How to pay off your mortgage faster and save money on interest (2024)

Paying off a mortgage early offers potentially thousands of dollars of interest savings and eliminates your monthly housing payment. It can also grant you peace of mind — your home will be 100% yours and can serve as a tappable equity source.

But how should you go about paying off your mortgage faster? You can reach the finish line early by refinancing to a shorter term, making extra payments, applying cash windfalls to your balance and more.

Here are five strategies to consider. Plus, learn the advantages of paying down a mortgage early and potential drawbacks like prepayment penalties and the opportunity cost of not investing.

How to pay off your mortgage faster

If you decide to pay off your mortgage early, there are multiple ways to do it. To illustrate each method in action, consider the following example: Say you have a $400,000 mortgage with a 7.04% APR, and you’re due to pay $561,907 in interest over a 30-year term.

1. Refinance to a shorter term

Refinancing your mortgage to a shorter term involves replacing your existing loan with a new one and paying more per month. The new mortgage would come with closing costs (about 2% to 6% of the loan amount) and a new APR, so it’s critical to calculate your break-even point — that is, how long it will take for your savings to exceed the cost of refinancing.

“Generally, refinancing makes sense when you can achieve a lower interest rate on the new loan than the existing loan,” said Thomas J. Brock, a CPA and chartered financial analyst. “It makes even more sense when the new loan term is shorter than or equal to the existing loan term… Achieving both these loan modifications guarantees a lower long-term cost of borrowing.”

With mortgage refinancing interest rates hovering around 7% in May 2024, it’s unlikely that you could score a decreased APR in the near future. Still, as long as refinancing won’t stick you with a higher APR, switching to a shorter term at least minimizes the accrual of interest. The best mortgage lenders for refinancing can help you determine whether a shorter term is the right choice.

Tip: Use a mortgage refinancing calculator to understand the biggest opportunity for savings in your situation.

2. Apply cash windfalls to your principal balance

The average American’s tax refund for the 2023 filing year was $2,869, according to the IRS. Over the calendar year, you might also receive a bonus from work. You could even be the recipient of an inheritance.

Apply such lump sums to your mortgage principal to shave time and interest off your loan. Using our example of a $400,000 mortgage with a 7.04% APR, applying a $3,000 windfall to your loan annually would trim nearly seven years off a 30-year term.

Warning: If you don’t specify that you want to pay down the principal, the lender may apply your funds to your upcoming loan payments, which may include pre-scheduled interest charges. This will negate your interest savings, so make sure you choose to apply the payment to your principal only.

3. Make biweekly payments

Instead of making a single payment each month, you can pay half of your monthly mortgage payment every two weeks. In doing so, you’ll end up making one extra payment per year.

In our example of a $400,000 mortgage with a 7.04% APR, making biweekly payments would reduce a 30-year repayment term by more than six years.

Lenders may allow you to opt into this biweekly payment schedule, but ask about enrollment fees, if applicable, and account for them in your estimated savings.

4. Pay more than your monthly payment

Figure out the amount you want to pay and then request to have it added to your principal balance. Pay more each month, once per year or whenever you have extra funds to contribute. But, again, be sure that your lender applies the payments to your principal balance.

5. Recast your mortgage

Recasting is a way to lower your monthly mortgage payment when you have a large sum of money you want to put toward your principal balance. Let’s say you sold your home but didn’t receive the proceeds until you closed on your new home or received a large sum through an inheritance. You’ll keep your remaining loan term and interest rate and lower your monthly dues, which is especially advantageous if you have a low interest rate you don’t want to lose through refinancing.

“Not all lenders will allow this, so you should check first,” said Sarah Alvarez, a lending executive at William Raveis Mortgage. Otherwise, you may be limited to refinancing to pay down a larger portion of your mortgage.

If you pay down your balance through recasting, you won’t necessarily pay off your mortgage early because the repayment term remains the same. However, if you continue making your original, higher payments and put the overage toward the principal each month, you’d be mortgage-free ahead of schedule. Recasting may come with an administrative fee of a few hundred dollars, but that’s significantly less expensive than the closing costs associated with refinancing.

Example: Let’s say you wanted to inject a $50,000 lump sum into the $400,000 mortgage mentioned above. Your new monthly payment would be $334 lower, but if you kept making the larger payment, you’d pay off your mortgage nine years ahead of schedule.

Should you pay off your mortgage early?

You can pay off your mortgage before the end of your loan agreement, whether you’d like to make extra payments over time or pay off the entire amount at once. However, if you decide to take the latter, lump-sum approach, prepayment penalties may apply.

On the upside, federal law prohibits lenders from imposing prepayment penalties on all nonqualified mortgages (which lenders offer without adhering to Dodd-Frank Act consumer protections, such as confirming your affordability of repayment). The law also prevents these penalties on several government-backed loans (such as FHA loans, VA loans and USDA loans), plus qualified mortgages 36 months after they originated. If you want to pay off a qualified mortgage before the 36-month mark, the penalties are limited to:

• 2% of the outstanding balance in the first two years
• 1% of the outstanding balance in the third year

What’s a qualified mortgage? It’s a home loan from a financial institution that took the extra step to ensure you could afford repayment when you initially borrowed. All conventional mortgages are “qualified.”

