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Should you pay off your mortgage early?

The biggest loan you are likely to get in your life is your home mortgage. Even though the interest rate on your mortgage is likely to be quite low, the sheer size of the loan, coupled with how long you make bill payments on it, can mean that you pay hundreds of thousands of dollars in interest.

If you want to save money, one way to do it is to pay off your mortgage early. There are various ways to pay off your mortgage early, including these two strategies:

  1. Bi-weekly mortgage payment: With a bi-weekly schedule, you end up with what amounts to an extra mortgage payment each year. If all months had the same number of days/weeks, a bi-weekly mortgage payment would result in 24 payments each year. However, a year actually has 52 weeks, so paying every other week means that you have 26 payments each year. Since your bi-weekly mortgage payment is half your monthly payment, two “extra” bi-weekly payments a year equal an extra mortgage payment. You can shave more than two years off your mortgage term with this method, and save on interest.
  2. Extra principal payment: It’s also possible for you to make an extra principal payment when you wish. Paying down the principal can help you reduce your loan balance faster, and save money on interest. You can make extra principal payments at any time, but they are most effective when you take them regularly.

Refinance to a shorter-term

Another strategy is to refinance your mortgage to a shorter term. In many cases, you can get a lower mortgage rate for a shorter term. Plus, since you have a shorter term, you are done with your loan that much sooner — and you save even more in interest since you are cutting back the length of time that you are paying interest.

However, there are pitfalls associated with refinancing to a shorter term. You might end up with higher payments as a result of your shorter mortgage term. If you are struggling with cash flow, the higher payments might only cause more problems for you.

Plus, if you lock in the payment associated with a shorter term, you can’t back off if you run into trouble. Many homeowners prefer to keep the mortgage term a little longer, and then employ other methods to reduce their mortgage balances.

One strategy that is common in the United States is to get a 30-year mortgage, but make payments as if it were a 15-year mortgage. The extra payments mean that the mortgage balance is reduced quickly. However, if there is a financial setback, you can stop making the extra mortgage payments and switch to the “regular” payment without incurring penalties and jeopardizing your home.

Finally, before you decide to pay down your mortgage, make sure that it’s really the most efficient use of your money. If you have credit card debt or other debts with higher interest rates, you are better off getting rid of those debts first. Pay off your higher-interest debt before you tackle your low-interest mortgage debt.



    Nice post. It is the best feeling in the world to finally pay off a mortgage. The 30 year with 15 year approach is a great option in that it gives you flexibility if money gets tight and you cannot continue the accelerated program. And by all means pay off credit card debt first.

  2. Harry S

    It’s a good idea to pay off your mortgage early since it takes off a lot of burden from your shoulder and gives you a lot of freedom.

  3. Troy B

    The post makes the point that if you have higher interest debt such as credit cards it makes sense to pay these off before paying off your mortgage. I would agree with that but I think the answer needs to be expanded. If you could use the money more effectively to invest at a rate that provides a higher return than the interest you are paying, it is worthwhile. I am not talking about a risky gamble. I chose to continue to carry a mortgage and invest in my business. The mortgage at the time was 6% I believe. The returns I made in my business were over 100%. Before making a decision consider the opportunity cost. If I pay off the mortgage, what am I not doing with that money???

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