Most mortgages last 15 or 30 years. Notably, the longer the term, the more you will pay in interest over the lifetime of the loan. Because of that, many people choose to pay off their mortgage early if they can. But there are some things you should know before doing so.
Check for Prepayment Penalties Before Paying Off Your Mortgage Early
If you want to pay off your mortgage early, start by checking whether there are any prepayment penalties. These are fairly common in mortgages, but there is a fair chance you don’t have one. This penalty is exactly what it sounds like. It may be a set amount or a percent of the amount you pay early. The idea is that the lender will lose money in interest, so this penalty makes up for it.
You can still pay off your mortgage if you have a penalty. You just need to make sure that it still makes financial sense.
Methods of Paying Off Your Mortgage Early
If you decide to go ahead with paying off your mortgage early, then you will have a few approaches that you can take. Remember to check for potential penalties before choosing your method:
- Overpay every month.
- Overpay when you have extra funds (such as bonuses or tax refunds).
- Make more frequent payments.
- Pay off the rest in one lump sum after a windfall.
Potential Downsides of Paying Off Your Mortgage Early
Before you pay off your mortgage early, make sure you have considered the potential consequences. We already mentioned potential prepayment penalties.
There’s also the chance that you will be cash poor after. For example, don’t pay off your mortgage early if it means you no longer have an emergency fund.
Finally, make sure that you specify your extra payments are for the principal, not the interest. This will have a larger impact on your efforts.