There are several ways to pay off a mortgage early, reducing the amount of money the borrower will pay in interest over the life of the loan. Before making the decision to start paying off a mortgage early, it is a good idea to consider whether it is a financially sound choice. There may be other debts that should be paid off first, or it may make more sense to consider savings or retirement accounts for extra income, rather than throwing extra money at the mortgage.
Before sending extra money to a lender, it is advisable to check the terms of the loan. Some lenders charge prepayment penalties to discourage borrowers who might want to pay off a mortgage early. If the loan includes such terms, borrowers may want to consider refinancing to get a loan with more flexible terms so they can pay it off early if they want to.
One of the simplest ways to pay off a mortgage early is to add a little extra to each payment. Homeowners can set a specific amount they want to send or may choose to add as much as they can with each bill. Switching to a biweekly payment schedule can also help, as borrowers will pay more money over the course of the year. Lenders are usually accommodating for borrowers who want to change their billing schedules.
Some borrowers choose to make a single extra payment each year beyond the regularly scheduled payments. They can save up money over the course of the year for this payment, or time it to coincide with expected bonuses from work or tax refunds.
There can be disadvantages to the decision to pay off a mortgage early. If borrowers are carrying any high interest debt, they should pay that off first, as they will keep taking a loss on that debt until it is cleared. Credit cards, for example, typically come with a higher interest rate, and extra money should go to that debt, rather than a mortgage. In addition to clearing the debt, paying off credit cards will improve a borrower's credit score, providing access to loans with better terms.
Mortgages can also be a very cheap form of debt if the interest rate is low. Borrowers receive tax benefits for interest payments, and these combined with the low cost of the loan can mean that it is better to pay the mortgage off on time, especially if the borrower plans to sell the property before the mortgage is fully paid. Instead, the extra money could be invested in a certificate of deposit, savings account, or retirement account to earn money for the borrower and create a safety cushion to have available in the event of a financial crisis.
Borrowers who are not sure about whether to pay off a mortgage early or to use extra funds in other ways can use a mortgage calculator to see how much they would save by prepaying, and contrast that with potential earnings from investments and tax savings via mortgage interest deductions.