Homeowners can reap significant financial rewards by paying off their mortgages early. Let’s consider the most effective prepayment strategies.

Lump-Sum Prepayments

Unlike monthly payments, one-time lump-sum prepayments go straight toward reducing a loan’s principal. This lowers the overall interest you’ll pay. Lump-sum payments have the most impact earlier in the mortgage term; the sooner you lower the principal, the sooner you save on interest. This can also shorten the length of the loan.

Making Micropayments

If you don’t have any windfalls for a lump-sum payment, micropayments might be a solid strategy. Paying a little extra each month will incrementally lower the principal balance and the interest you pay. That could also shave off more time than you might think.

For example, paying an extra $100 each month on a $350,000 25-year mortgage with 5% interest will take two years off the term.

Refinancing

You might trade your 30-year mortgage for a 15-year one. The new mortgage will have higher monthly payments, but you’ll save on long-term interest.

For this to make financial sense, the interest rate difference and refinancing fees should add up. A refinancing calculator can help you there.

Help from a HELOC

This is one of the more complex strategies and best used by people who have considerable equity in their homes. This works if you can get a HELOC, or home equity line of credit, with a lower interest rate than mortgage payments. If so, you can take out a HELOC, use that money to pay off the mortgage and make payments on the HELOC instead.

Your lender can guide you through this consideration.

Pitfalls to Avoid in Mortgage Payoffs

You might take the slow-and-steady approach to paying off your mortgage if any of these apply:

  • Consumer debt. If you got it, in the form of credit card debt or high-interest loans, it’s probably best to tackle that debt first.
  • Windfall fever. Your knee-jerk reaction may be to put a windfall toward your mortgage. You might consider other financial moves; a high-interest savings account or low-risk investments might be better options.
  • Big-ticket items. A wedding? A new roof? A new car? Some big expenses will likely come your way, and it might be wise to be prepared with money in the bank when one does.

To talk about paying off your mortgage, contact a member of the Decker Group at (972) 591-3097 or connect with us online.