For most people, a home loan is the largest debt they have, and the longer it takes to pay off your mortgage, the more you will pay in interest over the life of the loan and the longer you will have a monthly payment to budget into your monthly expenses.
While the idea of eliminating your mortgage sounds like a great idea, it doesn’t make financial sense for everyone. In some cases it can improve your financial situation, but in others it would make more sense to invest that money somewhere else or pay off other loans or revolving credit with higher interest rates. If you do decide to pay it off early, here are three proven strategies.
1: Pay Extra Toward Principal
Your monthly payment is divided into paying the interest and paying down the principal balance. If you pay more toward the principal, you can get the entire loan paid off sooner and reduce the amount you will pay in interest over the life of your loan. You can accomplish this in several ways, including:
- Adding to each monthly payment
- Making payments every two weeks or every week instead of every month
- Make an extra payment when you get extra money
- Make one extra payment each year
2: Refinance to a Lower Rate
If your current loan has a higher interest rate, refinancing into a lower-interest-rate loan can reduce your total monthly payment. The key, though, is to continue paying your higher payment even after you refinance because the extra amount will go toward your principal balance. Refinancing could reduce your payments by hundreds of dollars every year, but if you keep paying the higher payment all that money is now going toward principal.
3: Refinance to a Shorter Loan Term
Shorter-term loans, such as 10 or 15 years, will have higher monthly payments, but will also reduce the total amount of interest that you pay over time, so if you can afford the higher payments, not only is your loan repayment term shorter, you will save quite a bit of money by not paying so much interest.
Paying off your mortgage earlier will require planning and may mean you need to be more disciplined about your personal finances. It can pay off in the long run by allowing you to live mortgage-free and giving you more expendable income to travel, contribute to retirement accounts, or pursue your other hobbies and dreams.