How to Pay Down a Mortgage Sooner: Four Options and What to Ask First

If a parent sat Johnny down to talk about his mortgage, what would they want him to know? Johnny is a fictional homeowner, and his situation is one that comes up often: he would like to pay his loan down sooner, and he is not sure where to start.

Option one: extra principal payments

The simplest approach is adding a little extra to a regular payment and designating it as principal. Principal is the balance you actually owe, so extra money applied there reduces what is left on the loan. Johnny can add a small amount each time he pays, and he can change or stop whenever his budget calls for it.

Option two: lump sums

A bonus, a tax refund or another one-time amount can be sent toward principal in a single payment. This works well for people whose income is uneven, because there is no ongoing commitment. Johnny can decide each time whether he wants to send something.

Option three: one extra payment a year or a biweekly style schedule

Some homeowners make the equivalent of one additional payment each year, either by setting money aside or by splitting payments into a biweekly style schedule. Whether this works depends on the servicer. Some will accept it, some will hold partial payments until a full one is complete, and some programs charge a fee. Johnny should ask before he changes anything.

Option four: refinance to a shorter term

A refinance replaces the current loan with a new one, and a shorter term means a faster payoff schedule. It also means a new loan with closing costs, and the payment structure changes. That is a bigger decision than the first three, so it should be compared carefully against simply paying extra on the existing loan. I make no claims about what anyone would save, because it depends on the loan, the borrower and the market.

What Johnny confirms before sending a dollar extra

This is the part people skip, and it matters most. Johnny does two things first.

He checks his loan documents for prepayment terms. Many home loans do not restrict paying ahead, but the only way to know is to read the note and any related documents for your own loan. If there is language about prepayment, he asks the servicer to explain it in plain terms.

Then he asks his servicer how extra payments are applied. This is the question that saves effort. Depending on the servicer and how the payment is sent, extra money may be applied to principal right away, or it may be held and counted toward the next regular payment. If it only counts toward next month's bill, it is not doing the job Johnny intended. He also asks whether he needs to mark the payment as principal only, whether the servicer has a specific place on the website or a specific form for that, and whether any fees apply to a particular payment schedule.

One thing you can do today

Find your note and your latest mortgage statement. Look for the prepayment language. Then write down two questions: how does my servicer apply extra payments, and what is the correct way to designate them as principal? A short call or message to your servicer can settle both.

Keep the goal in perspective

Paying a mortgage down sooner is a reasonable goal, but it is one of several things competing for the same dollars. Emergency savings, other debts and your overall budget all matter. The right pace is the one you can keep up comfortably.

Let me help you find the path

If you are in the Charleston area and want to talk through your options, including whether a refinance makes sense for you, I can walk you through it. Call 843-LOW-RATE.

Home Loans Inc - Jason Sharon, Mortgage Broker. Company NMLS #1728740, Jason Sharon NMLS #1281448. Equal Housing Opportunity.