How to pay off your mortgage early by paying extra

Paying extra is the cheap, easy way to pay off your mortgage early

If you have a mortgage, chances are it’s a 30-year loan. And that’s a long time to pay interest.

Many homeowners can’t afford refinancing to a shorter, 15-year loan term because payments are quite a bit higher.

But there’s a way to pay off your mortgage early without any fees or penalties.

Just pay a little extra on your mortgage when you’re able.

By making extra payments, you can pay off your mortgage faster and save on interest. Here’s how.

In this article (Skip to...)

• How extra mortgage payments work
• 3 ways to pay off your mortgage early
• How to set up extra payments with your lender
• Is there a penalty for paying off your mortgage early?
• Should you refinance or prepay?

How extra mortgage payments work

Real estate attorney Rajeh Saadeh explains the concept behind accelerated payments:

“Say you have a 30-year mortgage. You can make additional payments applied to your principal at the time your mortgage payment is normally due, or earlier.

“Or you can do so at more frequent intervals during the year,” he says.

Any time you pay extra on your mortgage, you need to indicate to your lender that the money should go toward loan principal — not interest.

By paying off some of your loan principal, you reduce the amount of that will accrue on your mortgage in the future.

That will reduce your loan’s term and enable you to pay off your loan more quickly, Saadeh explains.

But you don’t want any extra payments to go toward your loan’s interest; that won’t reduce your principal owed or shorten the life of your loan.

Make sure your lender or servicer is applying any extra money toward principal as its first priority. Otherwise, you’ll need to indicate that your extra payments should be applied that way.

3 ways to pay off your mortgage early

You’re free to pay a little extra toward your mortgage whenever you have cash on hand.

But if the goal is to pay off your mortgage early, it helps to have a prepayment plan. Figure out:

• How often you’ll make extra payments
• How much extra you’ll pay each time
• How early the loan will be paid off
• How much interest you’ll save — are your goals being met?

Here are three solid strategies to pay off your mortgage early.

Strategy 1: Pay a little more each month

One surefire way to pay off your loan sooner and pay less interest is to increase what you send your lender each month.

Katsiaryna Bardos, associate professor of Finance at Fairfield University. gives one example:

• Assume you borrowed $184,000 via a 30-year mortgage loan
• Your interest rate is 3.25% and your monthly payments are $800
• The total interest paid over 30 years would be $104,300

But imagine you make an extra $100 payment each month toward your principal.

• In this case, you can pay off that loan in just under 25 years
• Your new interest total would be about $84,300

In this case, Bardos notes, you save $20,000 and shave 5 years off your loan term by paying just $100 extra every month.

Strategy 2: Make bi-weekly mortgage payments

Another way to pay down your mortgage faster is to make payments twice a month instead of once a month.

This strategy works especially well for those who get paid every two weeks instead of bi-monthly or monthly. You know a portion of each paycheck is going to your lender.

The math here is easy; simply divide your monthly mortgage payment in two and make that payment every other week.

With many lenders, it’s possible to set yourself up for automatic payments on a bi-weekly schedule instead of a monthly schedule.

Using Bardos’ previous example:

• Your new mortgage payment is $400 instead of $800, paid every 2 weeks
• This results in 26 payments a year — or 13 full monthly payments annually instead of 12
• You’d repay your mortgage in a little over 26 years
• You'd save about $14,500 in interest

Suzanne Seini, a Realtor with Active Realty, explains: “Making 13 payments instead of 12 every year can knock a few years off your mortgage, depending on your loan’s interest rate.”

And, since biweekly payments can often be automated, you don’t have to stomach writing another check to your mortgage lender.

The extra payment just happens automatically.

Strategy 3: Make one extra mortgage payment each year

Alternatively, you could make a separate additional payment once a year — say every January.

Following the above example, that would mean paying $800 twice in one chosen month annually.

“If you make the payment at the beginning of each year, you’ll pay off the loan in [just over] 26 years and save $14,700,” Bardos says.

“But your savings will be slightly lower if you choose to make this payment at the end of your chosen month versus the start of that month.”

How to set up extra mortgage payments with your lender

Before choosing one of these strategies, consult with your lender to make sure it doesn’t charge a prepayment penalty.

Also, learn how to properly send payments and ensure that the money will be credited toward your principal.

• The lender may require you to mail a separate paper check. If so, you should indicate in the memo field that you want those funds to apply to your principal and/or include a separate note specifying this
• Your lender may allow you to make extra payments over the phone or online/electronically. In this case, ask how to properly indicate that the money should go toward loan principal
• You may be able to automate an accelerated payment schedule with your lender so that the funds will be withdrawn from your bank account and applied to your mortgage balance automatically. This approach is recommended if you pick a bi-weekly payment strategy

Check that your extra payments have been received and applied to your principal as intended.

To do so, monitor your loan account and mortgage statements regularly.

Is there a penalty for paying off your mortgage early?

Good news: If you want to prepay your mortgage — also known as making “accelerated payments” — most lenders allow this without any fees.

“In the United States, the vast majority of residential real estate mortgages... do not charge a prepayment penalty,” says Bardos.

But be forewarned: Some lenders do charge a prepayment penalty if you pay some or all of your mortgage early.

Per the Consumer Financial Protection Bureau, a prepayment penalty usually only applies if you pay off the entire mortgage balance.

In some cases, prepayment penalties can apply when:

• You refinance your mortgage
• You sell your home within three to five years of purchasing it
• You attempt to pay off a large sum of your mortgage all at once

Fortunately, prepayment penalties do not normally apply if you make accelerated payments in small chunks at a time.

But to be sure, read your loan paperwork carefully. And check with your lender before pursuing any accelerated payment plan.

Should you refinance or pay extra?

Paying extra each month (prepaying your mortgage) is not always the best strategy.

“For many, it doesn’t make sense to pay down a mortgage loan more quickly, as your interest rate is likely very low,” suggests Saadeh.

“Instead, you can use that extra cash to invest in an asset like stocks, bonds, or retirement funds, and likely earn a higher rate of return than the interest rate you’re paying.

“Or,” Saadeh continues, “you could refinance your loan and save big if you can significantly lower your interest rate.”

If paying off the mortgage faster is your main goal, you might consider refinancing to a 15-year loan. Depending on how long you’ve held the mortgage, you may be able to pay it off in almost half the time.

Or, maybe the payments on a 15-year loan are too high. In that case, you could take a combined approach:

1. Refinance to a 30-year mortgage at today’s ultra-low rates
2. Take the money you’re saving each month, and apply it toward your principal as an extra payment

This is a clever way to get around the higher 15-year payments, while still shortening your loan term and saving a lot on interest.

Your next steps

Paying off your mortgage early — or not — is a personal decision.

Choose the strategy that makes the most sense for your mortgage, your budget, and your long-term financial goals.

If you’re unsure what to do, connect with a lender or financial advisor who can help you out.