Paying off a 30-Year Mortgage Early

Buying a house has never been cheap, but lately, it’s become more challenging for homeowners to lock in an affordable interest rate that helps pay off the mortgage early.

Paying off your mortgage early can offer benefits like increased cash flow and interest savings. Building equity in your home is enticing, especially for first-time homeowners, however, the rise in housing costs will influence your strategy to pay down your mortgage early.

In 2024, the St. Louis Federal Reserve said the average housing price was $492,300, a jump of 31% in the last five years.

For interest rates in 2024, refinancing a 30-year fixed-rate mortgage will be slightly over  7%, and 15-year fixed mortgage comes in at slightly under 7%.

However, getting out from under a monthly mortgage payment 15 years earlier while building equity, could still be enticing, especially for first-time homeowners. Once that mortgage debt is wiped out, the money used there could be moved to retirement savings or college savings for children.

And then there are the tax benefits of owning the home, which should not be ignored. The more careful the process and analysis, the better informed you can be.

Anyone who is uncertain can find help through a nonprofit credit counselor, who can offer advice on your equity, debts and financial plan.

Can You Pay Off Your Mortgage Early?

In most cases, homeowners can pay off their mortgage early by following specific ground rules and confirming their loan terms.

First, recognize how your payment works. Mortgage amortization is the process of paying off a mortgage loan. Amortization refers to how a payment is applied to principal and interest.

Homeowners make a fixed payment each month, but this payment is allocated to both principal and interest. In the beginning, most of the payment will go toward interest, while a small portion covers principal. Later, a larger percentage will begin to cover the principal while less will go towards interest. Toward the end of the loan, most of the payment will cover the principal, as most of the interest already will be paid.

You build equity in a home by paying down the principal. To estimate the equity, calculate a fair price you feel the home is worth, then subtract the loan balance. If a home could be sold for $300,000 and you have $150,000 left on the loan, you have $150,000 in equity.

Some mortgages come with prepayment penalties. The highest is usually around 2% if the loan is paid off in the first year, but it can range from 0%-2%. It usually decreases the longer you’ve had the loan. So, paying off a loan early in the first year can result in a larger penalty than paying off the loan early in the 4th or 5th year.

How to Pay Off a 30-Year Mortgage Faster

There are a few ways to pay off a mortgage sooner than the 30-year term.

Options to pay off your mortgage faster include:

• Pay extra each month
• Bi-weekly payments instead of monthly payments
• Making one additional monthly payment each year
• Refinance with a shorter-term mortgage
• Recast your mortgage
• Loan modification
• Pay off other debts
• Downsize

There are advantages to each approach. The choice comes down to careful study and a decision based on your financial position and ability to repay what will be higher monthly payments.

Pay Extra Each Month

Take any leftover funds at the end of the month and make an additional principal payment. Attacking the principal with extra monthly payments lowers the amount of interest you pay over the life of the loan. A common strategy is to divide your monthly payment by 12 and make a separate “principal-only” payment at the end of every month. Be sure to label the additional payment “apply to principal.” Simply rounding up each payment can go a long way in paying off your mortgage. For example, instead of $763, pay $800.

Pay Bi-Weekly

Around 36% of American workers are paid bi-weekly, which aligns with this payment method. Paying bi-weekly means paying half the monthly amount every two weeks. That means 26 half-payments, or 13 full payments, which is one extra payment per year. Check with your bank or lender to ensure that it will accept bi-weekly payments instead of monthly.

Make an Extra Mortgage Payment Every Year

Throw all or a portion of new-found money like a year-end bonus or inheritance at the mortgage. The earlier into the loan you do this, the more of an impact it will have. In a typical 30-year mortgage, about half the total interest you pay will accumulate in the first 10 years of your loan. That is because your interest rate is calculated against the very high principal amount you owe in the early years.

Refinance with a Shorter-Term Mortgage

Refinancing a mortgage refers to getting a new loan to replace your current mortgage. The new loan can help cut monthly costs or pay off the loan quicker with a new loan term. A shorter term on the mortgage means it goes away sooner but at the cost of a much higher monthly payment – and perhaps some out-of-pocket closing costs. Ask yourself: Can you afford the higher monthly payment of a 15-year loan? Or, are you better off contributing extra each month to a 30-year payment?

Recast Your Mortgage

Recasting your mortgage is an excellent way to lower your monthly payment while keeping your interest rate and avoiding the fees that come with refinancing. Recasting usually charges fees around $200-$300. It involves paying a lump sum toward the principal amount. The lender then modifies your amortization schedule to reflect your new balance. This is a good idea to lower your payment without changing your interest rate.

Loan Modification

Loan modification refers to a change lenders make to an existing mortgage. This could mean a lower interest rate or going from an adjustable to a fixed-rate mortgage. These programs are for borrowers falling behind on their payments, often due to unemployment, increased living expenses, disability, or other loss of income.

