6 Ways to Pay Off Your Mortgage Early

Professional Reviewer: David Goldberg, Vice President of Mortgage Lending, Mutual of Omaha Mortgage

Summary: Paying off your mortgage early can save you thousands of dollars, which can then be put toward other financial goals. While it may seem impossible, all it takes is the right plan and commitment and you can cut years off your mortgage.

More than likely, the mortgage on your home is the largest loan you’ll ever take out. With monthly payments that can last for years or even decades and interest rates that dramatically increase the total price of your home beyond the purchase price, a mortgage is a huge part of any homeowner’s budget.

So, by paying yours off early, you may be able to save tens of thousands of dollars that can be put toward reaching other financial goals, such as retirement, paying for a child’s education or paying off other debts.

However, paying off a mortgage may not always be the best option for some people, according to Mutual of Omaha Vice President of Mortgage Lending David Goldberg.

“It really depends on the borrower’s financial situation, current and planned needs and whether the funds being used to pay off the mortgage early could generate a better return in other investments or opportunities than if used to pay off the loan,” Goldberg said.

For example, a borrower who has excess cash to pay off the mortgage but knows they’ll need those funds for future college expenses for a child, keeping the mortgage open might make more sense.

Borrowers who purchased or refinanced during the COVID-era (2020-2022), likely have rates in the 2%-4% range. In those cases, unless they have pressing needs to eliminate the monthly payment, keeping their cash for other purposes instead of paying off the loan is typically the better option.

Yes! You can pay off your mortgage early

If it’s your goal to pay off your mortgage early, you may be thinking it’s impossible. But it’s actually much easier than you might think. It simply takes the right financial strategy and the discipline to stick with it.

Use these seven tips to build a plan and accelerate your final mortgage payment without breaking a sweat.*

1. Add a little more money to every monthly payment

Paying just $50 extra every month can knock about two years and more than $15,000 of interest off your total mortgage loan payback. Adding $100 to your mortgage payment every month lets you pay that mortgage off four years early and can save you more than $28,000 over the life of your loan.¹

It’s important to note, that paying extra does not reduce your monthly payment on a fixed-rate mortgage.

“The savings comes on the backend of the loan,” Goldberg said. “Making an extra payment every year would reduce a 30-year loan by about 4-5 years depending on the rate.”

2. Make extra payments when you receive bonuses or refunds

Almost any time you make an extra payment on your mortgage, 100% of the payment can be applied to your principal balance (if you tell the mortgage company that’s where you want the money to go).

You can use a tax refund, an annual bonus or any extra cash you acquire to take a bite out of your mortgage. Depending on how much extra you pay, and how often you do it, you could pay off your mortgage years early and save yourself thousands of dollars in interest over the life of your loan.

3. Make 13 mortgage payments a year

Simply making one extra mortgage payment every year could slash around $34,000 in interest off the total and reduce your loan term by four years. Make sure your mortgage lender knows you want that extra payment applied to your principal balance and not counted as an early regular monthly payment.

You can do that by writing a note on the check or sticking a label on it. If you use online banking, put a note in the payment memo line. On your next mortgage statement, make sure the payment was applied properly. If not, simply call your mortgage company and have them fix it.

4. Refinance to a 15-year loan

If your salary has gone up since you took out that 30-year mortgage, consider refinancing to a 15-year loan. Yes, your payment will go up, but your lifetime savings will be great. Consider this scenario: You took out a $300,000, 30-year mortgage at a 4% interest rate.

After five years, you refinance to a 15-year loan on the remaining principal balance of $271,340 at a 3.2% rate (rates on 15-year loans are typically lower than on 30-year loans). Not only will your mortgage be paid off 10 years early you’ll also save close to $90,000 in interest.

5. Refinance to a lower rate but keep making same payments

Your credit rating has a big impact on your mortgage interest rate. Many people see their credit scores improve as they make regular, on-time loan payments — and that can translate into lower interest rates when they refinance.

A lower rate on a lower principal balance (because you’ve already paid down at least some principal) brings a lower monthly payment, too. But since you’re already used to making the bigger payment every month, every dime you pay that’s greater than the current payment goes toward paying down extra principal.

