How to Pay Off Your Mortgage Faster: 7 Tips to Consider

Paying off your mortgage early can save you money, but it’s not the right move for everyone. Explore the benefits, potential drawbacks and simple ways to start the process.

It sounds like a win-win: Pay off the principal you borrowed more quickly, and you’ll own your home earlier and pay less in loan interest. But is it always the right choice? Let’s explore the benefits and drawbacks of paying down your loan faster and how to begin if you decide it makes sense.

Should I Pay Off My Mortgage Early?

There are a lot of conflicting ideas about whether or not paying off your mortgage early should be a top priority. A family member might tell you that paying off their mortgage was one of the best moments of their life, while a friend warns you that paying early is a mistake. With financial gurus on both sides of the fence, it can be hard to know what to do. So, should you pay off your mortgage early?

Unfortunately, there is no one-size-fits-all answer to this question. Whether you should pay off your mortgage early depends on what’s most important to you and what stage of life you are in. For example, if you’re a first-time buyer with many competing financial priorities (and plenty of time to earn and invest), your considerations will be different from empty-nesters with a lot of savings and a fixed income. Everyone’s situation and priorities are different.

Before you commit to paying off your mortgage ahead of schedule, ask yourself these seven questions. Your answers can help you determine whether it aligns with your financial picture.

1. Do I have an emergency fund? Ensure you have a cash cushion to cover unexpected expenses, such as a large medical bill, or major home repair. Without an emergency fund, you could find yourself using a credit card or taking out a loan at a much higher interest rate to handle an unforeseen financial crisis.


2. Have I maxed out my retirement accounts? Whether it’s a 401(k), an IRA or another type of retirement account, maxing out your retirement savings should be a top priority. Putting a substantial amount of money into your retirement fund is even more beneficial if your employer matches part or all of your financial contributions.


3. Do I have enough saved for my child’s education? If you have children and plan on paying for part or all of their college tuition, you may want to invest in a 529 plan. Under the 529 program, you can put money into a mutual fund or similar investment, and your account will be protected from both state and local taxes.


4. Do I have other debt to pay off? It’s important that you focus on paying off all of your other debt obligations before increasing your monthly mortgage bill. Credit card debt can really add up over time, especially when you take into account interest rates and other fees.
   
   For example, a mortgage with 6% interest is less expensive than a credit card debt with a 22% interest rate if you only make the minimum payment. In this situation, it makes more financial sense to prioritize paying off the credit card before focusing on the mortgage.


5. Do I understand the terms of my mortgage? Before switching to a “shorter-term loan” or sending additional mortgage payments to pay off your mortgage early, look closely at your loan documentation. Check for any prepayment penalties that could apply.


6. Would I be better off investing? If you have a low interest rate on your mortgage and few other investments, you might benefit more from putting your extra money in a Roth IRA, 401(k), or index fund, all of which may offer a higher return than paying off your mortgage. You may also want to consult a licensed financial planner to determine your best investment options.

Benefits of Paying off Your Mortgage Faster

Once you have asked yourself the critical questions above, you should have a better understanding of your financial obligations and goals. From this informed position, you can explore whether paying off your mortgage fits your plans. Here are some of the advantages:

Enjoy More Peace of Mind

Once you no longer owe your lender, you will own your home free and clear. For many people, you can’t put a price on feeling that sense of financial security and freedom.

Pay Less Interest

In a typical 30-year, fixed-rate mortgage, a borrower will actually pay more in interest than principal over the life of the loan. Increasing your payment amount allows you to pay more principal earlier, which can significantly reduce your interest payments. This will allow you to build equity faster, enabling you to own your home outright sooner.

Increase Available Income

Without a monthly mortgage payment, you free up more of your income for savings, investments, or other goals. Keep in mind that you will still need to pay property taxes and insurance.

Strengthen Retirement Security

If you are at, or close to, retirement age, being mortgage-free can significantly lower your living expenses, helping your savings stretch further.

Disadvantages of Paying Off Mortgage Early

Being free of mortgage debt has its appeal, but it’s important to assess the potential trade-offs that could impact your cash flow, tax situation, and financial flexibility.

Lose Tax Deduction

Not having a mortgage payment might help your budget, but you will also lose the tax deductions available for mortgage interest. If you itemize and have few other deduction options, this is money you might not be able to get back otherwise. Always consider consulting with your tax advisor on what the tax implications would mean to you for paying off your mortgage early.

Ties Up Your Money In Your Home

Paying off your mortgage early can reduce your financial flexibility, as funds that were once easily accessible in savings are now tied up in home equity.