Pay Off Other Debts

Wise money management means paying down debts with higher interest rates first. You may well be paying 18% interest in credit card debt and 5% in mortgage debt. Payday and title loans usually come with high-interest rates and should be dealt with before focusing on a mortgage loan. A debt consolidation plan is a smart option if you are carrying several loans. Using a financial adviser or nonprofit counselor to consolidate your loans could save you money. A HELOC is another powerful tool for paying down debts and lets you put your home equity to use.

Downsize Your Home

Buy a house you can afford: Another solution would be to buy a smaller home or move to an area offering more affordable housing.

Here are some questions to consider when shopping for a home.

• What’s my budget?
• How much are closing costs?
• Are there any health hazards?
• Is the roof in good condition? How old is it?
• How old are the appliances?
• Is the home susceptible to flooding or other natural disasters?

Consult a Trusted Real Estate Agent: Talking to a trustworthy real estate agent can provide insights into the world of homebuying. They know how the market works and when and how to capitalize on a buying opportunity. They’re also skilled negotiators that can haggle a home’s price down to its actual value.

Optimize Your Down Payment: Get the most out of your down payment. A larger down payment means less room for interest to grow. The more you can put down, the better.

Do-It-Yourself Method

The easiest option may be to devise your own plan. If it’s affordable, perhaps you add a certain amount each month, then make one extra payment each year. Making frugal living decisions can secure funds for bolstering your payments. Shop at discount stores and boutiques. Consider limiting streaming subscriptions, visiting parks and museums, or anywhere with small or non-existent admission fees. You can add more to the mortgage if your financial position improves via a raise or a new job. In short, the do-it-yourself plan offers flexibility in how you approach the mortgage.

Should You Pay Off Your Mortgage Faster?

The answer to whether it makes senses to pay off your mortgage faster depends on the interest rate your paying. Higher mortgage rates incentivize homeowners to accelerate the payoff process rather than accrue excessive interest. Mortgage rates are climbing, so refinancing may not be a great option for those who’ve already locked in a low rate.

We’ve broken down some bullet points of things to consider when deciding whether to pay off your mortgage early.

In order, the considerations should be:

•  Can I eliminate the debt owed on any loan with an interest rate higher than my mortgage? If so, do that first. Credit card debt should be a primary consideration.
• Am I better off funding my retirement? Funding an IRA or 401k is a necessity that cannot be overlooked. If you’re under 50, putting money in a retirement account and giving it time to grow with compound interest, is always a good decision.
• Do I have an emergency fund? The pandemic proves anything can happen, so having enough money set aside in case you lose your job is essential.
• If I have children, am I better off funding a college savings account for them or paying down a low-interest mortgage? The answer is almost always funding college, an investment in your children’s future, and a tax benefit to you.
• What do I lose in a tax write off if I eliminate my mortgage? This sounds complicated, but it isn’t hard to figure out. Take your last year’s tax return and see your tax liability without the mortgage write off. It may show that keeping the low-interest mortgage is worth the ancillary benefit of a larger tax refund.
• Once I am otherwise debt-free, is my interest rate high enough that applying extra payments to principal or refinancing is worth it? The old rule of thumb was that reducing the interest rate by 2% made a difference. As the loan amount increases, that number may drop to 1%.
• Interest rates are rising, so if you plan to refinance, look into your options now before rates climb any further.

Pros and Cons of Paying Off Your Mortgage Early

Mortgages can be complicated. When deciding whether you should pay off your mortgage early, it helps to assess the pros and cons of doing so. This way, you can visualize the direct impact of this decision on your finances and lifestyle.

Pros of Paying Off Your Mortgage Early

• Free up cash flow: More cash flow can reduce stress and help you meet monthly payment obligations.
• Pay less in Interest: This is a significant factor for most homeowners. Paying less interest on a mortgage lets you store that cash in an emergency fund or pay off other high-interest debt.
• Stop paying PMI: You can eliminate PMI once you’ve reached 20% equity in your home. PMI protects the lender from default, so you should aim to eliminate the extra payment as soon as possible. It offers no other benefit for the homeowner.

Cons of Paying Off Your Mortgage Early

• Lose your mortgage tax deduction: Homeowners can deduct what they pay in mortgage interest from their taxable income. Paying off your mortgage means losing this benefit and could mean a larger tax bill in the future.
• Could earn more by investing: This is especially true if you have a low-interest mortgage. The amount you spend paying it off could have been allocated towards investments, which may yield a greater return in the long run.
• Lose liquidity and hinder cash flow: When you throw all your money into paying off a mortgage, there may not be much leftover in case of an emergency purchase.

Start Planning Your Early Mortgage Pay Off

The next step is planning how you intend to pay off your mortgage early. Mortgage calculators are an invaluable resource for visualizing a way forward. They can break down a clear path to follow and a realistic timeline. Call a nonprofit credit counseling agency for guidance on approaching and planning your mortgage payoff. They offer free financial advice that will give you a clearer picture of where you stand, clarifying financial strengths and limitations. Consider a debt management plan if you need help understanding your debts and organizing your bills.