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Dreaming of shedding years off your mortgage and saving a ton on interest? You’re not alone. From millennials and Gen Z to those who are preparing to retire, many homeowners are prioritizing early mortgage payoff. Here we’ll explore powerful techniques to pay off a mortgage early like biweekly payments, lump sum payments, and even the potential of mortgage refinance. We’ll answer all your burning questions, like “Is it really better to pay off my mortgage early or invest?” Let’s unveil the best ways to pay off your mortgage early and help you craft a personalized plan for financial freedom.

Why Pay Down your Mortgage Faster?

Now that you’re a homeowner, you aren’t paying your landlord’s mortgage and instead you’re building equity in your own place. Now picture yourself with that same home and free from a monthly mortgage payment, with the financial freedom to invest, travel, retire, or just breathe a little easier. That’s the magic of early payoff.

What are some advantages to paying off your mortgage early?

Save Money on Interest: The longer it takes to pay off a loan, the more interest is paid over that time. Early payoff can mean tens or even hundreds of thousands saved in the long run (depending on loan size).
Fast-Track to Financial Freedom: Being mortgage-free means a significant chunk of your income is freed up. Depending on your investment strategy, this could allow you to invest more aggressively, save additional money for retirement sooner, or simply enjoy a more comfortable lifestyle.
Tap Into your Home Equity: A larger dent in your mortgage balance increases your equity. Your home’s equity can be a valuable resource for unexpected expenses or home improvements.
Peace of Mind, Priceless: There’s a priceless serenity that comes with knowing your home is truly yours, with no monthly payment hanging over your head.

What is the Best Way to Pay Off Your Mortgage Early?

There’s no one-size-fits-all approach to early mortgage payoff. The ideal strategy depends on your financial situation, risk tolerance, and long-term goals. Consider these factors when creating your plan:

Current Financial Situation: Analyze your income, expenses, and existing debt to determine how much extra you can comfortably allocate towards your mortgage.
Risk Tolerance: Are you comfortable with a potentially tighter budget in exchange for faster payoff?
Long-Term Goals: Do you prioritize early financial freedom or are there other financial goals you want to focus on?

Once you’ve considered these factors, you can choose the strategies that best suit you.

Understanding Principal Vs. Interest

Before we delve into specific strategies, let’s solidify the role of interest vs principal in your mortgage payment. This is key to maximizing your payoff efforts.

Interest: The fee you pay for borrowing money (expressed as APR).
Principal: This is the actual amount of money you borrowed for your mortgage to purchase the home.
Amortization: The calculation of how your loan is paid down over a specific amount of time when regular payments are made.

Note: There are other costs added to your total monthly mortgage payment (local property taxes, homeowners insurance, HOA fees, etc.), but we’re only discussing principal and interest right now.

Every monthly payment is divided between interest and principal. In the early years of your loan, a larger chunk goes towards interest, with a smaller amount chipping away at your principal balance.

Example: For simplicity, let’s imagine your monthly Principal and Interest (P&I) payment is $1,000. Every loan is amortized over time, meaning monthly payments are split between principal and interest, reducing the loan balance over the span of your loan term. In the beginning, maybe $700 goes to interest and only $300 reduces your loan amount. The next month, your overall principal is reduced by $300 and the interest is now calculated upon your new, lower balance. That’s why early payoff is so powerful – it allows you to pay down the principal faster, reducing the overall interest you pay over time.

Related: Take a look at our amortization calculator.

Strategies for Early Mortgage Payoff

Pro Tip: Before changing your payment strategy, confirm if your mortgage servicer allows extra principal payments without penalties.

Alright, now that you’re armed with that knowledge, let’s explore some strategies to conquer your early mortgage pay-off strategy. Get ready, these may surprise you!

The Biweekly Mortgage Payment:

One popular way that some homeowners pay down their principal more quickly is to make biweekly payments. Instead of paying one monthly payment, you pay half the payment every 2 weeks.

Here’s a simple example to show the power of a biweekly payment. Let’s say you have a home loan for $400,000 with a 7% interest rate on a 30-year mortgage. In the example below you would pay $139,850.33 less in interest over the life of the loan with biweekly mortgage payments than if you made standard monthly payments!

There are online calculators available to determine these payments, or we can talk and run the numbers for you!

How Does a Biweekly Mortgage Payment Work?

