Paying Your Mortgage Off Faster, Honestly

The guide in brief

Paying off a mortgage faster: the guide in brief

Here is a plain summary of the main points in Paying Your Mortgage Off Faster, Honestly. The full guide goes further, with a side-by-side comparison, a step-by-step way to ask your servicer for a recast, and the questions to bring.

There is no trick

What pays a house off early is money left over each month, sent to the right place. No product creates that money for you. If someone is selling a shortcut around it, what they are really selling is the shortcut.

Why early extra principal works hardest

In the early years of a mortgage, a large share of each payment goes to interest rather than to the balance. An extra payment toward principal early on removes balance that would otherwise have gone on charging interest for many years, so the same extra amount saves more interest early in the loan than it does near the end.

The line-of-credit method, decoded

A popular method says to run your paycheck through a home equity line of credit and let the shuffle pay your house off. The honest catch: almost all of the savings come from the extra principal you were already able to send, not from moving money around. A line of credit also carries a variable rate that can rise, and the lender can reduce or freeze the line, sometimes just when you would need it most.

Honest ways to do it

Pick one or two and stay consistent; boring beats clever here.

• add a set extra amount to principal every month;
• make one extra payment over the course of each year;
• round every payment up;
• send bonuses, tax refunds and other windfalls to principal;
• after a lump sum, ask your servicer about a recast.

Before you send extra, check your loan documents for any prepayment penalty, and make sure the servicer applies the extra money to principal.

The recast: a lower payment without a new loan

Extra principal lowers your balance, but your required payment was set when the loan closed, so it stays the same and the loan simply ends sooner. A recast changes that. After you send a lump sum to principal, the servicer works out the payment again on the new, lower balance, at the same rate and over the time left on the loan. The end date stays the same and the required payment goes down. There is no new loan and no appraisal; servicers usually charge a fee.

Two honest details. Only the principal and interest part of the payment drops, so if taxes and insurance are paid through escrow, the full bill falls by less. And because you then pay down less principal each month, you pay more interest overall than if you had kept sending the old payment. A recast buys a lower bill; extra principal alone buys an earlier payoff. A refinance is a different tool again: a new loan, with a new rate, a new term and its own closing costs.

Not every loan can be recast. It depends on the kind of loan, who holds it and the servicer’s own rules. The loan usually has to be a first mortgage that is current. Second mortgages, lines of credit, a loan still in an interest-only period and a loan that is behind usually cannot be recast, and many government-backed loans can be re-figured only to cure a missed payment, not after a voluntary lump sum. Ask your servicer, the company named on your monthly statement, for its written policy and for the new payment in writing before you send any money.

A recast is especially useful when you buy your next home before the current one sells. The new loan is underwritten at its full payment, and the lender looks at how you will carry the old home in the meantime. When the old home sells, the proceeds go to principal and a recast brings the payment down. Before you make the offer, ask whether the new loan can be recast and who will service it, and keep the sale money set aside until the recast is done.

When not to rush the payoff

Paying a mortgage off early is not always the wisest use of a spare dollar. Think twice if you do not yet have an emergency fund, if you carry higher-interest debt such as credit cards, if you would give up an employer match on retirement savings, or if the payments would leave you rich in house and short of cash. A financial adviser or tax adviser can help you weigh those trade-offs.

To see how extra payments could shorten your own loan, try the early payoff calculator, or read about refinancing and fixed rate mortgages if a new loan is the tool you need.