Normally, it would take years to pay back a mortgage loan. The longer the loan takes, the larger the interest it will have.
While it’s the best decision for people who can’t pay the full purchase price of a property upfront, it can come with a few drawbacks.
The amount of interest accumulated from a mortgage can total up to half of the property’s purchase price, depending on how long it is. However, there are ways around this.
Most of this will require you to make a great increase, which isn’t the most pleasing thought.
But if you can finish your mortgage payments earlier, you’re sure to gain benefits after, whether it’s in connection to your savings, your investments, or even your retirement.
So, where and how should you get started on it?
How to Calculate Early Mortgage Payoff
There are different ways to calculate how much your monthly payments should be in order to pay off your mortgage earlier. While you can do this yourself, you can use early payoff mortgage calculators available online for more accurate results.
Early mortgage payoff calculators display how much more you need to pay each month to lessen the year count of your loan and how much interest you will be able to save by paying it off earlier.
To calculate for this, you will need to indicate the following:
- your mortgage amount
- your outstanding balance
- the loan term in years
- the interest rate
- the number of years left on the mortgage
- the number of years you want to pay it off within
Paying off your mortgage early usually starts with making an additional payment on top of the usual amount you pay every month. The purpose of doing this is to lessen the period of time wherein you will have to pay for the loan.
Although this means an increase in your payments now, it can provide you with much greater benefits in the future.
For example, your total mortgage amount is $350,000. The loan term is 30 years wherein every month, you increase the principal and interest payment to $1,000.
With the additional payments you’re making monthly, you will be able to pay it off 15 to 16 years faster. This can help you save over $150,000 worth of interest.
Is It a Good Idea to Pay Off Your Mortgage Early?
If you’re looking to save some extra cash for other purposes, one way to do so is by paying off your mortgage earlier.
You’ll need to put out much more than you usually do every month for your payments.
However, your overall spending on interest lowers significantly. This happens because you’re getting rid of the additional years where the loan interest is increased.
The amount you get to save varies based on your remaining mortgage balance. Regardless, it can save you thousands of dollars, which initially comes from the interest alone.
By paying off your mortgage earlier, you will also free yourself of a heavy debt. This gives you more financial freedom with how you budget and balance your finances.
With fewer payments to make on a monthly basis, you can put the money toward investments or saving instead.
This difference can be a great help if you’re looking to build your retirement funds. Paying off your mortgage early doesn’t only save you a big cost but also can lower your living expenses.
Ways to Pay Off Your Mortgage Early
There are different ways to start paying off your mortgage early. The method you choose can vary on how often you get an income and how much you can afford to pay comfortably every month.
In deciding the best way to pay off your mortgage, take into consideration your financial status and how capable you are to make larger payments every now and then.
Be sure that the method you will be using to pay off your mortgage is something you are comfortable with, even if it takes longer.
It would be much better to make minor changes to your mortgage payments rather than choosing quicker methods that would put a great dent in your finances and lifestyle.
Another thing to note is your mortgage provider. Not all lenders allow their clients to make prepayments on their mortgage, particularly if they are governed by different rules.
Ask your provider if they will allow you to make prepayments before you make earlier payments.
Here are some suggestions:
Mortgage acceleration refers to the practice of paying off the mortgage loan faster than what you are required to follow based on your mortgage agreement.
Some people offer mortgage acceleration plans for people who aren’t familiar with paying off loans. However, you can do this by tracking the progress yourself.
It can be through extra payments, making increases on your monthly payments, and much more.
Extra Principal Payment
One of the most common methods to pay off loans quickly is by making an extra payment each time.
Say your monthly mortgage payment is $900, and you make an additional $200 to $300 payment with it. This way, it will be like you’re paying off for the additional years in advance.
Take note that the extra payment you make can be in any amount, as long as you’re comfortable with it.
Depending on your capabilities, you can choose to increase the extra payments or stop doing so for a month or two. It gives you the flexibility to make adjustments.
