Paying off your mortgage ahead of schedule can give you peace of mind and put you on more stable financial footing as you head into retirement. In some cases, making extra payments is the best way to pay off a loan faster. In other situations, refinancing is a better choice.
What You Should Know About Making Additional Payments
Making extra payments can reduce your principal balance faster than simply making your required monthly payments. You’ll be charged interest on a smaller balance, which will reduce the total amount you’ll pay in interest over the life of the loan.
Some homeowners pay half of their monthly required payment every two weeks. Instead of making 12 monthly payments, they make 26 half-payments, or 13 whole payments, over the course of a year. If you get paid every two weeks, adopting that strategy can help you chip away at your principal faster without straining your budget. Another common approach is to make lump sum payments when extra funds are available. For instance, you might want to apply some or all of your income tax refund or annual bonus to your mortgage principal.
Before you submit an extra payment, check your mortgage documents or contact your loan servicer. Some lenders charge a prepayment penalty, which can reduce or eliminate any potential benefit from making additional payments. If you decide to make extra payments, tell your loan servicer that you want those funds to be applied to your mortgage principal.
How to Figure Out If You Should Refinance
Another option is to refinance your mortgage and lower your interest rate. That can be a smart move if it will save you money over time.
When you refinance, you’ll have to pay several thousand dollars in closing costs. To figure out if refinancing would make financial sense, divide the amount you would have to pay in closing costs by the amount that your monthly loan payment would decrease. That’s the number of months it would take you to break even.
If you intend to continue living in the house beyond that number of months, then refinancing can save you money in the long run. If you move before then, you won’t save enough to justify the closing costs.
Choose the Strategy That’s Right for You
There are multiple ways to pay off a mortgage ahead of schedule. Consider the terms of your current loan, how much you still owe in principal, how much you could lower your monthly payments by refinancing and how long it would take you to break even.
Making extra payments is easier than refinancing, and sometimes it works out better financially. If you won’t get hit with a prepayment penalty, that might be your preferred strategy. Do some research so you have real numbers to work with. Once you have all the relevant information, you’ll be able to figure out which approach is right for you.
