ôô

8 Ways to Pay Off a Mortgage Early

Ready to pay off your mortgage? Laura explains who should pay off their mortgage ahead of schedule and who shouldn't. Learn eight ways to get rid of your home loan as quickly as possible—if it’s a smart financial move for you.

By
Laura Adams, MBA
10-minute read
Episode #443

Additionally, you may be losing out on the opportunity to invest your extra money for returns that are much higher than the after-tax rate that you’re paying on your mortgage. For instance, investing in a mutual fund in a Roth IRA that pays 8% on average is better than paying down a mortgage that only costs you 3% after taxes.

If you don’t have an emergency fund, aren’t investing at least 10% of your gross income for retirement, or have high rate debt, (such such as credit cards, payday loans, or student loans) don’t even think about sending extra money to your mortgage.

While getting rid of any type of debt is ultimately good for your finances, paying it off in the right order is essential. Always consider your mortgage in the context of your entire financial situation.

If you don’t have an emergency fund, aren’t investing at least 10% of your gross income for retirement, or have high rate debt, (such such as credit cards, payday loans, or student loans) don’t even think about sending extra money to your mortgage.

Living mortgage-free may sound good, but the bottom line is that it’s not always the best use of your money. You’re much better off saving for emergencies, getting rid of expensive debt, and shoring up your retirement funds, before paying off your home ahead of schedule.

See also: When Not to Pay Off a Mortgage Early

Paying Off a Fixed-Rate Mortgage Early

I received an email from a Money Girl Podcast listener named Christian who asks, “My wife and I have no debt, except our mortgage. We max out our retirement accounts, contribute to 529 savings plans, have life insurance, and invest in real estate. Now we have extra money to pay off our mortgage. What accelerated mortgage strategies do you recommend?”

Christian didn’t mention having an emergency fund. But if he and his wife also have savings equal to 3 to 6 months’ worth of their living expenses and expect their future income to remain steady, they’re perfect candidates to begin chipping away at their mortgage.

So, how do you do it? The key to paying off a mortgage (or any debt) early is simple: send more money that gets applied to the principal balance.

With a fixed-rate mortgage, a portion of each payment goes toward paying down both the debt and paying interest. But the proportion of principal and interest within the fixed payment changes each month.

In the early years of a fixed-rate mortgage, the portion that’s credited to principal is very small and the interest you pay is proportionately high. This shifts over time and is eventually reversed. By the end of a fixed-rate mortgage most of your payment is credited to principal and you pay very little interest.

This happens because as the principal balance amortizes or decreases, so does the amount of interest you pay. But since the monthly payment stays the same, the excess is subtracted from the principal balance each month, helping you build increasing equity in your home.

So, the faster you pay down your principal balance, the less interest accrues, and the shorter your loan term will be. I give you much more information about this in chapter 8 of my book Money Girl’s Smart Moves to Grow Rich.

There are some great mortgage calculators that show how paying down your principal can shorten the length of your loan and save money. Check out the Mortgage Payoff Calculator at Bankrate.com or do an online search.

See also: Financial Q&A: Money Tips for Couples and Families

Pages

About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura's previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.