November 23, 2024

While it’s not the right decision for every homeowner β€” and not possible for those on a tight budget β€” paying off a mortgage in its entirety is a goal for many people.
Whether it’s just for the psychological freedom of eliminating what is most households’ largest budget line item or to reduce expenses before retirement, accelerating your mortgage payoff can be a smart financial move.
We sought advice from Pete Boomer, executive vice president of mortgage at PNC Bank; and Melody Robinson Wright, director of financial education at Kinly. Both replied via email, and their answers were edited.
Wright: Knowing you own your home outright is a major incentive for paying your home off early. Some homeowners may look toward early payoff to save on interest, free up cash or reduce their overall debt burden before retiring or reaching other milestones in life. Paying down your mortgage early also allows you to wave goodbye to private mortgage insurance (PMI) fees as they can be removed once you reach 20 percent equity in the home. With PMI fees ranging from 0.5 percent to 2 percent of your loan balance, freeing up this money allows you to use it elsewhere such as for upgrades to increase the value of the home or to take advantage of wealth building opportunities.
Boomer: Another big advantage of paying down a mortgage more quickly is building up equity in the property. A very effective strategy for achieving this is to make one additional monthly payment per year. Homeowners can pay off a typical 30-year mortgage eight years earlier by doing so.
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Wright: Paying off your mortgage early reduces your debt burden and potentially saves you thousands in interest. However, depending on how aggressive your payoff timeline is, you may find that it results in you being unable to reach other financial goals or missing out on opportunities to grow your money through investments. With a paid-off mortgage, you’d also miss out on being able to take advantage of the tax deductions for mortgage interest payments.
Boomer: One clear advantage is that it eliminates a monthly mortgage payment, allowing homeowners to tackle other debts or invest in other ventures. Additionally, an early payoff will reduce the amount of interest that a homeowner will pay over time. A potential disadvantage of paying off a mortgage early is that it may come with a prepayment penalty, so it is important to understand the details included in your loan documents.
Wright: a) Lump sum: Making a lump-sum payment may reduce the amount of time it takes you to pay off the loan as well as reducing the amount of interest paid over the life of the loan, saving you a good bit of money. A large lump sum payment can also be advantageous if you can recast the loan. When recast, the loan is re-amortized to the lower principal balance amount resulting in a lower monthly payment. However, some loans such as FHA or VA loans aren’t eligible for recasting, fees may be charged and other criteria such as a minimum lump sum amount paid may need to be met to qualify for a loan recast. b) Extra sum monthly: Paying extra on your loan no matter what amount can reduce your total interest and length of the loan. The disadvantage is that you may need to follow special rules to ensure that the extra sum is being applied to your principal and follow up to ensure that the payment was applied correctly. c) Extra annual payment: Making an extra annual payment is advantageous because it reduces the length of your loan while potentially saving you thousands of dollars in interest. d) Biweekly payments: Biweekly payments work to your advantage by giving you one extra mortgage payment a year for a total of 13 payments versus making 12 payments. This can help you save a good bit on interest. The downside is that some lenders may not offer the option for you to make biweekly payments or you may be charged an additional fee. e) Refinance into a shorter-term loan: Refinancing to a shorter-term loan can reduce the length of the loan and the amount you pay in interest. However, before refinancing, one must make sure that the benefits outweigh the cost of refinancing your loan and that you’re able to afford the higher monthly mortgage payment.
Wright: If you’re looking to pay down your loan faster, create a plan for how quickly you’d like to pay it off and consider what changes you could make to your current budget or spending plan to help you achieve this goal without impeding other financial goals. Even without refinancing, you can pay a 30-year mortgage like a 15-year mortgage by making extra payments. You can also pay down your loan faster by creating a rule to put a percentage of any money earned or received from side hustles, windfalls or bonuses toward your mortgage.
Boomer: One good option is automating the pay down. This can be done by dividing the monthly payment by 12 and applying this additional amount directly toward the principal each month. Automating these payments and making this part of a homeowner’s monthly budget is a great way to achieve a faster mortgage loan payoff.
Do you have questions about home improvement or homeownership? We’re here to help with your next home project.
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