your monthly payments based on the new, lower balance. Friendly reminder: confirm that extra payments are chipping away at your principal, not just the interest.
9. Explore streamline refinancing for FHA loans
Streamline refinancing, which applies to FHA loans, could be an option if you're looking to cut down fees and paperwork while improving your mortgage terms. It's especially handy if you've already been making payments on time and your credit score has improved since you first got your mortgage. This could qualify you for better interest rates.
Final thoughts: start today, save tomorrow
Now you know how making extra mortgage payments can pay off: it can help you build home equity faster, save on interest and free up funds to invest in other opportunities.
To get started, pick one or two of the strategies we suggested and lay the groundwork. You can forecast your potential savings with our Refinancing Calculator to explore different interest rates and loans terms. For words of wisdom tailored to your needs, a Citi Specialist is ready to help.
