Why pay off your mortgage faster?
If you’re financially able to pay off your mortgage early, it's a no-brainer. Paying off debt always feels good, but a mortgage payoff offers a lot more than just peace of mind:
- Build equity and own your home sooner: You can leverage home equity to buy a second home or get a home equity line of credit (HELOC) to pay for home improvements or additions.
- Save on interest: By shortening the loan term and reducing the amount of interest you accrue, you could potentially save tens of thousands of dollars.
- Spend or invest funds elsewhere: When you don’t have a monthly mortgage payment, you may have more financial flexibility to diversify your investments, explore entrepreneurial ventures or change careers.
9 strategies to pay off your mortgage faster
There are several simple strategies that can help you pay off your mortgage early.
1. Refinance to a lower rate or shorter term
Maybe you had to buy when interest rates were high, and they’ve since come down. Fortunately, you could refinance your current mortgage to save money down the line. By getting a lower interest rate or switching to a shorter term, like a 15-year mortgage, you could save on interest and tackle that principal more quickly. Just be sure to account for prepayment penalties, closing costs and other potential fees to see if it’s worth the effort. Plus, remember that a shorter term generally means higher monthly payments.
Explore other loan options or test out potential new interest rates and loan terms with our Refinance Calculator to see how much you could save.
PRO TIP
Before you jump into refinancing, do the math to make sure your savings will outweigh the fees from appraisals, closing costs and application charges. You have to stay in your home past the break-even point, which is when the savings from refinancing start to outweigh the costs.
2. Make extra payments toward principal
Here’s a trick so simple, you might not have even considered it: Make extra mortgage payments. Extra payments are the easiest way to pay off a mortgage early, especially if they go directly toward your principal balance. (Review your mortgage terms to understand how extra payments are recorded.) Even small payments can add up over time and can help get you to the finish line faster.
Set aside a small portion of your monthly budget for extra mortgage payments. You could even start giving your mortgage a “yearly bonus” to chip away at the principal. Believe it or not, making just one extra annual mortgage payment on a standard 30-year mortgage could cut up to 7 years off your loan term. If the lender doesn’t do it automatically, make sure to tell them to apply extra payments toward the principal rather than future payments or interest.
If you’d like to see the impact extra payments can have, run the numbers with our Additional Payment Mortgage Calculator.
3. Round up your monthly payments
Speaking of making big impacts with small payments, try rounding up your mortgage payments each month to the nearest $100. For example, if your payment is $2,531.57, you'd round up to $2,600. That extra $68.43 toward the principal every month could save you over $7,000 on a 15-year mortgage at 6% interest. Again, be sure those extra payments are put toward the principal.
4. Use windfalls to make lump-sum payments
Anytime a big chunk of change hits your account—like a tax refund, bonus or even an unexpected inheritance—consider funneling it toward your mortgage. These windfalls can make a huge dent in your principal and help you pay off your loan faster.
5. Try the dollar-a-month challenge
Have you heard of the dollar-a-month plan? The idea is to increase your mortgage payment by one dollar each month—yup, just a dollar. So, if you're paying $1,000, next month, you'd pay $1,001, then $1,002 the following month and so on. This gradual but steady increase can make a substantial impact without overwhelming your budget.
6. Set up automated extra payments
Set it and forget it! Automate your extra payments to help ensure you stay on track without having to remember to make manual payments each month. Chat with your lender about setting up automatic payments that go directly toward your principal.
7. Make 15-year payments on a 30-year schedule
If you qualify for a 15-year mortgage but like the lower payments of a 30-year term, you might opt for the 30-year mortgage. But if you have the financial flexibility, making payments like it’s a 15-year loan can pay your mortgage down faster. If finances ever get tight, you can always switch back to the lower payments until things smooth out.
8. Recast your mortgage after extra payments
Ever heard of mortgage recasting? If you throw some extra cash at your mortgage, ask your lender to recast it. This recalculates your monthly payments based on the new, lower balance. As always, confirm that extra payments are chipping away at your principal, not the interest.
9. Explore streamline refinancing for FHA loans
Streamline refinancing, which applies to FHA loans, could be an option if you’re looking to cut down fees and paperwork while improving your mortgage terms. It’s especially handy if you’ve already been making payments on time and your credit score has improved since you first got your mortgage. This could qualify you for better interest rates and help make it easier to pay extra each month.
Work toward paying off your mortgage early
Now you know how making extra mortgage payments can pay off: It can help you build home equity faster, save on interest and free up funds to invest in other opportunities.
To get started, pick one or two of the strategies we suggested and lay the groundwork. You can forecast your potential savings with our Refinance Calculator to explore different interest rates and loan terms. For information tailored to your needs, a Citi Specialist is ready to help.