Because a year has 52 weeks, this works out to 26 biweekly payments. This essentially allows you to make 13 full payments a year instead of 12. That one extra payment really compounds over time! When you pay your principal balance down faster, there’s less money to charge interest on, which lowers the amount of overall interest paid.

Make an Additional Principal Payment

Similar to biweekly payments, you can make an extra payment towards the principal each month. Even a small amount can make a big difference over time. Let’s revisit our example: $400,000 loan at 7% interest with a 30-year loan term. If you consistently put an extra $500 towards the principal each month, you could save a significant amount of money on interest payments in the long run.

There are online calculators available to determine these payments, or we can chat and run the numbers for you!

Important! Be sure to clearly communicate to your lender that any extra payments should be applied to the principal, not interest.

Rounding Up: Small Change, Big Impact

Don’t underestimate the power of small changes. Consider rounding up your monthly payment to the nearest hundred and applying the difference towards the principal. This might seem insignificant, but over the years, it can make a dent in your loan amount.

For example, rounding up a $1,950 payment to $2,000 translates to an extra $50 towards the principal each month. Over a 30-year loan term, that’s a total of an extra $18,000 you’ve put towards your loan principal and $18,000 less that interest has had to compound on!

Windfall Warrior:

Tax refunds, bonuses, or unexpected financial windfalls can be powerful tools for early mortgage payoff. Instead of spending them all, consider putting all or part of that money towards a lump sum payment on your mortgage principal.

Let’s say you receive a hefty $5,000 tax refund. Putting that entire amount towards your principal can significantly decrease your loan balance, reducing your future interest payments.

More Early Payoff Strategies for the Ambitious Homeowner

Should I Refinance My Mortgage to Pay it Off Faster?

Refinancing your mortgage can be a strategic move for early payoff. It involves replacing your existing loan with a new one, typically with a shorter term (like a 15-year loan) and ideally a lower interest rate. For example, if you were to refinance and get a 2% lower interest rate, you could save thousands of dollars on interest over the life of the loan.

Another benefit of a shorter loan term: With a 15-year loan, you’ll be putting more money towards your principal balance each month. This allows you to pay off your house much faster and save on overall interest costs. While your monthly payment will increase because the loan term is shorter, it won’t double (which is a common misconception with shorter term mortgages).

Important to consider: There are closing costs associated with refinancing a mortgage. These upfront fees can be significant. Let’s discuss this to make sure the long-term savings from a lower interest rate outweigh the upfront costs of refinancing.

Purchasing with a 15-Year Fixed-Rate Mortgage Option:

If it fits well into your budget, a 15-year fixed-rate mortgage might be an option when purchasing a new home. While the monthly payments will be higher than a 30-year loan, you’ll build equity much faster and save a ton on interest in the long run. Let’s discuss your options and we can give you advice on what would be best for you with your personal budget and finances.

Related: Check out our calculator to compare 2 mortgage options!

Should I pay off my mortgage early or Invest?

It might not all be about “can I pay down my mortgage early?”, a better question might be “should I?”

Cash Flow Flexibility: Putting extra money towards your mortgage might mean tightening your belt in other areas. Make sure you have a solid budget and an emergency fund saved up before diving in. Financial experts recommend 3-6 months’ worth of your expenses set aside for an emergency.
Investment Opportunities: The money you put towards early payoff could potentially generate a higher return if invested elsewhere. However, the stock market has inherent risks, while paying off your mortgage guarantees a return in the form of saved interest. Let’s discuss this and talk with your financial advisor to discuss where your bucks will make the most bang!

Ultimately, the decision depends on your financial goals and risk tolerance, but it is important to know all of your options!

Own Your Future, One Payment at a Time

Remember, paying off your mortgage early is a marathon, not a sprint. Be patient, stay disciplined, and celebrate your milestones along the way.

Let’s talk! We can run all kinds of scenarios for you on your current and potential mortgage options. We’ll see how funds can be allocated and the long-term impact of those choices. We’d love to help you calculate your individual situation!

NFM Lending is not a Financial Advisor, Tax Advisor or Credit Repair Company. You should consult with a Financial Advisor, Tax Advisor or Credit Repair Company to learn more. Refinancing an existing loan may result in the total finance charges being higher over the life of the loan.

Tax Day has come and gone, but while tax season isn’t on most people’s list of “favorite day of the year”, there’s a light at the end of the tunnel: your tax refund! The average refund in 2023 was $2,753, and with that kind of windfall, a tropical getaway might seem tempting. But before you jump on a plane, let’s explore how you can leverage your tax refund. A down payment for a first-time homebuyer, or long-term goals like financial freedom and building generational wealth!