Make an Extra Payment Each Year
Similar to how the extra principal payment works, you can opt for making an extra payment annually.
While this won’t let you finish off your payments in the soonest time possible, it can speed up the process.
This method will require you to make significant increases to your mortgage payment by a month of the year that is best for you.
Like extra principal payments, the amount you add doesn’t need to be the highest. However, it would make a bigger difference if the amount you put into it is considerably big.
If you start doing this by your first year into the mortgage, the results can be much more effective than if you were to start a few years in.
Pay Half of Your Mortgage Payment Every Two Weeks
This is also known as a bi-weekly payment. When you do this, your monthly mortgage payment is split into two installments. The effect is similar to making additional payments to the loan each year.
Instead of paying off the mortgage once a month, you will be paying for it every two weeks. Bi-weekly payments can reduce the interest that gets compounded, especially if this is done on a daily basis.
This doesn’t speed up your process of paying off the mortgage. However, it can knock off payments within the loan without having to worry about having extra money for it.
Before you do this, be sure to ask your mortgage provider if they accept early payments.
Pay a Lump Sum Toward the Principal
If you are capable of paying off an even bigger amount of the mortgage, you can choose to make a single large payment in a year.
For example, in a year, you will need to pay a total of $11,000, which is separated into installments for each month. You can pay the $11,000 along with one of your monthly payments to knock off a year of the loan’s term.
A one-time payment like this will depend on your ability to pay for it. However, it doesn’t need to be a year’s worth of payments.
This can range from three to six months’ worth of the mortgage, as long as it will be able to make a significant deduction from your balance.
Refinance to a 15-Year Mortgage
If you’re looking to pay off your mortgage, then you can choose to refinance it.
You can refinance a 30-year mortgage to a 15-year mortgage, enabling you to get a lower interest rate on your payments.
However, keep in mind that when you do this, you will be required to make a larger payment monthly.
The pro to doing this method is that you get to cut down the interest by half, which is thousands of dollars’ worth.
This means you get to increase your savings when the mortgage is paid off sooner.
Is There an Early Payoff Mortgage Penalty?
While it would great to be able to lessen your expense by paying off your mortgage early, there are certain rules that you have to follow.
Early pay off for mortgages have penalties. This is a fee that is charged when you pay off your principal balance ahead of the time you are supposed to.
Usually, the amount is equal to a certain percentage of overall unpaid balance during the time of the payoff.
Even mortgage providers know that borrowers will look into different ways to avoid having to pay such a large interest from their loan.
Making extra payments can both lower the interest accumulated as well as shorten the length of the loan.
However, this can put lenders and investors at a disadvantage. With less interest to gain, they make less money.
Although your monthly mortgage payment is priced wherein you can easily make adjustments, it can produce bigger casualties that may require you to take out an even bigger amount from your pockets.
The easiest way to avoid a prepayment penalty is by finding a lender who will not charge you for this. There are mortgage providers who choose not to charge their clients with a payoff penalty.
Take note that this doesn’t apply everywhere. Some states may have no choice but to implement this rule due to law.
Before you choose your mortgage provider, especially if you intend to eventually make prepayments in the future, it’s important to ask about their policies and conduct your research.
- How to Be A House Flipper | Finding, Fixing, and Making Money
- How to Get Portfolio Loans for Investing in Real Estate
- The Secret to Investing in Real Estate
- Capital Gains Tax in Real Estate Explained and How to Put Off Paying Taxes
- The Best Passive Income Ideas To Make Money and Retire Early
Premium online courses for any level of investor: beginner-advanced. Completely go at your own pace and can be taken through "Self-Study" or through "Membership".
Inside the membership, attend live 90-minute Group Coaching sessions with Coach Dustin Heiner as he and the MPI Coaches teach you how to build a successful real estate investing business.
Connect with the MPI Coaches and the other like-minded investors inside the MPI Mastermind Community. Ask questions about investing and get feedback how to be successful in your business.