While a mortgage is typically considered “good” debt, especially given low interest rates compared to other types of debt and higher potential return on certain investments, paying off your mortgage early can save you a substantial amount in interest. When you pay off your mortgage ahead of schedule, you’ll have the security and satisfaction of owning your own home as well as the extra money that would have gone toward mortgage payments to invest elsewhere, like your children’s college fund or a retirement account.
Pay off high debt
Paying down your home loan early only makes sense if you’ve already paid off any high-interest debt. With rates between 3 and 4 percent for a 15- to 30-year mortgage, interest on your mortgage is probably significantly lower than on credit cards or private student loans. Continuing to make the minimum monthly mortgage payment while paying more each month on your high interest debt will save you more money in the long run.
Make sure you have sufficient savings
The future is by nature uncertain, and should you lose your job down the line, it’s important to have enough money set aside to ensure you, your family, and your mortgage payment are taken care of while you look for more work. There’s no use making higher mortgage payments if you’re suddenly unable to pay them at all, so before you start writing a bigger check, make sure you have at least three months worth (six or twelve would be even better) of expenses set aside in an emergency savings account. Consider keeping your emergency savings in a high yield account to earn while you save.
Pay more each month
The easiest way to pay off your mortgage early is to pay more every month. Take a look at your monthly budget and see if you can shave off some extra money on nonessentials to apply toward your loan payment. Use FinanceWorks through our free online banking to see where your money is really going. Cooking at home instead of eating out a few times per week, clipping coupons for groceries and school supplies, and hang-drying clothes outside are a few ways to save some extra cash. No matter how much extra you pay, make sure it’s going toward the principal and not the interest or escrow.
Refinance to a shorter loan
If you’re currently paying a mortgage on a 30-year term, consider refinancing with a 15-year mortgage. Your monthly payments will be higher, but you’ll pay off the loan in half the time. Since you’ll be locked in to the new rate, you’ll have more incentive to make the higher monthly payment than simply resolving to pay more each month. Use our mortgage calculator to see what type of financing you might qualify for.
Switch to biweekly payments
There are 52 weeks and 12 months in the year. If you start making a half-months payment every two weeks, you’ll have made 13 months worth of payments by the end of the year. Switching to biweekly payments can shave a few years off your 30-year mortgage without having to spend significantly more money each month.