Can I Use my Tax Refund for a Down Payment?

Are you dreaming of homeownership? Using your tax refund for a home purchase could lead to several advantages when owning your first home! Here are some benefits to a larger down payment on your loan:

Lower Interest Rate: A larger down payment can qualify a first-time homebuyer for a more favorable interest rate on your mortgage.
Smoother Pre-Approval Process: A bigger down payment strengthens your financial standing. With less “risk” for a lender to consider, this can make the pre-approval process smoother.
Avoiding PMI: With a down payment of at least 20% of the home’s value, you will avoid private mortgage insurance (PMI), which adds to your monthly mortgage payment.
Lower monthly payment: This one might be a no-brainer, but a larger down payment means a smaller loan amount. Smaller loan amount equals smaller monthly payment!

Related: Down-payment assistance programs can help first-time homebuyers get started and increase your down payment!

How Much do I Need for a Down Payment on my First Home?

Down payment requirements vary by the type of loan you want to have. Lower down payment doesn’t always mean a better loan program; there are multiple different factors to decide which loan program is right for you. The best mortgage for a first-time homebuyer is the loan that you’re most qualified for. That will depend on several factors, including your debt-to-income ratio, credit score, and yes…down payment.

We take all of these factors into consideration and help you strategize between your options and choose the right one to fit your current and future goals.

Mortgage Types and Minimum Down Payments

Related: Check out our mortgage calculators to do the down payment math yourself!

It’s easy to see how a first-time homebuyer can use a tax refund for a down payment and boost their homebuying strategy, but what about people that already own a home? Other than using the funds for home renovations, how can you use your refund to set yourself up for a better future?

Can I Pay Down Principal or Refi with a Tax refund?

We understand the allure of a vacation, but here’s the thing: by putting your tax refund towards your mortgage, you’re essentially doing two things at once: saving money on interest payments in the long run and building equity in your home faster.

Your tax refund may also be able to help you pay fees associated with refinancing to save you money by:

Lowering your interest rate
Shortening your loan term (from 30yr to 15yr)
Removing private mortgage insurance (PMI) that may have been required if your down payment wasn’t 20% or more of the cost of your home.

If you’ve decided to use your tax refund on your existing mortgage, there are a few ways to go about it:

1. Applying Tax Refund to Principal

A lump-sum payment directly to your principal balance shortens your loan term, builds equity, and ultimately saves you on interest. The more you pay down the principal, the more interest you save.

Keep in mind:

Ensure the payment goes towards your principal, not just a regular payment (principal + interest).
Check for prepayment penalties – some mortgages have them for early large payments. Review your loan terms and talk to your lender if needed.
Some lenders might offer “loan recasting,” which recalculates your remaining loan term with the lower principal balance, potentially reducing your monthly payments.

If you’re looking for options to lower your monthly payments specifically, refinancing might be a good fit if rates have lowered since you first bought your home.

2. Using a Tax Refund for Refinancing Fees

Refinancing your mortgage means replacing your existing loan with a new one, potentially with a lower interest rate, better terms, or you could take cash out for projects or major life changes. Here’s where your tax refund can come in handy – it can help cover the refinancing fees, including closing costs and appraisals.

Is refinancing a good option for me?

Lower Interest Rates: Perhaps interest rates have dropped since you first took out your mortgage, offering an opportunity to save.
Improved Credit Score: If your credit score has improved significantly since the last time you bought a home, you might qualify for a lower interest rate.
Debt Reduction: Have you paid off other debts since buying your home? A lower debt-to-income ratio can improve your eligibility for a better interest rate.

How much does a refinance cost?

While refinancing can save you money in the long run, there are upfront costs involved that you should consider. The Mortgage Reports estimates closing costs to range between 2-6% of your loan amount.

Here are some situations where refinancing might not be the best move for you:

Recently Closed Loan: Many lenders and loan programs have restrictions on how soon you can refinance after taking out a new mortgage. For almost everyone, you’ll want to wait 180 days before refinancing after your most recent loan began.
Minimal Interest Rate Drop: Aim for a rate reduction of at least 1.5-2% to make the refinancing process worthwhile compared to the cost.
Short-Term Ownership: If you plan to sell your home soon, refinancing might not make financial sense.
Longer Loan Term: Since a refinance is a new loan on the same property, you’ll be starting your loan term over again. A longer loan term might seem appealing for lower monthly payments, but it ultimately means paying more interest overall.

