When you take out a mortgage, you agree to repay the loan over a set timeframe, typically 15 or 30 years.
Paying off your mortgage early can mean paying less interest, accruing equity faster and dropping private mortgage insurance earlier.
There are different ways to cross the finish line faster, but there can be drawbacks, too — including mortgage prepayment penalties.
1. Increase your monthly payment
The simplest way to shorten your repayment schedule is to pay more than the monthly amount you agreed to.
That will shrink your total balance, which has the added benefit of reducing the interest you'll pay over the life of your mortgage. Make sure you indicate that you want the extra funds to go toward the principal.
In most cases, you can do this at any point without paying a penalty.
Historically, borrowers who paid off all or a large portion of their home loan within the first few years of their term could be assessed a penalty of up to 2%. Most conventional mortgages don't charge prepayment penalties anymore, however, except for some non-qualified and non-conforming loans.
2. Make biweekly payments
With this approach, instead of the usual 12 monthly payments, you'll make half-payments every two weeks. Because there are 52 weeks in a year, that adds one additional month's payment to your principal each year.
Check with your lender to see if there is a fee associated with changing your payment schedule.
3. Make extra principal payments
If you can't regularly make larger or more frequent payments, you could still chip away at your principal with one-off lump-sum contributions.
Commit to putting any work bonuses, tax refunds, inheritance or other windfalls toward your mortgage principal.
4. Recast your mortgage
Recasting your mortgage involves making a sizeable lump-sum payment toward the principal, after which your lender will reamortize the loan. Most lenders require a payment of at least $10,000 in a single year before letting you recast and many will charge a recasting fee of up to $500. In addition, FHA, VA, USDA and jumbo loans usually can't be recast.
You'll have the same interest rate and loan term you had before. Your monthly payments will be smaller, however, which could allow you to put more toward the principal in the future.
5. Refinance
If you refinance your mortgage, you may be able to shorten your loan term, though you'd have to make larger monthly payments, even if you get a better rate.
When you apply for refinancing, your lender assesses your credit history, income and how much equity you have. For a basic rate and term refinance, lenders typically want a credit score of 620, a debt-to-income ratio of 43% and at least 10% home equity.
As with a purchase mortgage, refinancing usually comes with lenders fees, which can be up to 2% of the loan amount. On a $300,000 refi loan, that could be as much as $15,000.
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When not to pay off your mortgage earlier
Prepaying your home loan means big savings on interest, but there are times when it's not the right strategy.
1. If there's a prepayment penalty
To help ensure they get all the money they're expecting, some mortgage companies charge a fee of up to 2% of the remaining loan balance if you close out your mortgage too early.
This prepayment penalty is only in effect for a limited time, however: For conventional mortgages taken out after 2014, the fee is only allowed within the first three years after you take out your loan.
2. If you're using retirement funds
Financial experts discourage touching your 401(k) or other retirement account early unless its an emergency, which paying off your mortgage early wouldn't qualify as.
3. If you don't have a robust emergency fund
One of the basic guidelines of financial health is having a cushion of three to six months' worth of expenses readily available in case of a job loss or other emergency.
Put aside thinking about paying off your mortgage until you have a healthy emergency fund.
Pros and cons of paying off your mortgage early
- Can save thousands in interest payments
- You'll increase your home equity faster
- Peace of mind
- Some methods have prepayment penalties
- Requires more money each month or a large payment at one time
- Less money for savings or investing
- Won't be able to claim the mortgage interest deduction on your taxes
Early mortgage repayment FAQs
Can you pay your mortgage off early?
You can typically pay your mortgage off early, although you may have to pay a prepayment penalty if you do it within the first three years of your loan.
Does paying off your mortgage early affect your credit score?
Paying off your mortgage shouldn't have a major impact on your credit score, although your credit utilization ratio should lower as your balance shrinks. Once you've paid it off in full, your mortgage will remain on your credit report as "a closed account in good standing" for ten years, according to Experian.
The change to your credit mix and the lower average age of your accounts may cause your score to take a slight hit.
Is paying off your mortgage early a good idea?
Prepaying your mortgage can save you money and give you peace of mind. But it means less money for things like saving for retirement or your children's education. Consider how important wiping the slate clean is for you before making changes to your payment schedule.
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