You might be tempted to pay off your mortgage if you have a high interest rate, you are close to retirement or you simply don't want the debt. The choice to pay off a mortgage depends on your financial situation and your goals. There are a few ways you can pay off a mortgage immediately or ahead of schedule. The best way to do it depends on what you can reasonably afford.
You can pay off your mortgage debt sooner than scheduled by making additional payments. Additional principal payments reduce your loan term and the amount you pay in interest. An additional monthly payment or two each year can make a big difference in the final cost. For example, a $360,000 30-year loan at 6 percent interest can be paid off in 21 years by making only two extra principal payments a year. This strategy can save you more than $140,000 in interest.
Your lender or third-party service providers may send you solicitations to enroll in a biweekly mortgage payment program. A service debits your personal bank account every other week for half the payment. This results in 13 full payments a year rather than the 12 made when you pay monthly. Plans usually cost hundreds of dollars up front and often involve recurring transaction fees. You can arrange to make biweekly payments on your own by setting up an automated draft from your bank account every two weeks. You can also mail a check to your lender twice a month or use online banking to send the extra payment. The best method of making consistent biweekly payments depends on your self-discipline.
Paying off your mortgage on schedule is the best way to protect yourself from financial hardship during tough times, such as job loss. Sticking to your loan's regular repayment schedule offers flexibility, allowing you to make just the minimum monthly payment or pay more toward principal when you can afford to do it. As of 2012, you can deduct mortgage interest, which lowers your taxes. Paying the minimum amount on a mortgage allows you to pay off high-interest debt and put more of your income toward retirement and more productive investments.
When you refinance or sell a home, it is best to make a lump-sum payment for the balance owed.
A refinance pays off the current mortgage debt with proceeds from a new loan. In general, it makes sense to refinance when the new loan has a better interest rate, a more stable payment or a more affordable payment. It is best to refinance if you plan to keep the loan long enough to offset refinance costs and reap the long-term savings.
Selling a house is the best way to pay off the mortgage if you no longer want to stay in the home and its value has increased sufficiently. A home with enough equity can pay off the current loan amount, cover the cost of selling, including real estate agent commissions, and leave you with enough money to enjoy or put to other productive uses.
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