Not sure if refinancing is right for you? That’s why we’re here! Our team can do a complete cost analysis for you before you start the process, making sure you’re confident in your decision before taking the first step.

Boost Next Year’s Tax Refund

Let’s say your tax refund this year wasn’t quite enough to make a huge dent on your homeownership goals today. Don’t worry, there are still ways to optimize your tax situation for next year’s return, potentially putting more money back in your pocket to fuel your homeownership dreams.

Here are some key strategies to consider:

Tax Credits for Homeowners

Mortgage Credit Certificates (MCCs): These state-issued tax credits can be a game-changer, allowing you to claim a portion of your annual mortgage interest as a federal tax credit, effectively lowering your monthly payments.

Reach out to us to learn more about MCCs and eligibility requirements in your area!

Homeownership Tax Deductions

Mortgage Interest: You can typically deduct your mortgage interest payments up to a certain limit depending on your loan amount and filing status.
Mortgage Points: If you paid upfront points to lower your interest rate, you might be able to deduct them as well, subject to specific IRS qualifications.
Property Taxes: The property taxes you pay on your home are generally deductible. If you dedicate a specific space in your home exclusively for work purposes, you might be eligible to deduct a portion of your related expenses like utilities and internet.
Home Office Expenses: If you dedicate a specific space in your home exclusively for work purposes, you might be eligible to deduct a portion of your related expenses like utilities and internet.
Find out more here: The IRS published a great resource for homeowners in 2023 regarding what you can and cannot deduct, MCC credit and other information.

Keeping good records of your mortgage-related expenses is crucial. This includes your loan documents, receipts for points paid, and documentation of any home improvements you make.

It’s important to note that tax laws can be complex, and eligibility for deductions and credits can vary depending on your specific circumstances. Consulting with a tax professional is always recommended to ensure you’re taking advantage of all the benefits available to you and remaining compliant with federal tax law. We can help you explore these options, or get you in contact with a great Tax Advisor.

In Conclusion

By implementing these strategies and working with a trusted loan officer, you can turn your tax refund into a springboard for achieving your homeownership dreams. We’re here to guide you through every step of the journey, from maximizing your tax refund to navigating the mortgage process.

Get a no-cost pre-approval and explore down payment options for first-time homebuyers – click the Apply Now button above!

* NFM Lending is not a Financial Advisor, Tax Advisor or Credit Repair Company. You should consult with a Financial Advisor, Tax Advisor or Credit Repair Company to learn more. The pre-approval may be issued before or after a home is found. A pre-approval is an initial verification that the buyer has the income and assets to afford a home up to a certain amount. This means we have pulled credit, collected documents, verified assets, submitted the file to processing and underwriting, ordered verification of rent and employment, completed an analysis of credit, debt ratio and assets, and issued the pre-approval. The pre-approval is contingent upon no changes to financials and property approval/appraisal.

There are many ways to prepare to buy a home, but a major one is to ensure your finances are completely sound. A lender is going to request many financial documents, one of which will be your bank statements. While it might seem like an insignificant request compared to your taxes or paystubs, your bank statements are vital to get your loan approved. So, what do mortgage lenders review on bank statements?

The simple explanation is that a mortgage lender needs to ensure you have sufficient funds to cover the down payment, closing costs, and some might even want to see if you have enough reserves to cover the first few mortgage payments. It is paramount these funds belong to you and they have been in your account for a while. Underwriters are thoroughly trained to pinpoint all unacceptable sources of funds, hidden debts and other red flags by analyzing your bank statements. Before you begin the homebuying process, it is best to ensure you don’t have anything questionable on your statements that will raise a red flag.

Applying for a loan is not something to take lightly. Your lender is going to inspect your finances to ensure you have the money you say you do, and that the money is really yours. It is best to analyze your finances from the perspective of a lender a few months before applying for a loan to ensure you reduce the risk of having any red flags. This will also give you time to gather the documentation or explanations you might need in case you think something will catch the lender’s eye. Keep it simple both before and during the application process by not adding or taking out any unnecessary funds, and to help ensure you have a smooth experience.

Recently, we talked about the third step in the home purchase process: finding your home. Once you have found a home you want to buy, the next step is to apply for your home loan. This is the time to assemble and submit all of your financial information and documentation to your lender for evaluation. Your Mortgage Loan Originator will help you figure out what documentation you need to provide, and ask you questions about your financing, so that you can submit the best possible loan application.

