Paying off a mortgage early can be an attractive financial goal. Eliminating a monthly payment can provide greater financial flexibility, reduce the amount of interest you pay over the life of the loan, and give you the peace of mind that comes with owning your home free and clear.
The good news is that you don’t necessarily need a huge lump sum to make meaningful progress. Several strategies can help you shorten your mortgage term, from making extra principal payments to refinancing or applying occasional windfalls to the loan.
Here’s a look at the most common options, along with examples of how they can work.
Table of Contents
1. Make One Extra Mortgage Payment Each Year
One of the simplest strategies is to make an additional mortgage payment every year and direct it toward the principal.
For example, suppose you have:
- A $300,000 mortgage
- A 30-year fixed interest rate of 6%
- A monthly principal-and-interest payment of about $1,799
If you make one additional $1,799 payment toward principal each year, you can potentially pay off the mortgage several years earlier and save a substantial amount of interest.
An easy way to accomplish this is to divide your regular monthly payment by 12 and add that amount to each monthly payment. In this example, an extra $150 per month is roughly equivalent to making one additional payment each year.
Before using this approach, check with your mortgage servicer to make sure extra payments are applied to principal.
2. Add a Little Extra to Every Monthly Payment
You don’t have to wait until the end of the year to make an extra payment. Another approach is to add a fixed amount to every monthly mortgage payment.
Suppose your required payment is $1,799. Adding $200 per month would increase your payment to $1,999.
That extra $200 goes toward reducing the loan balance, assuming your servicer applies it to principal. Because interest is generally calculated based on the outstanding balance, reducing the principal sooner can also reduce future interest charges.
The advantage of this strategy is consistency. Instead of finding a large amount of money once a year, you gradually accelerate your payoff throughout the year.
3. Make Biweekly Payments
With a traditional mortgage, you typically make 12 monthly payments each year. A biweekly strategy involves paying half of your monthly mortgage payment every two weeks.
Because there are 52 weeks in a year, you make 26 half-payments—or the equivalent of 13 full monthly payments—over the course of a year.
For example, if your monthly payment is $1,800:
- Monthly approach: 12 × $1,800 = $21,600 per year
- Biweekly approach: 26 × $900 = $23,400 per year
The extra $1,800 effectively creates one additional monthly payment each year.
This can shorten the loan term and reduce interest, although the exact savings depend on your interest rate, balance, and remaining term.
Be careful with third-party companies that charge fees to establish a biweekly payment program. You may be able to accomplish the same goal yourself by making additional principal payments through your mortgage servicer.
4. Apply Bonuses, Tax Refunds, or Other Windfalls
Another option is to make occasional lump-sum principal payments.
Imagine receiving a $5,000 bonus at work. Instead of spending the entire amount, you could put some or all of it toward your mortgage.
A single $5,000 payment may seem small relative to a $300,000 mortgage, but it immediately reduces the principal on which future interest is calculated. Repeating this strategy whenever you receive a significant windfall can accelerate your payoff considerably.
The same idea can apply to:
- Tax refunds
- Inheritances
- Cash gifts
- Proceeds from selling an asset
- Annual bonuses
- Side-business income
You don’t necessarily have to put every dollar toward the mortgage. The key is deciding how much of each windfall fits your broader financial plan.
5. Refinance Into a Shorter-Term Mortgage
If you have a 30-year mortgage, refinancing into a 15-year mortgage can significantly accelerate repayment.
For example, suppose you owe $250,000 and have 25 years remaining on your mortgage. A refinance into a 15-year loan could eliminate the debt much sooner.
The trade-off is a potentially higher monthly payment. You also need to consider closing costs and the new interest rate.
A shorter loan term isn’t automatically the best choice for everyone. If the higher payment would leave you without enough cash for emergencies or other important financial goals, keeping the existing mortgage and making voluntary extra payments may provide more flexibility.