If you want to access your home equity, a cash-out refinance, or a home equity loan is an option. But those require a new appraisal, home loan origination fees and other third-party expenses. Plus, you’ll have to wait one to two months for funding. In an emergency, the costs and timeline may be tough to manage, and you may not have the funds or flexibility to spare.

Lose Escrow Account Convenience

If your property taxes and insurance payments were handled through escrow, you’ll lose the convenience of having your loan servicer manage those payments. You'll need to navigate them on your own. Large lump sum payments may be required, which demands careful financial planning and discipline.

How to Pay Off Your Mortgage Early

If you have weighed the advantages and disadvantages above, considered your financial goal,s and still want to pay off your mortgage early, you can get started in several ways.

1. Make Extra Payments Whenever Possible

Any extra payments to your mortgage principal can help speed up your payoff timeline. Even one additional payment per year can make a noticeable difference. You’ll build equity faster and reduce both your loan balance and the overall term of your mortgage. Use our mortgage calculator to see how even small extra payments can add up to big savings.

How Payments Impact Your Amortization Schedule

Whether you have a 15-year or 30-year mortgage, your amortization schedule provides a detailed breakdown of how your principal and interest payments affect your loan balance and the total interest paid over time. By making extra payments, either monthly or periodically, you can significantly reduce both your loan amount and the interest you pay.

Spread Out One Extra Payment Over the Year

The simplest way to make an additional payment each year without breaking the bank is to add a little extra toward your principal each month. Here’s how it could work:

Take your monthly mortgage payment and divide it by 12. Then, add that amount to your regular payment each month as additional principal. For example:

• Monthly Payment = $2,000
• Additional Principal= $166.67 (2,000 ÷ 12)
• Total monthly Payment = $2,166.67

Pennymac customers: You can make extra payments automatically by entering the amount in the “Additional Principal Amount” section when setting up your Pennymac AutoPay.

Don't want to commit to extra payments each month? You can make additional principal payments quarterly, semi-annually, or anytime you want. You'll pay down your loan a little quicker, resulting in less interest over the loan's lifetime.

2. Ensure Bonus Payments Are Paying Off The Principal

Do you have a tax refund, work bonus or extra cash you want to put toward your principal? A one-time payment toward your principal can be a smart way to use your funds. Just make sure it’s applied correctly. Before sending any extra money to your lender, double-check that it’s clearly marked as a principal-only payment. Otherwise, it might just be applied as an early payment on your next bill.

Pennymac customers: Ensure your extra payments are appropriately allotted. Go to your online account and select “One-Time Payment.” Then, choose “Principal Reduction” and schedule a date to make the bonus payment. If you prefer, you can always contact a Pennymac Loan Expert for assistance.

3. Refinance Into a Shorter-Term Loan

If you’ve paid down your loan or you’ve received a raise at work and are bringing home more each month, then consider taking the next step – refinancing your loan into a shorter-term loan.^*

For example, if you’re in a 30-year home loan, explore a conventional fixed-rate 15-year loan. he monthly payment will be about 50-60% more, as you’re repaying your loan in half the time. But you could also benefit from a slightly lower interest rate and cut total interest payments in half.

4. Pay Down Other Debts

The quicker you pay off other debts, particularly debts with high interest rates such as credit cards—the more cash you have to pay down your mortgage principal. In fact, you may even consider consolidating any high-interest debts with a cash-out refinance^* or home equity loan; the rates are typically half to one-third the interest rate of a credit card.

5. Round Your Payment Amounts Up

Is an extra mortgage payment per year out of your budget? Try rounding up. For example, if your monthly payment is $1,432.25, round it up to $1,500. That extra $67.75 may not seem like much, but it can make a noticeable dent in your loan term over time.

6. Cut Expenses and Redirect Savings

One way to accelerate your mortgage payoff is to examine your monthly spending. Are there areas where you can cut back? For example, cancel unused subscriptions, eat out less, or try to lower your utility rates. Apply any savings directly to your mortgage principal. Even redirecting $100 a month can have a significant impact over time, and it’s money you’re already used to spending.

7. Look Into Mortgage Acceleration Programs

Some lenders offer mortgage acceleration programs that can help shorten your loan term. A common method is making biweekly payments instead of monthly, which results in one extra full payment each year. While this can help you chip away at your principal faster, you need to ensure it aligns with your paychecks and other bill due dates.

A Powerful, Personal Decision

Deciding whether to pay off your mortgage early is complicated. It can give you more freedom in some areas but limit you in others. Take your time to examine your goals and calculate your potential savings. Most importantly, talk with your lender or a Pennymac Loan Expert to determine if an early mortgage payoff makes sense for you.

^{*Refinancing your existing loan may result in your total finance charges being higher over the life of your loan.}