If you have a 30-year mortgage, you may feel as though you’ll always be paying off your house. But you can slash the time it takes to pay off your mortgage using a number of strategies, many of which don’t require spending a lot of extra money.
When it comes to paying off your mortgage faster, try a combination of the following tactics:
— Make biweekly payments.
— Budget for an extra payment each year.
— Send extra money for the principal each month.
— Recast your mortgage.
— Refinance your mortgage.
— Select a flexible-term mortgage.
— Consider an adjustable-rate mortgage.
Make Biweekly Payments
To pay off your house faster with this option, split your monthly mortgage payment amount in half and send it every two weeks. By the end of the year, you’ll have made the equivalent of 13 monthly payments. This strategy can shave four to six years off a typical 30-year loan, depending on your interest rate. On a 15-year mortgage, biweekly payments may cut one to three years from the repayment time, depending on the loan amount and interest rate.
Not every lender will accept biweekly payments, says Jackie Boies, senior director of housing and bankruptcy services for Money Management International, a nonprofit credit counseling agency. Ask your lender whether it accepts biweekly payments and how they’d be processed.
[Read: Best Mortgage Lenders.]
Budget for an Extra Payment Each Year
If you don’t want the hassle of sending biweekly payments, you can get similar savings by making an extra payment once a year. A tax refund or bonus may provide the cash you need for this strategy. Earmark the entire amount toward the loan principal and you could reduce your repayment term by up to five years if you make extra payments annually.
“The more rapidly you reduce that principal amount, your total cost of borrowing is going to go down,” says John Pataky, executive vice president and chief banking officer for TIAA Bank.
Send Extra Money for the Principal Each Month
If you can’t afford to make an extra payment each year, consider sending an additional amount each month. “Prepaying mortgages are best for those individuals who lack the discipline to save,” says Robert R. Johnson, professor of finance in the Heider College of Business at Creighton University.
You can round up your regular payment to the next $100 amount to make record-keeping simple or add $100 to the payment amount. Contact your lender to confirm how it handles payments that exceed the regular monthly bill. That additional amount needs to be applied to the principal to reduce your mortgage term and interest. Actual savings will depend on the terms of your loan and how much extra you pay each month.
Recast Your Mortgage
If you get an inheritance or other windfall, consider recasting your mortgage. Some loan servicers offer this option when they receive a lump-sum payment toward the principal. With recasting, companies reamortize the loan so the term stays the same, but the monthly payment is lowered based on the reduced principal. To pay off your mortgage quickly using this strategy, continue making your previous payment amount and apply the extra money toward the principal.
Not all mortgages are eligible for recasting, though. Loans through the Federal Housing Administration and the U.S. Department of Veterans Affairs cannot be recast, and jumbo loans are often ineligible as well. Lenders have different requirements regarding how often a loan can be recast and how much must be put down toward the principal. There may also be a recasting fee.
Refinance Your Mortgage
Another way to pay your mortgage faster is to refinance your loan. Refinancing can lower the interest rate and result in significant savings. Homeowners can also refinance for a shorter term to get out of debt more quickly. For instance, rather than refinancing for a 30-year mortgage, the new loan could be for a 15-year term. While monthly payments will be higher with a shorter term, consumers could cut their interest costs over the life of the loan.
“Many borrowers incorrectly believe that the payments on a 15-year loan would be twice as high as on a 30-year loan,” Johnson says. Instead, the increase could be far less.
For example, the monthly principal and interest payment on a 30-year mortgage for $200,000 at 4% interest would be approximately $955. A 15-year mortgage under the same terms would have a $1,479 monthly principal and interest payment.
[Read: Best Mortgage Refinance Lenders.]
Select a Flexible-Term Mortgage
While 15- and 30-year mortgages are most common, they are not the only options available. Consider whether you could afford a shorter amortization term.
If you choose to refinance, look for a lender that offers flexible-term mortgages. Shorter terms mean less money paid on interest over time. If you’re not sure which term to select, an independent mortgage broker can help determine how short a term you can comfortably repay.
