What's the Fastest Way to Pay Off Your Mortgage?
Most people find their mortgage is the biggest debt they have, and the prospect of paying it off for the next 15 to 30 years can seem intimidating. It's not uncommon for homeowners to wonder whether they should pay off their mortgage sooner rather than later, so they can own their home outright and focus on other financial goals.
But what's the fastest way to pay off your mortgage? And more importantly, is this a good idea, or could you be better off paying gradually, over a longer term?
The rationale behind paying off your mortgage early
Before approving your mortgage, many banks may want to make sure your projected monthly payments don't exceed 28% of your income. Staying within this limit helps keep your mortgage payments affordable.
If you can afford more than your monthly payment, there may be some logic in paying your mortgage off more quickly. Your bank charges compound interest, which means you don't just pay interest on the original sum you borrowed, but also on the interest itself. The sooner you pay off your mortgage, the less interest you pay overall. The less interest you pay, the less your home costs you over the life of your loan. And while you'll still pay property taxes, homeowners insurance, utilities and other bills, you'll have more money to invest, save or spend once you're done making monthly mortgage payments.
Is paying your mortgage early always a good idea?
There's a compelling case for paying off your mortgage early, but that doesn't mean it's right for you. There may be a number of drawbacks, depending on your situation.
For starters, your bank may charge you for paying your mortgage early. If that's the case, then the earlier you pay off your mortgage, the higher the penalty may be.
Penalties may be steeper if you have a fixed-rate mortgage, where the interest rate is locked in for a number of years. This is because the bank takes on the risk that interest rates could go up or down, so they'll need you to make at least a certain number of payments for the loan to be financially worthwhile to them.
You should ask your bank about any early repayment penalties before deciding to pay off your mortgage. Work out how much the penalty would amount to, and consider whether it might be cheaper to stick to your regular monthly payments, at least in the short term.
Credit card balances, car payments or other loans tend to have higher interest rates than mortgages, so the interest ends up accounting for a greater total percentage of the cost of the purchase. For this reason, you may want to focus on paying these off first before thinking about paying off your mortgage early.
Lastly, tying up all your money into property isn't necessarily a good idea. You'll likely want to have some money you can get your hands on quickly in case of emergencies. While property is valuable, you have to sell it off to get cash, which could take several months. With this in mind, you may not want to use your disposable income to pay off your mortgage.
3 tips to pay off your mortgage fast
If you've decided paying off your mortgage early is the way to go, what's the fastest way to pay it off? Here are three potential strategies.
- Make additional payments: You could either increase your monthly payment or make regular extra payments—for example, one every six months—and ensure these go toward the principal of the loan, not just your next month's payment. A small or modest-sized extra payment each month might shave a year or more off your mortgage.
- Refinancing: Not all lenders allow additional payments. Refinancing to a mortgage with a shorter term that still has monthly payments you can afford may allow you to pay off your mortgage faster. Consider consulting with a financial advisor to ensure that a refinance will actually save you money in the long run.
- Invest: Another potential strategy is to take the money you would have put toward additional payments and use it to build an investment portfolio instead, so that it earns interest and grows over time. Once your investment grows enough, it may help you pay off your mortgage quicker.
Paying off your mortgage early might seem like an obvious choice, but it's not always that simple. Think carefully about your financial circumstances, and do the math before you decide if it's the way to go.
A few financial insights for your life
This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.