Despite the possibility of being charged a prepayment penalty, you can still pay off your mortgage any time you’d like. You’ll just need to weigh the pros and cons to decide if it’s worth it.

Benefits of paying off your mortgage early

Paying off your mortgage early can offer various advantages. Here are a few to consider.

No more mortgage payments

A monthly mortgage or rent payment is typically the largest bill you have to pay each month. Once your mortgage is paid off, you remove that expense from your monthly budget. As a result, you should experience a boost in your monthly disposable income, which can cover living expenses in retirement, travel and more.

Save on interest

The earlier you pay off your mortgage, the more money you’ll save. But how much?

Say again that you have a $400,000, 30-year mortgage with a 7.04% APR, costing $561,907 in overall interest. Now suppose you increase your monthly payment amount by $439 to pay off the loan in 20 years: You’d save approximately $215,358 in interest.

If you don’t want to pay hundreds more per month towards your mortgage, smaller monthly payments can also make an impact. Continuing with the example above, an extra payment of just $50 per month would save you about $39,900 in interest on a 30-year loan. It’d also shave 21 months off your loan term.

Use a mortgage repayment calculator to estimate savings for your loan amount, duration and APR.

Peace of mind

Owning a property free and clear means you’ll always have a home and won’t have to worry about a housing bill, aside from property taxes and home insurance. It’s also an asset you can borrow against if you ever need a sizable amount of funds. For example, loan options include a home equity loan or line of credit and a reverse mortgage once you’re at least 62.

Related >> How to tap your home’s equity

Disadvantages of paying off your mortgage early

Paying your mortgage off early also comes with potential drawbacks.

You might save more by paying down high-interest debt

Mortgages often come with relatively low interest rates in comparison to unsecured credit products like credit cards and personal loans.

For example, credit cards had an average interest rate of 21.59%, and two-year personal loan rates averaged 12.49%, according to February 2024 Federal Reserve data. Meanwhile, the average 30-year fixed rate on a mortgage sat at just under 7% in May 2024, according to Freddie Mac. And many homeowners have mortgages with rates much lower than that.

Takeaway: If you have other debts with higher interest rates, paying off those debts first can be cost-effective (also known as the debt avalanche method).

You might be better off investing

If you funnel money towards paying down your mortgage more quickly, this is money that you won’t invest in the stock market or save for retirement. You might earn more elsewhere than you can save by paying off your mortgage. For example, individual retirement accounts (IRAs) with aggressive, stock-heavy allocations have a long-term historical average annual return rate of about 9%.

If you invest $439 into a traditional IRA each month from the age of 35 onward and earn a 9% average annual rate of return, you’ll have an estimated $858,878 by the time you turn 66. In comparison, a $439 extra payment on the $400,000 mortgage in the example above only offered $215,358 in savings.

Return rates will vary and investments carry more risk, but they also hold the potential for higher gains.

You could face a prepayment penalty

Paying off your mortgage in full within the first couple of years can trigger a prepayment penalty of up to 2% of your outstanding balance. If your loan amount is $300,000, that could mean a fee of up to $6,000. Be sure to factor applicable penalties into your potential savings.

You could miss out on a mortgage interest tax deduction

If you itemize deductions on your federal taxes, you might take the mortgage interest deduction. As a result, your mortgage payments may be helping to offset some of your income.

Paying off your mortgage balance will eliminate those savings and should be considered when calculating your net potential gain. When in doubt, consult your certified tax advisor.

7 questions to ask before paying off your mortgage early

Before you start paying down your mortgage early, consider whether it’s the right financial move for you. Here are some short- and long-term questions to consider:

1. What’s my mortgage rate? The average 30-year mortgage rate was 6.94% in late May 2024, compared to just 2.95% in May 2021. If you locked in an ultra-low rate, it could make more financial sense to put your money elsewhere, like a high-yield savings account or CD.
2. How tight is my monthly budget? Paying down your mortgage may not be a financial priority if you don’t have much breathing room in your budget. Instead, you may be better off building an emergency fund.
3. Do I have high-interest debt? The interest rates on your credit cards and personal loans likely exceed the rate on your mortgage. You could save money by paying down those balances before tackling extra mortgage payments.
4. How long do I plan to stay in the home? Early payoff strategies are best suited for homeowners who plan to stick around for a while. It doesn’t hurt to make extra payments because you’ll have a lower balance to repay when you sell. But that amount may be negligible compared to several years of making extra payments.
5. Do I have enough money set aside for retirement? Paying off your mortgage before retirement can help your financial security. But you also need funds to keep up with maintenance, property taxes and overall living expenses. Make sure you’re putting away enough cash for retirement before paying off your mortgage.
6. Would I face a prepayment penalty? If you’re considering paying off your mortgage within the first three years of repayment, you could be hit with a prepayment penalty of up to 2% of the loan balance. Consider waiting until after the three-year threshold to pay off the loan to avoid the penalty.
7. Do I itemize deductions on my taxes? If you itemize your tax deductions and lower your taxable income by deducting your mortgage interest, calculate how removing that deduction would change your tax bill. Otherwise, you may owe more than expected the next time you file. Consult a tax professional to be sure.

Additional reporting by Lauren Ward