For some people it makes sense to work toward paying off a mortgage ahead of schedule. Why would you? The obvious reason is that it can save you thousands of dollars in interest. This would also allow you to invest that mortgage payment amount in a retirement account or use the funds for other necessary purposes. For others, the reason to do this is to be debt-free by retirement.
Rocket Mortgage had a recent article on the savings piece of this. "Assuming an interest rate of 6.67% – the weekly average as of August 13 – a homeowner with a newly originated 30-year fixed mortgage at the median loan amount at Rocket Mortgage of $221,977 could save approximately $68,000 in interest and pay off their loan nearly six years early if they made the equivalent of just one extra monthly payment each year, assuming their monthly principal and interest payment is roughly $1,425 (excluding taxes and insurance)." Wow. That is impressive.
If you are locked in at a 3% interest rate it may not make sense to pay off the mortgage ahead of time but instead you may want to put your extra funds in a higher paying investment account. If you have lots of other, higher interest rate debt this also may not make sense for you.
This is all really determined by your financial goals.
If you want to see what paying down your mortgage early could save you in interest use an amortization calculator like this one on Bankrate. You can put in your specific scenario and determine if this makes sense for you.
If you're not ready or able to pay off your mortgage yet but want to pay it down more quickly, there are several ways to do so but first check with your lender to confirm that there is no early payoff penalty.
- Pay half your mortgage payment every 2 weeks instead of every month. Twelve months equals twelve payments, however, 52 weeks divided by 2 is 26 payments. That's an extra month's worth of mortgage payment every year.
- Another way to pay an extra payment each year is to divide your mortgage payment by 12 and add that amount on to your regular payment. Over the course of the year you will have paid a 13th payment.
- Round up the amount you pay with any extra funds you can spare. Add an extra $50 or $100 to your regular payment. These small but consistent extra amounts will have an impact over time.
- Send any bonus or spare money in the direction of your mortgage. Did you get a bonus at work? Pretend you didn't, and send it straight over to your mortgage. The more you pay down your principal, the less interest you'll be paying over time. Partial lump sum payments push the interest to principal ratio in your favor.
- Add one additional lump sum payment as principal annually when you have spare cash.
There is no right answer but it is something you should consider as part of your overall financial goals.
