About 1-in-4 Homeowners Use a Clever Mortgage Payoff Strategy. Should You? | Mortgages

Between today’s high housing prices and elevated interest rates, paying off a 30-year mortgage early can feel like an insurmountable feat. But the desire to save money and pay off debt faster is stronger and more widespread than you might think.

About a quarter of homeowners pay extra toward their principal balance, amounting to an additional 13th mortgage payment annually, according to lender Rocket Mortgage in an analysis of its clients. They accomplish this through a series of “small, intentional habits,” researchers say, like making biweekly mortgage payments and putting work bonuses, tax refunds or other cash windfalls toward their home loan balances.

Making just one extra payment each year can help borrowers pay off a mortgage six years early – and save tens of thousands of dollars in the process.

“For homeowners who have room in their budget and want to reduce debt, small additional principal payments can have a surprisingly meaningful impact over time,” said Bill Banfield, chief business officer at Rocket Mortgage, in the report.

Learn more about how today’s homeowners are employing this strategy and whether paying extra toward your mortgage is the right move for your wallet.

Taking small steps with your mortgage now can save you thousands in interest later, Rocket found.

At the current average mortgage rate of 6.67%, a homeowner who borrows a typical 30-year mortgage (in other words, at Rocket’s median loan amount of $221,977) can pay off their loan nearly six years early – and save about $68,000 in interest charges over the life of the loan – by making just one extra monthly payment per year.

Those who can make two or more extra payments per year can shave 10 years off their loan, unlocking a clear path to becoming mortgage-free in a fraction of the time.

Mortgage borrowers who took out a loan between 2020 and 2022 – when interest rates were at historically low levels – are more likely to pay extra toward their principal balance than those who borrowed after rates climbed, according to Rocket.

Researchers offer a simple explanation: Those with lower interest rates and lower monthly payments have extra cash flow compared with those who borrowed when rates and payments were high. The latter group simply has less cushion left over at the end of the month to make more than the minimum required payment.

No matter when the loan was originated, though, one trend is universally true. Mortgage borrowers are more likely to make extra principal payments early in the loan term. Banfield says the data suggests that “the beginning of a mortgage may be an important moment when (borrowers) are particularly focused on reducing debt and building equity.”

If you’re inspired to join your fellow homeowners in paying extra toward your principal balance, there are a few ways to do so without throwing your monthly budget totally off balance.

By switching to biweekly payments, you make 26 half-payments throughout the year, amounting to 13 full payments rather than the traditional 12. But you don’t need to whip out the calculator: You can essentially skip doing the math yourself and reap the benefits of paying extra toward your principal with little effort on your end.

Enrolling in biweekly mortgage payments should be fairly simple, depending on your mortgage servicer. You may be able to make the switch by logging in to your online account, while others may require you to call and request the change. Be sure to request that any extra payments go toward your principal balance rather than toward escrow costs or advance payments.

Especially for borrowers who get paid biweekly (every other Friday) rather than semimonthly (on the first and 15th day of the month, for instance), switching to biweekly mortgage payments makes a lot of sense.

Work bonuses, tax refunds and lottery winnings are all cash windfalls that can be put to any number of uses. If you’re looking for a way to make your money work harder, you can potentially use it to pay down your mortgage.

However, before locking up extra cash in your home’s equity, be sure you have a sufficient emergency fund to cover three to six months’ worth of expenses. Also, a cash windfall may be better spent paying down high-interest credit card debt, if you have it, before chipping away at your mortgage.

If you already have an emergency savings account and low credit card debt, it may also make sense to consider putting cash windfalls into investment accounts rather than using them to pay down your loan’s principal. It all depends on your risk tolerance and expected return on investment for each scenario.

You don’t have to make a full extra mortgage payment to chip away at your principal balance. Just rounding up your monthly payment to the next $100 increment can still deliver significant savings over the life of the loan without making an outsized impact on your carefully planned budget.

This final strategy may not shave much time off your loan, but it keeps you more liquid than enrolling in biweekly payments.