9 Financial Tips for Paying Off Your Mortgage Early

There are advantages to paying off your mortgage early, like having more disposable money and a lower chance of facing foreclosure if your employment is lost.

Did you know that the average American has over $200,000 in mortgage debt? It's scary, but it's also a sign of the times. The housing market has shifted significantly in the last decade and with it, so have Americans' attitudes toward home ownership. With a median home price of $205,000 and the average millennial paying over $2000 a month to rent an apartment instead of buying a house, it's no wonder why so many people are putting off buying a home. But for those who can afford it and want to take on this financial responsibility sooner rather than later, there are several effective ways to pay off your mortgage faster—and save some money in the long run.

1. Know the difference between paying off your mortgage and refinancing.

First and foremost, it's important to know the difference between paying off your mortgage and refinancing your mortgage. Paying off your mortgage means that you've paid off the entirety of your mortgage loan, including the principal and interest due. Refinancing, on the other hand, means that you've taken out a new mortgage on top of the old one, most likely at a lower interest rate. 

For example, let's say that you have a $200,000 mortgage with an interest rate of 5%. If you decide to refinance and take out a new mortgage with an interest rate of 3%, you're not actually paying off any of your mortgage loans. You're simply taking out a new loan on top of the old one, and you'll have to start paying that one off too.

2. Negotiate a lower interest rate

According to a financial study conducted by the Federal Reserve, the average American household that has a mortgage has over $200,000 in debt. This is usually caused by the fact that many people take out a mortgage at a higher interest rate than they can get today. For example, the average interest rate for a 30-year fixed mortgage is 4.84%. 

While this is the average interest rate, many homeowners who took out mortgages in recent years have interest rates that are much higher, sometimes upward of 6% or 7%. If you're currently paying an interest rate above 4%, you should try to negotiate an acceptably lower interest rate with your lender. You might be able to get your interest rate reduced to 4% or lower, which will save you money in the thousands of dollars in interest payments. 

3. Adjust Your Debt-To-Income Ratio

In addition to paying off your mortgage, you also have to make monthly payments on your car loans, student loans, credit card debts, and other types of debt. All of these monthly payments add up to what's known as your debt-to-income ratio (DTI), which is the ratio between the total amount of debt you have and the amount of income you make. 

When the amount of debt you have doesn't equal the amount of income you make, your lender will often require you to make a larger down payment on your mortgage. For example, let's say that you have $100,000 in debt and an income of $50,000. Your DTI would be $100,000/$50,000 = 2. If you decide to buy a home and want to take out a mortgage, your lender might require you to make a 20% down payment on your home instead of the usual 10%. 

4. Pay more than the monthly minimum.

Let's say that you have a mortgage with a $500,000 principal, and you're making the standard payment of $2,950 each month. If you pay the standard payment for 10 years, you'll end up paying $159,000 in total. If you increase your payments by $100 per month and pay $3,050 per month instead, you'll pay off your mortgage three years sooner and spend $46,000 less in interest.

5. Consolidate other debts with a home equity loan.

As discussed above, paying off your mortgage before time can save you thousands of dollars in interest payments. But paying off your mortgage early is also risky. If you have to miss a mortgage payment or lose your job, you could end up losing your home. If you have some high-interest credit card debt that you'd like to pay off, you can take out a home equity loan on the mortgage you already have. Home equity loans are second mortgages that are secured by your house. Many home equity loans are variable-rate loans that have lower interest rates than your first mortgage.

6. Put extra money toward your mortgage every month.

One of the best and simplest ways to pay off your mortgage early is to put extra money toward your mortgage every month, even if it's only a small amount. For example, say that you have a mortgage with a $300,000 principal, and you make payments of $2,200 every month. If you increase your payment to $2,500 per month, you'll pay your full mortgage off in half the time.

7. Bump up your mortgage payments for a few months.

If you want to pay off your mortgage even faster, you can extend your mortgage payments for a few months. This will lower your monthly payment but will also extend the time it takes to pay off your mortgage. Depending on the interest rate on your mortgage, you may be able to save thousands of dollars by extending your mortgage.

You can also choose a longer fixed-rate mortgage, which will lower your monthly payment and reduce the time it takes to pay off your mortgage. A longer-term fixed-rate mortgage offers stability and predictability, but it will also cost you more in interest over the life of the loan. For example, let's say that you have a mortgage with a $300,000 principal, and you're making payments of $2,500 per month. If you extend your mortgage payments to, say, $3,500 per month, you'll pay off your mortgage in half the time. 

8. Change your repayment schedule to pay more each month.

Most mortgages allow you to change your repayment schedule from monthly to bi-weekly and pay half as much each month. This can save you a great amount of money over the course of your loan as you pay less interest. It's also a good way to make sure you have a decent amount of money in your account each month to make the mortgage payment. Most banks and lenders will let you change your payment schedule, but you should check first. For example, let's say that you have a mortgage with a $300,000 principal, and you make payments of $2,200 every month. If you change your repayment schedule to bi-weekly and make payments of $1,100 every two weeks, you'll pay off your full mortgage in half the time.

9. Take advantage of tax benefits to pay off your mortgage faster.

Above, we've covered numerous ways to pay off your mortgage faster. But these strategies come with a cost. For example, extending your mortgage payments will cost you more in interest payments, while putting extra money toward your mortgage each month will cost you lost savings. If you want to pay off your mortgage quickly but don't want to make these sacrifices, you can take advantage of the many tax benefits that exist for people who pay off their mortgages early. For example, if you make an extra payment on your mortgage every year, you can deduct that amount from your taxes.

Summing up

There are several advantages to paying off your mortgage early, including having more disposable money, fewer expenses, and a lower chance of facing foreclosure if your employment is lost. Making sure you have enough money to get by each month without going into debt is crucial, though. If you can decide to pay off your mortgage sooner rather than later, you'll enjoy greater financial independence and experience less worry. Additionally, you'll save paying thousands of dollars in interest.