Yes, making one extra mortgage payment per year is a smart financial move that can save you thousands in interest and shave years off your loan, especially if you have a high-interest rate or plan to stay in your home long-term, but ensure your emergency funds and retirement savings are solid first, and check for prepayment penalties with your lender. This strategy builds equity faster and reduces total interest paid by applying extra funds to the principal, shortening your loan term significantly, notes this article from AmeriHome Mortgage.
Adding two extra mortgage payments each year, beyond your regular monthly installments, directly reduces the loan principal faster than scheduled. This means less interest will accrue over time, potentially shaving years off your mortgage and saving thousands in interest.
Making one extra mortgage payment per year on a typical 30-year loan can shave 4 to 7 years off your mortgage term, depending on your interest rate and loan balance, by effectively making 13 payments instead of 12, significantly reducing total interest paid. This works because more of your early payments go to principal, shortening the loan faster, with methods like adding 1/12th of your payment monthly or paying quarterly being effective strategies.
The 3-7-3 Rule in mortgages isn't a loan type but a federal timeline from the TILA-RESPA Integrated Disclosure (TRID) rule, ensuring borrower protection by mandating disclosures within 3 business days of application, a 7-business-day wait between the initial Loan Estimate and closing, and another 3-day wait if significant changes (like APR) occur, giving borrowers time to review costs before committing to a loan.
To pay off a 25-year mortgage in 10 years, you need to make significant extra principal payments through strategies like increasing monthly payments, making bi-weekly payments (effectively one extra payment a year), applying windfalls (bonuses, refunds) as lump sums, or refinancing to a shorter term, focusing on early payments to maximize interest savings.
The main downsides of prepaying are tying up cash that could earn more elsewhere (like investments), potential prepayment penalties from lenders, reduced liquidity for emergencies, and missing out on the time value of money, especially if your loan interest rate is low; it also means losing potential tax deductions and can complicate financial aid.
The "10/15 mortgage rule" is a strategy to pay off a 30-year mortgage in about 15 years by consistently paying an extra 10% of the principal amount each month (or equivalent weekly/bi-weekly payments), significantly reducing total interest and achieving homeownership much sooner, though it requires significant discipline and financial commitment. It works by accelerating principal repayment, which cuts down the loan term and interest, effectively transforming a 30-year loan into a 15-year one.
The main cons of paying off a mortgage early include losing the mortgage interest tax deduction, facing opportunity costs (missing higher investment returns), and reducing your financial liquidity (tying up cash in your home instead of having it accessible). You might also incur prepayment penalties (though rare on conventional loans), and it can slightly lower your credit score by removing a large, established debt, according to U.S. Bank.
Just one extra payment a year can save you thousands in interest and help you pay it off years faster. Use our Mortgage Payoff Calculator to see how small changes can make a big impact: https://ramsey.
But if it's applied monthly, quarterly or even annually, you should aim to overpay just before. If your interest is not due to be calculated for a few months to a year, you could put your money into a high interest savings account before using it to overpay on your mortgage.
“Paying off your mortgage early seems impossible but it is completely doable and people do it all the time, but how can you do it and why would you want to put in the extra effort? Paying off your mortgage early will rev up your wealth building.”
Making an extra payment on your mortgage can help you pay off your mortgage early. It also helps reduce the principal balance quicker which means there is less principal to gain interest. In the long run, your extra payments could help you save money as well as reducing the length of your loan term.
Prepayment risk is the risk involved with the premature return of principal on a fixed-income security. When prepayment occurs, investors must reinvest at current market interest rates, which are usually substantially lower. Prepayment risk mostly affects corporate bonds and mortgage-backed securities (MBS).
The average age to pay off a mortgage in the U.S. is around 62, with many becoming mortgage-free in their early 60s, coinciding with or just after typical retirement age, though figures vary by source. While some financial experts suggest paying it off by 45 for aggressive investing, data shows a significant portion of homeowners, especially older ones (60+), are mortgage-free, but increasingly, older adults (60s, 70s, 80s) carry more mortgage debt than previous generations, according to Marketplace.
Tips to pay off mortgage early
A 30-year fixed-rate mortgage is a loan you use to buy a home that you pay off over 30 years. Your mortgage rate is fixed for the life of the loan and never changes.
Not Putting Extra Payments Toward the Loan Principal
Otherwise, you may not see much progress in your early mortgage payoff efforts because your extra payments will be absorbed by interest.