How to Pay Off a Mortgage in Five Years

Owning a home outright can be a major accomplishment.

When you no longer have a mortgage to pay, you can use that money for other things like investing, working less or retiring early.

The good news is that you don’t have to wait decades to enjoy this kind of financial freedom. You can pay off your mortgage early and achieve it sooner than you think.

How are mortgages paid?

If you want to pay off your mortgage sooner, it’s important to know how each payment contributes to lowering your debt.

Your mortgage payments include different parts. The first part is principal, which is the actual amount you borrow to buy your home. For example, if you have a $300,000 mortgage, the principal is $300,000.

Along with the principal, mortgage payments also include interest. This is the fee you pay for borrowing money from the lender.

Interest is calculated as a percentage of your outstanding principal balance. Your specific interest rate, however, depends on various factors like your creditworthiness and market conditions. If you have a 6% interest rate on your $300,000 mortgage, you’d pay about $18,000 in interest annually, or $1,500 per month.

When you make your mortgage payment, some of it goes to reducing the amount you owe (the principal), while the rest covers the cost of borrowing (the interest). As you continue making payments, the balance goes down and you gain more ownership in the property. This is called equity.

It’s important to note that during the early years of a 30-year fixed-rate mortgage, a larger chunk of your monthly payment goes to paying interest (only a small portion goes to reducing the principal).

However, the amount you owe in interest gradually decreases as you move further along in the mortgage term. At this point a shift occurs and more of your payment starts chipping away at the principal.

To pay off your mortgage faster, you’ll need to make extra payments toward the principal—on top of your regular monthly payments. So let’s say you make an extra payment of $200 toward the principal every month. This additional payment helps decrease the principal faster, thus shortening the time it takes to pay off the mortgage.

Is paying off your mortgage early a good idea?

Accelerating mortgage payoff can offer many benefits. One major advantage is the savings on interest.

When you pay off your mortgage ahead of schedule, you significantly reduce the total interest paid over the entire loan period. This can potentially save tens of thousands of dollars.

Another benefit is the increase in home equity. Paying off your mortgage faster means you own a larger portion of your home, and more equity can open doors to future refinancing opportunities, such as home equity lines of credit and home equity loans.

Less stress is also an advantage. Living mortgage-free can bring peace of mind, allowing you to redirect those funds to other financial goals, such as saving for retirement, a child’s education, or other investments.

But while accelerating mortgage payoff has many advantages, there are situations when it might not be the best strategy.

• High-interest debts: If you have other outstanding debts with higher interest rates, such as credit card debt or personal loans, it might be better to prioritize paying off these debts first.

• Insufficient income: Speeding up mortgage payoff means making larger payments, which could put a strain on your budget. It’s important to carefully evaluate your overall financial picture and make sure you also have enough income to cover your other financial responsibilities.

Inadequate savings: Additionally, you might skip paying off a mortgage early if you don’t have enough in savings for an emergency. Ideally, you should have a minimum 3 to 6 months’ worth of living expenses.

Strategies for paying off a mortgage early

To pay off your mortgage early, you’ll need to increase your monthly payments and apply additional funds to your principal balance.

For some people, this might involve finding ways to boost their income, or re-budgeting and cutting back on unnecessary expenses. Re-budgeting also requires calculating the expense and figuring out how much more you’ll need to pay each month.

Let’s say you currently owe $200,000 on your mortgage and you want to pay it off in 5 years or 60 months. In this case, you’ll need to increase your payments to about $3,400 per month.

Along with higher payments, the below strategies can help support your payoff efforts.

• Refinancing: Refinancing to a lower rate can reduce your monthly interest charges. As a result, more of your monthly payment will go to paying down the actual amount you owe. You can pay off the principal faster and save money on interest in the long run.

• Recasting: Mortgage recasting involves making a lump sum payment toward the principal balance, and then recalculating the monthly payment based on the reduced balance. This doesn’t affect your interest rate or loan term, but it can lower your monthly payment and free up funds. You can then use this money to make extra principal payments.

• Biweekly payments: Instead of making a single monthly payment, you can pay one-half of your mortgage payment every two weeks. This results in 26 half-payments a year, which is the equivalent of 13 full monthly payments. Biweekly payments help chip away at the principal balance faster, shortening the overall term of the loan.

• Lump sum payments: If you receive an unexpected windfall such as a tax refund, bonus, or inheritance, use a portion (or the entire amount) to help pay down your mortgage principal.

The bottom line

Combining one or more of these strategies with increasing your monthly payment can accelerate your mortgage and pay off the balance years earlier.

Before implementing these strategies, make sure your loan doesn’t have a prepayment penalty—and always apply extra payments to the principal balance.