The benefits of paying off your mortgage early include more financial freedom and eliminating significant debt. If you eliminate your monthly mortgage payment ahead of schedule, you could save thousands of dollars in interest. Paying your mortgage off also frees up cash that you can use to invest in real estate, retirement accounts, or elsewhere.
We'll outline four strategies to help you repay your mortgage faster and achieve financial freedom.
Before You Accelerate, Build a Strong Financial Foundation
The first step toward achieving nearly any significant financial goal is to lay the proper financial foundation. This typically involves creating and following a budget, which should track all of your money each month, including income and expenses.
"Creating a budget is absolutely critical and can be easily organized," says Emily Irwin, head of Wells Fargo Advice Center. She suggests using a budgeting app or even a spreadsheet to organize and track all incoming funds and expenses.
Ideally, this process helps identify areas where costs can be cut or reduced. That makes it easier to free up money that can be redirected toward increasing your mortgage payments.
As part of your financial review, it's important to target any high-interest debt you may have. Paying down these debts can free up cash, allowing you to pay off your mortgage more quickly.
"Tackling high-interest debt, like credit cards or personal loans, is smart since those can drain your finances," says Cliff Ambrose, FRC, founder and wealth manager at Apex Wealth.
Pay Down Debt, But Don’t Skimp on Retirement Contributions
While establishing a budget and eliminating debt are key steps, you should continue to fund your retirement savings. This is not an area where you'll want to cut costs if it can be avoided.
"Don’t forget to pay yourself now for your future," says Irwin. "Retirement savings contributions, which can grow exponentially with compounding and company matches, typically should not be foregone in lieu of aggressively paying down your mortgage. For most Americans, eliminating a future income stream typically would typically carry more risk."
4 Strategies to Accelerate Your Mortgage Pay-Off
When you're ready to focus on accelerating mortgage payments, there are four main approaches to consider.
1. Expedite Your Pay-Off With Additional Payments
You can make extra mortgage payments to eliminate your mortgage balance more quickly. Consider making an extra monthly payment each year or paying half of your monthly payment every two weeks (bi-weekly). Over a year, either approach will mean you’ve made 13 mortgage payments instead of 12.
"The average homeowner makes mortgage payments once per month—that’s 12 payments per year," says Felton Ellington, community lending manager at Chase Home Lending. "Even a small change, like moving to bi-weekly payments, can have a positive impact. In this example, you’d end up making 26 payments, or the equivalent of 13 months. Put simply, you’d be making one extra payment every year."
Before making extra payments, contact your mortgage loan servicer to ensure they are applied correctly and to avoid any potential prepayment penalties. You’ll want to verify that the extra payments are applied to the mortgage principal, not future monthly payments.
Another way to eliminate your principal balance more quickly is to round up your monthly payments. You can also allocate any extra income you may receive to mortgage payments or consider using a tax refund to help pay down your mortgage.
2. Refinance for a Better Rate or a Shorter Term
Refinancing is a commonly used approach to revise the terms of a mortgage. The process involves applying for a new mortgage to pay off your existing mortgage with a lump sum. Ideally, refinancing means you can obtain a lower interest rate, a smaller monthly mortgage payment or a shortened loan term. The result should allow you to repay the loan faster. You may also consider opting for a 15-year mortgage, which typically carries a better interest rate than a 30-year conventional loan.
"Many homeowners refinance their mortgage loans when rates go down to pay a lower interest rate on their existing loan balance going forward," says Aaron Craig, vice president of mortgage and indirect sales for Georgia's Own. "However, if you are looking to pay off your mortgage earlier, refinancing to a shorter term and a lower interest rate could be a great option. In many scenarios, refinancing is a great way to save some money and get your loan paid down faster."
Before proceeding with a refinance, evaluate the costs associated with this step to ensure that you are saving money. Closing costs, for instance, can be anywhere from 2% to 5% of the total loan amount.
On a $400,000 mortgage, you may spend between $8,000 to $16,000 on closing costs. Be sure you plan to stay in the home long enough to justify this type of expense. You'll also want to compare the interest rate on your new loan with your existing loan to ensure it's more competitive.
3. Build Momentum with the Snowball Method
The snowball method involves tackling your smallest debt first to build momentum. Once your smallest debt has been fully repaid, you take that money and use it to pay off your next smallest debt. You continue this process until all debts are repaid. This strategy is best for individuals who need quick wins to remain motivated.
4. Tackle High Interest-Rate Debt with the Avalanche Method
The avalanche method focuses on paying off high-interest debts first to save more money over time. After your highest interest rate debt has been repaid, you move on to the debt with the next highest interest rate. The freed-up funds that you had been paying toward your first debt should help you pay the second debt off more quickly.
You continue with this approach until all debts have been repaid. The benefit of this form of debt repayment is reducing your interest payments more quickly.
Bonus Pay-Off Strategies and Considerations
Beyond refinancing, making extra payments, and employing specific debt repayment strategies, there are other options for paying off your mortgage ahead of schedule.
One option is downsizing, which involves selling your home and purchasing a less expensive property that would ideally come with a smaller mortgage. Before taking this step, however, consider the costs of moving and whether you’re ready for a smaller space.
In the right market, this effective step can save you hundreds of dollars per month on your mortgage payment. If you need deeper insights into your local market, consult your real estate agent and request a comparative market analysis for your current home, and the smaller options that you’re considering.
"A lot of people are kicking around the idea of selling their home since prices are so high, then downsizing and buying a less expensive and smaller new home," says Craig. "If done right, this can be an effective strategy, if your new mortgage loan amount will be significantly less than your current mortgage amount on your current home. With newfound equity from home prices going up in recent years, this is a real possibility."
Yet another way to eliminate your mortgage more quickly is by increasing your income. This could include taking on a side hustle or asking for a raise or a promotion at work. The extra money you generate through these options can be directed toward paying down your mortgage more quickly.
Maintaining a Balanced Approach
No matter which approach, or combination of approaches, you decide to employ to repay a mortgage more quickly, it's important to always keep an eye on your overall financial picture. For example, you should avoid using all of your free cash to repay one debt. That could put you in a situation where you must use credit cards to make ends meet, thus racking up another debt.
When handled wisely, repaying your mortgage well ahead of schedule can pay off both in the long term and in the short term, saving you thousands of dollars in interest.
"Paying off your mortgage early can provide a range of financial and lifestyle benefits. One of the most significant advantages is the substantial interest savings over the life of the loan," says Graham Cottrell, a broker with Singletrack Mortgage. "Once the mortgage is fully paid, you free up a considerable portion of your income each month."
The Bottom Line on Accelerating Your Mortgage Pay-Off
If you've set your sights on paying off your mortgage early, research the best approach for your financial situation and goals. Refinancing, making extra payments, or picking a strategy to pay down your other debts will lead you toward greater financial freedom.
If you need further guidance on how to best accomplish this goal, consider contacting a financial expert or advisor who can examine your finances and develop a comprehensive strategy.