Consider Using an Adjustable-Rate Mortgage
When the housing market collapsed in 2008, adjustable-rate mortgages helped contribute to a wave of foreclosures. The loans started with a low introductory interest rate that adjusted higher after a specified period. During the recession, homeowners who could initially afford their mortgage payments found they could no longer do so after the interest rates increased.
You may be inclined to shy away from adjustable-rate mortgages, given their checkered history. However, they can still be a useful tool for financially stable families or those who anticipate they will move in the near future, such as military families. An adjustable-rate mortgage can help you build equity in a home quickly, and the low interest may free up additional money in a household budget to put toward the principal.
“If you’re considering an adjustable-rate mortgage, look closely at the details and fully understand the potential increase in the interest rate and monthly payment,” Boies says. “You’ll want to be sure your budget will be comfortable at the higher amount.”
How Can I Pay Off My 30-Year Mortgage in 15 Years?
Assuming you have a $200,000 mortgage at a 4% interest rate, you’d need to pay about an extra $500 a month toward your principal to drop your repayment period to about 15 years. That may be a tall order for many households, but smaller payments can still make a dramatic difference in your pay-off period and interest savings.
How Can I Pay Off My 30-Year Mortgage in 10 Years?
Unless you receive a windfall, you’ll likely need to use a combination of the strategies above to pay off a 30-year mortgage in 10 years. For instance, you could refinance to lower your interest rate, select a shorter loan term and make additional principal payments each month.
Another option would be to look for creative ways to raise money that can be used to pay down a mortgage quickly, such as by renting out a room.
“We see a large number of retirees turning unused space in their homes into a revenue stream by home sharing with long-term housemates,” says Riley Gibson, president of Silvernest, an online roommate-matching service for retirees and empty nesters. Gibson says homeowners earn, on average, $10,000 a year, and they may have lower bills by splitting utility costs. On a $200,000 mortgage at 4% interest, an extra $10,000 a year could reduce a 30-year term to 12 years and save the homeowner more than $90,000 in interest.
In light of the COVID-19 pandemic, home sharing may have added benefits. “Home sharing is also an attractive option for those who deferred their mortgage payments and will have to catch back up on them once the forbearance window closes,” Gibson says.
[Read: Best Debt Consolidation Loans.]
How Many Years Does an Extra Mortgage Payment Take Off?
Your savings will depend on the size and term of your loan. Using the example of a $200,000 mortgage at a 30-year term and 4% interest, one extra payment each year can shave four years off the repayment period and save more than $20,000 in interest. To get these savings, you must be able to apply the extra payment to the principal.
Should You Pay Off Your 30-Year Mortgage Early?
Part of deciding how to pay off your mortgage quickly is determining whether it fits into your overall financial picture. Before paying down a mortgage, homeowners should be sure they are contributing to retirement funds such as individual retirement accounts and 401(k)s. Building an emergency fund should also take precedence over paying off a mortgage. For some households, there may be tax benefits to holding a mortgage as well.
Consider these benefits and drawbacks to paying off your mortgage early:
— Paying off a mortgage early has the potential to save thousands of dollars in interest charges.
— Money that was previously used to make mortgage payments can be redirected to other priorities.
— Being debt-free can offer peace of mind and minimize the chance of losing a home in the event of a job loss or similar event.
— Homeowners will lose their mortgage interest tax deduction, so it can be better to pay off other debt before a home loan.
— Focusing on the fastest way to pay off mortgage balances could draw money away from other necessities such as emergency savings.
— Mortgage interest rates are so low that it could make more sense, financially, to invest extra money instead.
“It’s an excellent financial goal to be debt-free,” Boies says, “(but) you need to weigh out all of your options.”
Your home may be your biggest asset. You can make it more valuable more quickly by using these methods to pay down the principal, reduce the amount of interest owed and slice years off your mortgage term.