Ensuring a Successful Loan Application
Once it’s time to apply for your loan, your Mortgage Loan Originator will request the following from you:

Jennifer Cook, an NFM Lending Branch Manager in Louisiana, says that the most important thing to remember when applying for a mortgage loan is to be completely honest with your Mortgage Loan Originator.

“Things like child support, side business income or loss, etc., that are not disclosed upfront can create issues down the road. It is critical to provide all requested documentation in a timely fashion at application.”

Navigating the Loan Application Process
The process of applying for a loan may seem complex and even overwhelming. According to Jennifer, one of the keys to a successful loan application is to work with reliable professionals that you trust.

“Make sure you are working with a lender and a real estate agent who you know and trust. Many people are seduced by super low rates advertised online, but when it comes down to it, a loan originator who gets all their leads via the internet or an 800 # doesn’t really care if you settle or not. They have no relationship with you personally or your agent.”

Working with knowledgeable real estate and mortgage professionals will help you greatly during the home purchase process. Your Mortgage Loan Originator can help you navigate what may seem like a confusing process, and help you make sure your loan has the best possible chance of being approved.

When you submit an application for a home loan, one factor a lender will take into consideration is your employment history. A recent job change, a gap in work history, or a change in pay structure can all affect the home loan you qualify for. Lee Killen, a Branch Manager at NFM Lending, answered some questions about how your job history can affect your ability to qualify for a loan.

How can a recent job change impact a borrower’s eligibility for a home loan?
A recent job switch or position change at one’s current company can impact a Borrower’s eligibility for a home loan either positively or negatively, depending on the pay rate and type of pay being received (hourly, salary, or commission). The easiest transition is moving from a job in the same field with an increase in salary. The most detrimental transition when trying to purchase a house is moving from a salaried position, to a position with a large portion of your pay coming from commission. You will need to document two years’ history of commission or bonus income before it can be used to qualify for a home loan.

In what other ways do job history and pay structure affect mortgage eligibility?
A lender’s main responsibility when lending money is making sure the Borrower has the ability to repay. A large part of this process is verifying job and income stability. Your lender will verify a minimum of two years’ work and income history through tax returns, W2s, and pay stubs, along with a verification of employment from each employer over the last two years. Self-employed income and unreimbursed business expenses will also be reviewed, and can negatively affect your ability to qualify for a mortgage. Make sure your mortgage professional has received and reviewed this documentation prior to entering into a purchase transaction. Please note that a major change in pay structure can also affect your ability to qualify. Changing from a salaried position to a commission-based pay structure could disqualify you for a loan if the change took place within the last two years. Commission or bonus income also requires a full two-year history.

What advice do you have for someone who has switched jobs recently, or is thinking of doing so, and also wants to apply for a mortgage?
If you are thinking of switching jobs and want to qualify for a home mortgage in the near future, it is recommended that you consult with a mortgage professional who can advise you as to whether a job move will negatively affect your ability to qualify for a mortgage. If you have already changed jobs, make sure you explain the reason for the change to your mortgage professional. This will need to be addressed in the financing process. Position and income changes are the key things lenders will look at. If you are staying in the same line of work and your income is increasing, this is typically not a problem.

When you are ready to purchase a home, be sure to talk to your lender and find out how any income or job changes will affect your loan eligibility. By staying prepared and working with a reputable lender, you can avoid stress and take the steps necessary to get qualified for a mortgage. For more information, or to get started with the pre-qualification process, click here to contact Lee Killen or one of our licensed Mortgage Loan Originators!

Fixed-rate mortgages are the most common type of mortgage selected by homeowners today. You are able to lock into a set interest rate which results in monthly mortgage payments that remain the same for the entire life of the loan. According to Warren Buffet, “the smart way to own a home has three elements: a fixed mortgage, affordable payments, and long-term hold.”

A fixed-rate mortgage (FRM) is a type of mortgage with a specific rate term. A fixed-rate mortgage has a fixed interest rate for the entire length of the mortgage term. These mortgages are typically available in 5 year increments between 10 and 30 year terms. The 30-year fixed rate mortgage is the most common type of mortgage people take out.

If you have any questions regarding what a fixed-rate mortgage is and how it can benefit you, please click here to contact a licensed Mortgaged Loan Originator.