How to pay your mortgage faster

Can you imagine life without a mortgage? Imagine the extra cash burning through your pockets. And the satisfaction of knowing your home is truly yours — without any financial obligations. There are several ways to pay down your mortgage and get out of debt sooner¹. Here’s how to turn this dream into a reality.

Find the best interest rate

Interest rates determine how much you spend on interest in addition to the principal. Generally, the higher the rate, the more you pay over the length of your mortgage. So, it’s important to choose a mortgage with a rate that fits into your repayment plan. Mortgages come in 2 interest rate categories:

Fixed-rate mortgages lock your rate for an entire term. This makes it easy to track how much principal you pay back each month
Interest rates on variable-rate mortgages can change at any time; your rate could be higher or lower, depending on the market. But lower interest rates mean you pay more on the principal and pay off your mortgage faster

Interest rates vary on different mortgages, depending on their features. For example, you pay a higher interest rate on mortgages with cash-back benefits. With a cash-back mortgage, in addition to the mortgage principal you get a percentage of the mortgage amount in cash. You can use this money to buy investments, pay for a special event or renovate your home. But cash-back mortgages aren’t available at all financial institutions.

Take advantage of prepayment privileges

Pay off your home quicker with mortgages that have prepayment privileges. Lenders offer open, closed and convertible mortgages Opens a popup.. Open mortgages usually have higher interest rates than closed mortgages, but they’re more flexible because you can prepay open mortgages, in part or in full, without a prepayment charge. Closed and convertible mortgages often let you make a 10% to 20% prepayment. Your loan agreement explains when you can make a prepayment, so get the details from your lender beforehand. Also, decide which privileges you want before finalizing your mortgage.

Shorten your amortization period

The amortization period is the length of time it takes to pay off a mortgage, including interest. The shorter the amortization period, the less interest you pay over the life of the mortgage. You can reduce your amortization period by increasing your regular payment amount. Your monthly payments are slightly higher, but you’ll be mortgage-free sooner. Find out how much you could save by shortening your amortization period with our mortgage payment calculator.

Pay a big lump sum before you renew

When it’s time to renew your mortgage, pay as much as possible. All CIBC mortgages are open at renewal, so you can pay as much as you want on your mortgage at this time.

Choose accelerated weekly or accelerated biweekly payments

If you switch to an accelerated weekly payment schedule, you’ll increase your mortgage payments from 12 to 52 payments annually — a payment every week instead of monthly, and one extra monthly payment every year. If you switch to an accelerated biweekly payment schedule, you’ll increase your mortgage payments from 12 to 26 annually — a payment every 2 weeks instead of monthly, and one extra monthly payment every year.

Increase your mortgage payment

Increase the size of your regular mortgage payment to take a large chunk off your mortgage principal. Choose a higher payment amount when you arrange your mortgage, or at any time during the term. This lets you pay down the principal faster. Example: If you increase your monthly mortgage payment amount by $170 from $830 to $1,000, you’ll save almost $48,000 in interest over the amortization period. And you’ll own your home about 8 years sooner.¹

Make annual lump-sum payments

In addition to your regular mortgage payment, use your prepayment privilege to make a lump-sum payment. It’s applied directly to your outstanding principal if you don’t owe any interest. Ask your lender how much you can prepay every year. Paying lump sums every year saves you money over the course of your mortgage². If you pay more than the amount of your annual prepayment privilege, you may have to pay a prepayment chargeOpens a popup. on the excess. Take advantage of extra cash, such as your tax refund or work bonuses. Also, increase your payment amount if your income increases. Make several prepayments early in your mortgage. The more prepayments you make, the less interest you’ll pay over the entire mortgage term.

Should I pay off my mortgage or invest?

Investing is one way to raise money for a lump-sum payment. For example, you can invest your money in a tax-free savings account (TFSA). Then pay a lump sum once your investment grows. Compare rates on your potential investment and your mortgage. If investing offers a higher rate of return than your mortgage, put your money in an investment and watch it grow. If not, put a lump sum on your mortgage instead. Learn about CIBC tax-free savings accounts. Some homeowners are eager to get out of their mortgage early, with reasons ranging from eliminating the psychological pressure of debt to slashing interest payments. For retirees, paying off a home loan early can help increase cash flow. This is especially beneficial when transitioning to a fixed income. Whatever your motivation, paying down your mortgage ahead of time reduces the amount of interest you pay on the loan. This can be a substantial savings. Here are some early payoff strategies to help you achieve that goal.

