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When and How to Payoff a Mortgage Early


The news and social media are full of success stories about people triumphing over their debt, but how exactly did they achieve this? Many people create a budget and stick to it, however paying off a mortgage is a little more complex. Let’s start with the benefits of paying off a mortgage:

  • Thousands of dollars saved from interest payments
  • More disposable income after payoff
  • True home ownership with Deed in hand

Common Risks

Sounds like a dream come true at first glance but paying off a mortgage can make you worst off. For example, if you stop contributing to a retirement account or college savings to achieve an early payoff, it may come back to haunt you later; imagine having to extend your employment past retirement to make ends meet or picking up a student loan to help out the kids. Also, it may not be a good idea to payoff early if you have high balance credit card debt or student loans because you may find it hard to make ends meet. Lastly, it isn’t a good idea to payoff a mortgage early if you have no emergency savings. The future is unforeseeable with the possibility of losing a job or becoming ill, therefore it is smart to have at least 6-12 months of emergency savings.

Here are things to considered if you decide to pay off your mortgage early:

  • Make sure your loan doesn’t have prepayment penalties that will impose large fees
  • Be sure to have at least 6-12 months of emergency savings
  • Are you financially stable?
  • Are interest rates falling?
  • Can you still max out your 401(k) and IRA contributions?
  • Can you still contribute to your children’s future?

Payoff Strategies

If paying off your mortgage still makes the most financial sense, then let’s go over some strategies! The most common way people pay off their mortgage early is to put more money towards their principal; there are a few ways that this can be done. First, you can pay more each month to your principal whether its 1/12 of your monthly payment, 1/4, or more depending on how soon you want to pay it off.

Second, you can achieve the same goal by paying 1 extra monthly payment a year, making a total of 13 payment in a year. lastly, you can use extra income towards principal such as bonuses, tax returns, or financial gifts, eliminating the need to dip into current income. Which ever way you choose to pay down principal, make sure to note online or through check that you want the extra money applied to the principal or the bank may apply it to the next month’s payment instead.

Another great way to achieve early payoff is to refinance your home. when refinancing, the key elements will be to reduce the loan term and ensure that the new interest rate is lower than your current rate. Otherwise, you will end up paying more in interest month to month compared to the previous loan. Furthermore, keep in mind that you will have to pay closing costs for the refinance. Although the closing costs may be wrapped up into the refinance, it is adding cost to the bill.

If a mortgage payoff makes good financial sense, any of the methods above will give you the tools to make the payoff a reality!

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