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How to Pay Off a Home Loan Early

by Ciele Edwards

For many people, a mortgage is the largest single debt they'll ever incur. Although paying off such a high debt is a challenging prospect, the benefits of doing so are significant. For example, when you own your home free and clear, you don't face the burden of a large mortgage payment each month. Not only does this free up more of your income, it protects you from losing your home to foreclosure during times of financial trouble. If you make your payments as agreed, it could take you 30 years or more to pay off your home. With a little dedication, however, you can pay off your mortgage well ahead of schedule.

Review your budget. Paying your home off early requires you to direct a greater portion of your income to your mortgage payments. Determine how much you need for bills and how much you spend on non-necessities, such as fast food, each month. Knowing exactly how much disposable income you have to work with ensures that you can apply additional income to your mortgage debt without accidentally spending money you need for other necessities.

Pay your mortgage lender a greater amount than you actually owe. Specify that you want the additional payment applied to your loan's principal balance. Otherwise, your lender may apply the additional funds to the following month's payment – much of which is interest rather than principal.

Ask your lender to switch you to a biweekly payment plan. With biweekly payments, you make two mortgage payments each month instead of just one. Each payment is equivalent to half of your standard payment. A biweekly payment plan has 26 pay periods – allowing you to make one extra mortgage payment per year. If you have a standard 30-year loan, making biweekly payments allows you to pay off your mortgage more than two years early.

Apply any unexpected income you receive to your mortgage balance. If, for example, you receive a particularly large tax refund or inherit money from a relative, immediately apply the funds to your mortgage's principal balance. Because the money is not a part of your everyday income, you won't feel its loss to the same degree that you would if you made a lump-sum payment out of your regular checking or savings account. Depending on the size of the payment and the amount you owe, you may be able to shorten your mortgage term considerably.

Refinance your mortgage into a loan with a shorter repayment term. The payments will be higher, but refinancing often allows you to reduce your total interest charges in addition to paying off your mortgage sooner. For example, if you refinance your 30-year mortgage into a 15-year mortgage, your payments will double but you'll pay off your home in half the time.

Tips

  • If you can't afford to apply a set amount of additional income to your mortgage each month or your income fluctuates and you never know just how much money you'll have to work with, consider rounding up each payment. Even if you only round up payments by a few dollars each month, those dollars add up over time and help you pay off your mortgage early.
  • If you have additional money to apply to your debts, consider using the funds to pay off high-interest debts, such as credit card debts, first. Paying off high-interest accounts saves you extra money in the long run that you can then apply to your mortgage loan.

Warning

  • If your mortgage carries a prepayment penalty, you cannot refinance or pay off the loan early without incurring penalty fees. The terms of a prepayment penalty can vary widely depending on the lender. Check your loan documents to ensure that you don't have an active prepayment penalty before paying off your mortgage early.

About the Author

Ciele Edwards holds a Bachelor of Arts in English and has been a consumer advocate and credit specialist for more than 10 years. She currently works in the real-estate industry as a consumer credit and debt specialist. Edwards has experience working with collections, liens, judgments, bankruptcies, loans and credit law.

Photo Credits

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