There are a lot of ways to pay off a mortgage early or quicker than the agreed upon terms.  Below are several ideas to consider when trying to pay off a mortgage.

Refinance to a shorter term mortgage:

10 & 15 year terms offer lower rates than 20 or longer terms and will help save a lot of interest over the life of the loan.  Make sure that the costs compared with the savings and the time expected to keep the mortgage makes financial sense (breakeven point).  The higher payments helps pay off a mortgage early which means huge potential savings!

Cancel PMI (private mortgage insurance) ASAP

• Certain loans require the PMI or annual fee for the life of the loan so you can’t cancel them.  When does PMI stop?
• If allowed, try to pay down the balance within your means to get under the 80% of the value required to cancel the PMI
• If you cancel the PMI, consider making the same payment you were prior to the cancellation and this will apply extra to the mortgage which pays it off earlier, saving interest

Pay extra per month to the principal & interest monthly payment

• If you are saving money from paying off another debt, got a raise at work, or refinanced, use those funds to pay extra towards the mortgage balance and save interest over the long term
• Make sure you instruct the lender to apply these extra funds to the principal balance
• If you have a specific goal of paying off in 10, 15, or 20 years for example, ask your lender how much extra that you need to pay on top of your regular payment in order to meet that goal

Apply extra money such as tax refunds, found money, sale of another property, etc. to the balance when received

• Use extra or found money to pay down the balance of the mortgage which shortens the term and saves interest paid
• Keep in mind when just sending extra money towards the balance, it does not lower the payment
• Make sure you instruct the lender to apply these extra funds to the principal balance

Sign up for a bi-weekly mortgage payment option

• Divides the mortgage payment in half and drafts the half payments every two weeks rather than twice per month which results in 26 half payments per year rather than 24 half payments. This results in one extra principal and interest payment made per year.
  • Most will charge for this service
  • Even though the theory is a good one, if you are being charged for the service it may be better to just pay extra per month to your mortgage company at no cost to pay off the mortgage early
  • If a lender offers the service for free, it is a great option but keep in mind that there are 2 months a year where there would be 3 half payments drafted.  I have heard from people that were surprised by this and it caused issues with their finances

Pay Off a Mortgage Early Tip:  Ask for a recast or re-amortization

Recasting a loan is where a lump sum payment is made to refigure the loan payment based on the new lower balance.

• Many lenders will allow this but make sure you ask the procedures and effect on the payment prior to sending the extra money
• Rather than just lowering the balance and shortening the term, a recast will lower the monthly payment while keeping the same rate and remaining term on the loan
• Great option for lowering the payment after selling another property, inheriting money, etc. without having to refinance and incur costs to lower the monthly payment
• Ask for the procedure and cost to recast the loan.  Lenders may charge up to $350 or so for a recast, there is usually a minimum amount of lump sum payment accepted, and the lender may want a signed letter requesting the recast

To find out if a refinance makes sense for you, contact Team Move today. Hopefully this article has given you viable options to pay off a mortgage early and save a lot of interest.  Consult your financial advisor to see if the strategy to pay off a mortgage early is better.  The alternative may be to invest your extra funds and keep the smaller mortgage payment.

Follow our writer, Russell Smith, on ActiveRain.  ActiveRain is a site that real estate professionals, buyers, and sellers may use to gain helpful knowledge.