Depending on the difference in the two payments, you could pay off your mortgage anywhere from two to eight years early and save thousands of dollars in interest.

6. Tap additional funds to make extra payments

Instead of waiting for the occasional windfall (like a bonus or a tax refund), you can actively seek out a steady way to put more money toward your mortgage.

Not sure where to find extra cash? Sit down and write down how much you spend each month on wants and needs. From there, determine what you are willing to cut out of your monthly spending and apply that money to your mortgage principal. Remember, even small amounts can add up to big savings over time.

Another source could be working a second job to supplement your regular paycheck, where all additional income goes toward making extra mortgage payments.

If you have a permanent life insurance policy with a healthy cash value balance, you could tap into that (through sensible withdrawals or policy loans) to quickly minimize your mortgage.² Or, you could finally go through your attic and sell some of those stashed-away goodies on eBay to bring in some extra cash, transforming your collectibles into mortgage principal pay downs.

Final thoughts

Every extra dollar you send to your lender reduces your principal balance, which in turn decreases the total interest you pay on the loan. And that helps you pay it off faster than expected. While that’s a prudent goal, having a mortgage should not be always be viewed negatively, according to Goldberg.

“While everyone should strive to pay off their mortgage as quickly as possible, having a mortgage is not a bad thing,” he said. “A mortgage can be a smart financial vehicle to open up other opportunities to leverage your wealth.”

*Examples are for a $300,000, 30-year mortgage with a 4% interest rate

**Withdrawing funds from your permanent life insurance policy will reduce the policy benefit

Watch this short video to learn how a cash-value life insurance might help you pay off your mortgage early.

Frequently Asked Questions

Can you prepay a mortgage?

Absolutely! Prepaying a mortgage simply means paying it off early. When you prepay a mortgage you send additional money to what is required by your original agreement. It’s important to remember to tell your lender that the money is to be applied to your principal balance, not the interest, so you can pay down the loan sooner and pay less overall interest.³

What happens if I pay an extra $1,000 a month on my mortgage?

Paying an extra $1,000 per month toward the principal on your loan may save you tens of thousands of dollars in interest, because it will help you pay off your loan sooner. Even if you can’t afford an extra $1,000, any extra money applied toward the principal will help cut the length of your loan and consequently lower the amount you’ll pay in interest over the life of the loan.⁴

What is the 2% rule for mortgage payoff?

It’s commonly believed that borrowers should strive to reduce their interest rate by 2%. However, Goldberg said this is rarely achievable. Instead, he recommends focusing on the benefits of the refinance. Are you able to pay off higher interest rate debt with the savings? Does refinancing allow you to eliminate expensive private mortgage insurance by going from an FHA loan to a conventional loan? Can you shorten the term of your loan from 30-years to something shorter like 25, 20 or even 15-years?

“In those cases, even saving 0.5% in rate could generate tremendous savings,” he said. “The benefits of refinancing are unique to the individual and require an analysis with their loan officer to make the best decision.”

Professionally Reviewed by: David Goldberg, Vice President of Mortgage Lending, Mutual of Omaha Mortgage

David Goldberg has guided thousands of clients through one of life’s most complex and emotionally charged milestones: buying a home. With over 21 years of experience in the mortgage industry, he’s successfully steered clients through turbulent times—including the 2008 housing crash, the unpredictable Covid-era market, and countless other challenges involved in securing mortgage approvals and closings. David holds a BSBA in Marketing from The Ohio State University and an MBA from Case Western Reserve University, combining deep industry expertise with a strong foundation in business strategy and client service.

Footnotes:

¹Bankrate, Prepaying Your Mortgage: What is it and Should You Do It? bankrate.com/mortgages/prepaying-your-mortgage.

²Yahoo Finance, Should You Make 1 Extra Mortgage Payment Per Year? Here Are 3 Benefits finance.yahoo.com/personal-finance/mortgages/article/one-extra-mortgage-payment-per-year

Disclosures:

Mutual of Omaha Mortgage, Inc., NMLS ID 1025894. 3131 Camino Del Rio N 1100, San Diego, CA 92108. Subject to Credit Approval.  For licensing information, go to: www.nmlsconsumeraccess.org

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