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There are many reasons that a refinance can help you improve your financial picture. And real financial security comes from having a home with no mortgage. Here’s how to pay off a mortgage faster.
- You can refinance to a shorter term, which usually also offers a lower interest rate
- You can refinance to a lower rate but keep making the higher payments, reducing your principal balance faster
- You can take a cash-out refinance to clear all your higher-interest debt, then use that monthly saving to accelerate the repayment of the mortgage
Usually, you have to make a higher payment to pay off a mortgage faster. But sometimes you can reduce your rate, continue to make the higher payment, and knock years off your mortgage term.
Living the dream
Do you ever lie there, imagining it? Do you dream of that morning when you make the very last payment on your mortgage? How you’re going to feel when you’re mortgage-free? What you’re going to do with all that extra money you’re going to have at the end of every month?
Well stop dreaming and set about making it a reality — years ahead of schedule.
Early payment penalties
First, check your mortgage documents or call your loan servicer. Some mortgage agreements impose prepayment penalties if you pay off your home loan early. Many don’t have any such requirement, and some impose only small “fines.”
But some demand significant sums that can undermine the economic viability of early payments. Check your agreement to see which category you’re in.
It’s the economics, stupid!
No, you’re not stupid. Your decision to pay off a mortgage faster should be based on whether it makes economic sense for you.
And that means at least considering whether you’d be better off investing elsewhere the extra money you’ll expend in bigger mortgage payments. Just remember two things:
- High rewards involve high risk. If you’re banking on high returns on your investments, those won’t be certain
- You’re definitely going to receive (as savings) the money you don’t have to pay out by having fewer mortgage payments
You can easily work out the total costs of borrowing for your two models: leaving things as they are now and paying down your mortgage quicker. A mortgage refinance calculator can help you see if how much you’ll save by refinancing to a shorter term. The hard part is in making the right assumptions about alternative investments.
Refinance to a shorter term
The most obvious way to pay off a mortgage faster is to refinance to a loan with a shorter term. So, if you have 20 or 25 years left to run on your 30-year…