6. Make a Large One-Time Principal Payment
If you have substantial savings available, you might consider making a large principal payment.
For example, suppose you owe $200,000 and receive a $50,000 inheritance. Applying the entire amount to the mortgage would immediately reduce the balance to $150,000.
That’s a significant reduction, but there’s an important question to consider first: Should you use the money to pay down the mortgage, or could it serve a better purpose elsewhere?
Before making a large payment, consider maintaining an adequate emergency fund and paying off higher-interest debt. You may also want to compare the mortgage interest rate with other potential uses for the money.
7. Use a Mortgage Recast After a Large Payment
A mortgage recast can be useful if you make a substantial lump-sum payment but don’t necessarily want to shorten the loan term.
For example, imagine you owe $300,000 and make a $75,000 principal payment. Your lender may allow you to recast the mortgage, recalculating the required monthly payment based on the lower balance.
Unlike a refinance, a recast generally doesn’t replace the existing mortgage. The interest rate and remaining term may stay the same while the required payment decreases.
A recast can therefore provide a middle ground: you reduce the loan balance and potentially lower the required monthly payment while retaining the existing mortgage.
Not all lenders offer recasting, so you’ll need to check your loan terms.
8. Combine Several Strategies
You don’t have to choose just one approach.
For example, a homeowner might:
- Add $200 to each monthly payment
- Make an extra payment at the end of each year
- Apply half of an annual bonus to the principal
- Make occasional additional lump-sum payments
Small actions can compound over time. The important factor is establishing a strategy that you can realistically maintain.
A Simple Example
Consider a homeowner with a $300,000 mortgage at 6% interest with a 30-year term.
The scheduled principal-and-interest payment is approximately $1,799 per month.
Now imagine the homeowner adds $300 to every payment, bringing the monthly payment to roughly $2,099.
That extra $300 isn’t simply an additional expense. It directly accelerates the reduction of the mortgage balance, which means less interest can accrue over time.
The precise payoff date and interest savings depend on how the lender calculates interest and how additional payments are credited, so it’s best to use your actual loan balance, interest rate, and remaining term when calculating the potential savings.
What Should You Do Before Paying Your Mortgage Early?
Paying off a mortgage early can be financially attractive, but it shouldn’t necessarily come before every other financial priority.
Consider these questions first:
Do you have an emergency fund?
Having accessible savings can be important because money sent to your mortgage generally isn’t as easy to access as cash in a bank account.
Do you have higher-interest debt?
Credit cards and other high-interest debt may deserve attention before accelerating a relatively low-rate mortgage.
Are you receiving available employer retirement matches?
If your employer offers a retirement-plan match, make sure you’re taking advantage of it before directing all available cash toward the mortgage. Your Ultimate Retirement Checklist.
Does your mortgage have a prepayment penalty?
Check your loan documents or ask your servicer before making large additional payments.
How will extra payments be applied?
Confirm that additional money will be credited toward principal rather than simply advancing your next scheduled payment.
The Bottom Line
There are several ways to pay off a mortgage early, and you don’t necessarily need to make dramatic changes to do it.
Adding a little extra each month, making one additional payment annually, using occasional windfalls, making lump-sum payments, or refinancing into a shorter loan can all accelerate your payoff.
The best strategy is usually the one that fits comfortably within your overall financial plan. Paying off a mortgage early can provide a valuable guaranteed reduction in future interest costs, but maintaining an emergency fund, managing higher-interest debt, and saving for other financial goals are important considerations too.
Before making a major change, run the numbers using your actual mortgage balance, interest rate, remaining term, and payment schedule. That will give you a much clearer picture of how much time and interest each strategy could save.
If you would like a mortgage payoff calculator leave a comment ‘PAYOFF’ and I’ll send you one.
Examples in this article are illustrative. Actual mortgage savings and payoff dates depend on the loan terms, payment timing, interest calculation method, and how your lender applies extra payments.
