Five Ways to Pay Off Your Mortgage Early

While your loan term might be fixed, that doesn’t have to determine when you’ll be mortgage-free. There are a few ways to cut the ties early while lowering the total amount paid in the process. Here, Trulia offers five ways you can speed up the process.

1. Refinance into a 15-year mortgage

Cutting your loan term in half is a big financial step, but the benefits are substantial. Not only will you shorten the payoff time, but you’ll also be rewarded with a lower rate and pay significantly less in interest during the life of the loan. The key here is to determine whether you can handle a larger monthly cost that comes with a 15-year mortgage. If you’re not completely confident that you’ll be able to commit to a higher monthly payment, challenge yourself to make payments you would be making if you had locked into a 15-year mortgage. Then, if financial circumstances change, you still have the flexibility to return to a lower monthly payment.

2. Refinance into a lower rate, but keep payments the same

There are dual benefits of refinancing your loan but sticking to the same payments: You will pay less in interest during the life of the loan and create a shorter path to mortgage freedom. Plus, it’s not as drastic as jumping from a 30-year mortgage to a 15-year mortgage. However, it’s important to research how to refinance. Closing costs for refinancing usually are lower than if you were to purchase a new home, but they’re still an added expense. Your new interest rate should be low enough to negate the cost of refinancing, or you should be planning on staying put long enough to reap the benefits of a smaller rate.

3. Get rid of private mortgage insurance (PMI)

If you financed more than 80 percent of your conventional mortgage, you likely are paying private mortgage insurance to protect the lender in case of default. Redirecting this amount—usually 0.05 percent to 1 percent of the loan amount annually—to the principal on your mortgage can have a big impact over time. You can request to get rid of PMI once you reach an 80-percent loan-to-value ratio, but the lender is required to remove it after you’ve reached a 78 percent loan-to-value ratio. You can speed up the process by increasing your equity through home upgrades or you can choose to refinance if the home already has increased in value for other reasons. Some lenders may even allow you to get an appraisal to show the new value and your increased equity without paying for a refinance.

4. Put those windfalls to work

Maybe your monthly budget doesn’t have wiggle room, and paying the costs to refinance isn’t in the cards. There’s another option. Tax returns, bonus checks and inheritance payments offer the opportunity to pay off a chunk of your mortgage without feeling the pain in your monthly budget. This could mean thousands of additional dollars chipping away at this massive financial responsibility each year. Sometimes your money could be better spent elsewhere—like paying off high-interest debt—but if wiping out your mortgage early is a priority, this is a great place to start.

5. Make extra or higher principal payments

Additional small principal payments add up over time. On a $150,000 loan for 30 years at 3.75 percent, with no additional payments, more than $100,000 will be paid in interest during the course of the loan. By adding just $100 per month in principal payments, the total interest paid is reduced by nearly $25,000 and the loan will be paid off six years sooner. Another way to do this is by making biweekly mortgage payments. Instead of making 12 monthly payments, this equals out to 26 half-payments—or 13 full payments—per year.

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