Owning a home is one of the hallmarks of the American dream, but most people don't really own the house they live in. In fact, less than 40% of homes were mortgage-free in 2017, according to the U.S. Census Bureau's American Housing Survey.
When you own your home free and clear, you can save, invest and achieve other financial aims. Understanding the many ways to pay off a mortgage early can help you take meaningful steps toward reaching that goal.
[Read: Best Mortgage Lenders.]
How Can You Pay Off Your Mortgage Early?
For many homeowners, a 30-year mortgage is standard. But chances are slim that families remain in one home for anywhere near that long.
On average, homeowners stay eight years before selling, according to Attom Data Solutions' 2019 first-quarter U.S. home sales report. Still, working on paying off your mortgage early could provide some benefits, such as interest savings.
"Paying down your mortgage can fast-track your path to true homeownership and save you from making interest payments over time," says John Pataky, executive vice president and chief consumer and commercial banking executive at TIAA Bank.
If your lender does not charge a prepayment penalty and you want to pay off your 30-year mortgage in 10 years or less, here are some good starting points:
Add a little more to your monthly payment. Early in a mortgage, most of your payment goes toward interest. Any extra payments chip away at your principal.
Say you have a $100,000 30-year fixed-rate mortgage at 4.5%, and you add $100 to your usual $500 monthly payment. You'd pay off your mortgage eight and a half years early and save more than $26,300 in interest.
Pay more often. Making half your monthly payment every two weeks results in one extra payment each year.
If you did this with the same 30-year fixed-rate mortgage, you would shave off five years from your loan term and save roughly $14,500 in interest.
Just keep in mind that you will make three half-payments two months out of the year. Check that your budget won't be stretched too thin.
Make extra payments whenever you can. Jackie Beck, creator of the Pay Off Debt app, and her husband paid off their $95,000 mortgage in less than three years. As the two earned more, they neither spent nor borrowed more money.
Instead, Beck and her spouse put extra cash toward their mortgage, at first just $35 each month and then more. At one point, they were so eager to pay off their loan that they made eight payments in a month.
Make one extra payment a year. This method provides about the same savings as making half a payment every two weeks but requires less work. When you make the payment doesn't matter. You could pay at the end of the year or wait until you get a tax refund or bonus.
Refinance your mortgage. If you can refinance your mortgage at a lower interest rate, your new loan will likely have a lower monthly payment. But if you make the same payment, you may be able to cut years off your mortgage and save thousands of dollars in interest.
Another strategy is to refinance your mortgage into a loan with a shorter repayment term. This may increase your monthly payment but ensure that you wipe out your debt faster and with less total interest.
Do not fritter away small windfalls. Every time you receive a work bonus, tax refund or cash gift, put it toward your mortgage instead of something else. How much you can save in time and interest varies, but even a few hundred dollars now and then adds up over several years.
Cut expenses and apply the savings. If your budget allows it, you can turn minor changes in your spending habits into big savings. Some options: Switch to a cheaper cellphone plan, cut the cable cord or skip a vacation. Then use whatever cash you save to make extra payments on your loan.
Living a frugal lifestyle may be difficult in the moment but can be worth it if your goal is to be debt-free.
[Read: Best Mortgage Refinance Lenders.]
Is Paying Off Your Mortgage Early a Good Idea?
Living mortgage-free can be an enviable goal. But paying off your mortgage early isn't the best use of money for everyone.
"I think the decision to pay off a mortgage depends on a variety of factors," says Marguerita Cheng, CEO of Blue Ocean Global Wealth in metropolitan Washington, D.C. "I have several clients who will pay off their home in their 60s, the year they retire or within one to five years of retirement, depending on their cash flow, tax status of their investments and tax bracket."
Here are some situations where it may make sense to focus on other financial goals:
You have higher-interest debt. If you have debt from a high-interest credit card or student loans, reduce those debts before tackling your mortgage early, Cheng says.
By knocking out debt with higher interest rates first, you can save more money overall. Your mortgage may have the lowest interest rate of all your debts and could be among the last you pay off.
Be sure extra principal payments on any debt don't come at the expense of building a proper rainy day fund or being able to comfortably pay ordinary expenses, Cheng says.
"While I don't want clients starting retirement with a large mortgage balance, the flip side is that clients need cash flow," she adds. "It's nice having a home that you own free and clear, but you still need to buy food, put gas in your car and live life."
Your employer offers a 401(k) match. If you have a 401(k) or similar retirement account through your employer and it offers matching contributions, get the maximum employer match before you pay off high-interest debt.
Say you contribute $500 per month and your employer adds $500 -- you're getting a 100% return on your investment. Just keep in mind that some 401(k) plans require you to stay with your employer for a certain period before you own your employer's contributions.
You want to help your kids pay for college. Setting aside cash in a 529 college savings plan can make the university experience more affordable. If your child will pay for college on his or her own, you may skip this one.
[Read: Best Home Equity Loans.]
You don't have an emergency fund. Owning a house can be a lot more costly than just the monthly mortgage payment. Maintenance and repairs can be pricey and, in some cases, unexpected.
Set aside three to six months' worth of savings to avoid a surprise expense that leads to debt. Try to build a buffer of a few thousand dollars before you focus on paying off your mortgage.
You're comfortable with investment risk. Stock and other financial markets fluctuate. When the markets are strong, you'll likely earn much more on your investments than you pay in interest on your mortgage. But if your investments lose money, you would have been better off applying that cash to your mortgage.
The key is to ask yourself whether you're more comfortable with the risks and gains of investing instead of paying off debt.
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