There are 3 common strategies for paying off your mortgage early — here's how to decide which is best for you (2024)

Many homeowners dream of having a paid-off home and achieving financial freedom sooner, but they are often uncertain about how to make it happen. Homeowners typically make their normal monthly mortgage payments and expect to pay off their homes over 30 years. However, there are ways to pay it off even faster using three proven strategies.

Ahead, CNBC Select covers what the three early mortgage payoff strategies are, the pros and cons of each one and which method is best for your situation.

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When you refinance your home, you can pay off your home faster by replacing your 30-year mortgage with one that's a shorter term. With a mortgage refinance, you can shorten your loan term by selecting a 20, 15, or even a 10-year loan.

By selecting a shorter term, your monthly payment may increase. However, many homeowners are earning more today than when they first bought their homes. With this higher income, you may be able to easily afford a small increase to your monthly payment.

Refinancing your mortgage may lower the interest rate or eliminate mortgage insurance premiums. By reducing interest charges and getting rid of mortgage insurance premiums, these savings can offset the increase in your monthly payment. One of the best mortgage lenders for refinancing is Rocket Mortgage due to its flexible loan repayment terms, fast approval process and lower credit score requirements.

Refinancing your mortgage can be costly and time-consuming. A potentially simpler way for homeowners to pay off their homes quicker and save on interest charges is by making extra payments. There are three primary methods for making extra payments – pay extra each month, make a lump sum payment or switch to bi-weekly payments.

• Paying extra each month. When making your payments, add extra money to pay down your balance a little bit at a time. This not only lowers your overall balance but also reduces your interest charges and shortens the loan term.
• Making lump sum payments. Some borrowers make lump-sum payments to reduce their loan balance in big chunks. You'll pay down your loan by taking bonuses, tax refunds and other large sums of money to reduce the balance and interest charged.
• Converting to bi-weekly payments. The first two methods require you to pay extra manually, but this one locks you into a quicker mortgage payoff. Many banks allow borrowers to convert to a bi-weekly payment option for a small fee. Making payments every two weeks results in making one extra monthly payment each year.

All three options enable borrowers to repay their existing loans quicker without paying mortgage refinance costs. There are no fees for making extra payments manually, though you should watch out for potential prepayment penalties. Additionally, some banks charge a fee for converting payments to bi-weekly versus monthly. Do the math to ensure the benefits outweigh the costs.

When you pay extra towards your mortgage, the return on that money is roughly equivalent to your mortgage interest rate. Generally, mortgage interest rates are substantially less than investors can earn on their investments. By investing in a brokerage account or high-yield savings account instead, homeowners may be able to pay off their homes even faster.

This strategy involves taking your extra payments and investing them instead. By creating this "mortgage payoff fund," you retain flexibility with your money and may be able to earn a higher rate of return. With the money in a brokerage or savings account, it remains available in case of an emergency or if you decide to spend it elsewhere.

Investing in a brokerage account involves risks. Although the stock market historically returns about 10%, annual returns fluctuate each year. Your portfolio may be down when you want to withdraw money to pay off your mortgage. Additionally, you may owe taxes on the capital gains and dividends each year and when you sell shares to pay off your mortgage. If you follow this strategy, be prepared to hold onto your investments through the ups and downs of the market.

If you prefer no risk, you canpark your cashin ahigh-yield savings account. There are many high-yield savings accounts, such as LendingClub High-Yield Savings and UFB Secure Savings, that currently earn over 4.00% APY. And because they are generally FDIC-insuredup to $250,000, they are virtually risk-free. Government bonds, likeI-Bondsand Treasury bonds, are also considered low-risk investments because they are backed by the U.S. government.

With multiple options to pay off your mortgage faster, how do you know which one is right for you?

• Mortgage refinancing locks in your payment schedule and typically requires mortgage closing costs. Additionally, current interest rates impact whether or not this is a wise choice. This method is best for people with good credit who want to lock in a monthly payment that puts them on the path of an early mortgage payoff.
• Paying extra on your mortgage is simple to do without incurring extra fees. However, you must remember to make the additional payments each month or when you receive extra money. Paying extra is best for borrowers with variable incomes or lower credit scores. They're not locked into a higher monthly payment and can pay more when they are able to.
• Investing in a "mortgage payoff fund" often yields higher returns and provides flexibility, but you may owe taxes on the money you make. This strategy is best for experienced investors who won't panic if the market takes a short-term dip.

Following the traditional 30-year mortgage payoff schedule keeps homeowners in debt and paying large sums of interest. These strategies help borrowers pay off their homes faster and reduce the interest they'll pay. After they own their home free and clear, the savings can be used to meet other financial goals, such as retirement, paying for a child's college education or achieving a debt-free life.

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