5 ways to pay off your mortgage early

1. Make extra payments

There are two ways you can make extra mortgage payments to accelerate the payoff process:

Biweekly mortgage payments

The first way is to split your monthly mortgage payment in half and make biweekly payments instead. By doing this, you’ll end up making the equivalent of 13 months of mortgage payments in one year, instead of 12, and saving a bundle in interest. This tactic might be easy for some homeowners because it’s barely noticeable in the monthly budget. Consult with your lender or servicer first to confirm whether it accepts biweekly payments (most do). If not, it’s up to you to set aside those biweekly payments and lump them into a single payment each month. The benefit of the extra annual payment is still there, but without the convenience of the lender allowing you to schedule payments every two weeks.

Extra monthly payment

The second approach is to pay extra against the principal each month, or make an extra principal-only payment annually. It can also save you tens of thousands of dollars in interest over the life of the loan. Let’s say your 30-year mortgage is for $250,000 and your interest rate is 4 percent. If you make an additional $100 monthly payment to the principal balance of your loan, you’ll shave off four years and $27,957 in cumulative interest payments from your mortgage. This can be a better tactic than refinancing, as it doesn’t lock you into a payment. If for some reason you can’t add more to your monthly mortgage payment, you won’t be penalized. If you go this route, make sure to check with your lender that the payments will be applied in the correct way to reduce the principal, not prepay the interest. You’ll also want to make sure the lender understands the extra payment is not for the next month’s mortgage payment.

2. Refinance your mortgage

Refinancing your mortgage to pay it off early only makes sense if you can get a lower interest rate or shorten the loan term. Be mindful that there are costs associated with refinancing, so you’ll want to make sure the savings outweigh those costs. Refinancing into a shorter-term loan, such as switching from a 30-year mortgage to a 15-year mortgage, can also help bring down your interest rate while putting you on the path to early payoff. However, with a shorter term, your monthly payment will be higher, which could stretch your budget too thin. You can use Bankrate’s calculator to compare payments and total interest between 30-year and 15-year terms.

3. Make lump-sum payments toward your principal

You might also want to make lump-sum payments to your principal any time you get a financial windfall or unexpected influx of cash. This could be a bonus at work, tax refund, inheritance or funds earned from the sale of valuables. With some mortgage servicers, you must specify that excess payments are to be put toward the principal. Check with your servicer if you are unsure how lump-sum payments will be applied.

4. Recast your mortgage

Mortgage recasting is different from refinancing because you keep your existing loan, pay a lump sum toward the principal and your lender then adjusts your amortization schedule to reflect the new balance. This will result in a lower monthly payment, but your loan term and interest rate will stay the same. One major benefit to recasting is that the fees are significantly lower than refinancing. Usually, mortgage recasting fees are between $200 and $300 (contact your lender to request the service and confirm the costs). Plus, if you have a low interest rate, you get to keep it. On the flip side, if you have a high interest rate, refinancing might be a better option. Note: FHA and VA loans can’t be recast.

5. Get a loan modification

If your mortgage payments are unaffordable but you want to get back on track and potentially pay the loan off early, consider a home loan modification. Generally reserved for borrowers experiencing financial hardship, a loan modification entails the lender adjusting the interest rate or loan term to help bring the loan current. With this option, you could save on interest and pay the loan off faster. There could be consequences for your credit, however, depending on how your lender or servicer reports it to the credit agencies, so be sure to discuss this with your lender upfront.

Can you pay off your mortgage early?

In most cases, you can pay your mortgage off early without penalty — but there are a few things to keep in mind before you do. First, reach out to your loan servicer to find out if your mortgage has a prepayment penalty. If it does, you’ll have to pay an additional fee if you pay your loan off ahead of schedule. This can affect whether paying your mortgage off early is financially viable for you. Second, make sure there aren’t any restrictions on how and when you can make additional payments. Some loans have terms that encourage you to follow the payment schedule, and it’s important to ensure that whatever extra payment you make goes to the principal and not interest.

Should you pay off your mortgage early?

Whether you should pay your mortgage off early depends on many factors, including the interest rate of your current loan and your personal risk tolerance. Start by considering the opportunity cost. If you repay your mortgage ahead of schedule, you’re putting money into the mortgage when you could have used those funds for other financial priorities. You’ll save on interest, of course, but if you invested the extra payments elsewhere instead of putting them toward your mortgage, you might find you’d have earned a higher return. On the other hand, if you know you’re likely to spend that extra money if you don’t put it toward your mortgage, making additional payments can be a good idea. The peace of mind that you get from owning your home mortgage-free can also be worthwhile, and is important to consider. Also, think about how much cash you have available for emergencies. You don’t want to tie all of your money up in your home and have no way to access it quickly if you encounter a crisis. Ultimately, with mortgage rates still low, it’s generally better in the long run to hold a mortgage with a low rate now and to invest your extra cash. Still, you can check Bankrate’s mortgage payoff calculator to see how much you can save by settling your mortgage early if you’re set on doing so.

