6 Terrible Mistakes To Avoid When Paying Off Your Mortgage Faster

An empty mortgage application form with house key.
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On the face of it, paying off your mortgage faster sounds like a great idea. You can shorten the time frame that you have to make payments and you’ll save potentially tens of thousands of dollars of interest along the way.

But there are both good ways and bad ways to pay off a mortgage early. If you don’t approach your mortgage prepayment in the right way, you could end up paying much more than you thought, and could potentially even leave yourself in a worse financial situation.

Here are the major missteps to avoid if you’re planning to pay off your mortgage faster.

Putting All of Your Money Into Your Mortgage

If you funnel all available cash into your mortgage, you could leave yourself on precarious financial ground. Imagine a scenario in which you drop every dollar you can into your mortgage, and then the unforeseen happens: You get into a car crash, you lose your job, you have a major home repair or you’re faced with any of countless other emergencies.

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With no cash reserves, you’ll immediately fall into debt as you’re forced to borrow to make those payments. In a worst-case scenario, you might not be able to keep up on your ongoing mortgage payments and default, which could eventually lead to foreclosure. If you’re planning on paying off your mortgage faster, be sure that you both have an emergency fund and that you aren’t siphoning off every last dollar of your monthly cash flow.

Failing To Apply Your Extra Payments to Principal

The best way to pay down a mortgage fast is to apply extra payments directly to your principal. This will immediately reduce the amount of interest you’re paying on your loan every month — albeit just slightly — and it will drag down your principal balance faster.

But if you don’t specify to your mortgage lender that your extra payments are for principal only, it may very well consider those payments to be additional regular payments — in other words, payments are a combination of principal and interest, rather than principal only. This will slow down the payoff of your mortgage.

Using Debt or Other Loans To Pay Off Your Mortgage

In most cases, your mortgage loan interest rate will be among the lowest that you can get on any type of debt. If you think it might be a good idea to take out a personal loan or get an advance from your credit card to pay down your mortgage faster, think again.

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Typically, those interest rates will be much higher than the rate on your mortgage, meaning you’re simply transferring your mortgage debt from a low-interest loan to a high-interest loan. This is particularly true if you’re considering using a credit card.

Not Considering Your Opportunity Cost

Any money that you divert to your mortgage is by definition unavailable to be used on other investments. This could actually be hindering your financial progress rather than helping it.

Imagine, for example, that you have a 5% mortgage and are thinking of putting a lump sum of $20,000 toward your principal balance. While you will save on paying the 5% interest, you might be better off tucking that money away into an S&P 500 index fund and sitting on it for the 30 years of your mortgage. If you can earn the long-term average of the stock market on that money, which is about 10% per year, you could potentially earn a lot more on your investment than you save by paying off your 5% loan.

Of course, this option entails taking on some risk as well, so be sure to speak with a financial advisor regarding the pros and cons.

Refinancing Into a Longer Loan

If you can refinance into a lower-rate mortgage, it’s usually a good option. For example, if you took out a 6% mortgage and rates fell back to the 3% range, you could save a bundle both in terms of your monthly payment and your total interest paid.

But be leery of refinancing into a brand-new 30-year mortgage, especially if you’ve already been paying your loan for a decade or more. Although your monthly payments will go down, your total interest might actually end up being higher, since you’ll be paying for an additional 10 years. Ideally, you’ll want to refinance into a loan term that matches the duration of your existing mortgage.

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Triggering a Prepayment Penalty

These days, most mortgage lenders don’t charge a prepayment penalty if you pay off your mortgage early. But some might. Before you consider paying off your loan early — and ideally, before you even take out the loan in the first place — check to make sure you won’t trigger a penalty for paying off your loan early.

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About the Author

After earning a B.A. in English with a Specialization in Business from UCLA, John Csiszar worked in the financial services industry as a registered representative for 18 years. Along the way, Csiszar earned both Certified Financial Planner and Registered Investment Adviser designations, in addition to being licensed as a life agent, while working for both a major Wall Street wirehouse and for his own investment advisory firm. During his time as an advisor, Csiszar managed over $100 million in client assets while providing individualized investment plans for hundreds of clients.
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