FAQ about early mortgage repayment

While it’s not the right decision for every homeowner — and not possible for those on a tight budget — paying off a mortgage in its entirety is a goal for many people. Whether it’s just for the psychological freedom of eliminating what is most households’ largest budget line item or to reduce expenses before retirement, accelerating your mortgage payoff can be a smart financial move. We sought advice from Pete Boomer, executive vice president of mortgage at PNC Bank; and Melody Robinson Wright, director of financial education at Kinly. Both replied via email, and their answers were edited. What are some reasons a homeowner might want to pay down their mortgage more quickly? Wright: Knowing you own your home outright is a major incentive for paying your home off early. Some homeowners may look toward early payoff to save on interest, free up cash or reduce their overall debt burden before retiring or reaching other milestones in life. Paying down your mortgage early also allows you to wave goodbye to private mortgage insurance (PMI) fees as they can be removed once you reach 20 percent equity in the home. With PMI fees ranging from 0.5 percent to 2 percent of your loan balance, freeing up this money allows you to use it elsewhere such as for upgrades to increase the value of the home or to take advantage of wealth building opportunities. Boomer: Another big advantage of paying down a mortgage more quickly is building up equity in the property. A very effective strategy for achieving this is to make one additional monthly payment per year. Homeowners can pay off a typical 30-year mortgage eight years earlier by doing so. What are the pros and cons of paying off a mortgage early? Wright: Paying off your mortgage early reduces your debt burden and potentially saves you thousands in interest. However, depending on how aggressive your payoff timeline is, you may find that it results in you being unable to reach other financial goals or missing out on opportunities to grow your money through investments. With a paid-off mortgage, you’d also miss out on being able to take advantage of the tax deductions for mortgage interest payments. Boomer: One clear advantage is that it eliminates a monthly mortgage payment, allowing homeowners to tackle other debts or invest in other ventures. Additionally, an early payoff will reduce the amount of interest that a homeowner will pay over time. A potential disadvantage of paying off a mortgage early is that it may come with a prepayment penalty, so it is important to understand the details included in your loan documents. What are the advantages or disadvantages of various methods to accelerate your mortgage payoff? Wright: a) Lump sum: Making a lump-sum payment may reduce the amount of time it takes you to pay off the loan as well as reducing the amount of interest paid over the life of the loan, saving you a good bit of money. A large lump sum payment can also be advantageous if you can recast the loan. When recast, the loan is re-amortized to the lower principal balance amount resulting in a lower monthly payment. However, some loans such as FHA or VA loans aren’t eligible for recasting, fees may be charged and other criteria such as a minimum lump sum amount paid may need to be met to qualify for a loan recast. b) Extra sum monthly: Paying extra on your loan no matter what amount can reduce your total interest and length of the loan. The disadvantage is that you may need to follow special rules to ensure that the extra sum is being applied to your principal and follow up to ensure that the payment was applied correctly. c) Extra annual payment: Making an extra annual payment is advantageous because it reduces the length of your loan while potentially saving you thousands of dollars in interest. d) Biweekly payments: Biweekly payments work to your advantage by giving you one extra mortgage payment a year for a total of 13 payments versus making 12 payments. This can help you save a good bit on interest. The downside is that some lenders may not offer the option for you to make biweekly payments or you may be charged an additional fee. e) Refinance into a shorter-term loan: Refinancing to a shorter-term loan can reduce the length of the loan and the amount you pay in interest. However, before refinancing, one must make sure that the benefits outweigh the cost of refinancing your loan and that you’re able to afford the higher monthly mortgage payment. Any tips to offer for people who want to pay down their loan faster? Wright: If you’re looking to pay down your loan faster, create a plan for how quickly you’d like to pay it off and consider what changes you could make to your current budget or spending plan to help you achieve this goal without impeding other financial goals. Even without refinancing, you can pay a 30-year mortgage like a 15-year mortgage by making extra payments. You can also pay down your loan faster by creating a rule to put a percentage of any money earned or received from side hustles, windfalls or bonuses toward your mortgage. Boomer: One good option is automating the pay down. This can be done by dividing the monthly payment by 12 and applying this additional amount directly toward the principal each month. Automating these payments and making this part of a homeowner’s monthly budget is a great way to achieve a faster mortgage loan payoff.

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