Can Home Loans Be Paid Off Early?

Consider this: You’re a happy homeowner, paying your mortgage each month. But you couldn’t help but wonder — could you pay off your home loan faster?

The short answer: Yes, you can pay off your home loan early. But be sure to read the fine print.

Each month, your mortgage payment is comprised of two parts: The amount that you are paying toward the principal, or the amount of the loan, and the amount that you are paying in interest to your lender. The money you put toward the principal builds home equity and reduces the amount you owe on the loan. Interest, which is what your lender charges you for borrowing the money, does not contribute to equity or your principal balance.

Paying off your loan early could help you save on interest. But there could be penalties associated with prepayment. Read on.

How do lenders charge interest?

Using a standard formula, lenders will  “calculate the monthly payment that allows for just the right amount to go to interest vs. principal in order to precisely pay off the loan at the end of the term,” the CFPB says. You’ll owe more interest at the beginning of your repayment process, because the balance of your loan is still high. As you pay down the principal, you’ll begin to owe less in interest. If you have a conventional fixed-rate mortgage, the total amount you pay each month won’t change — it’s just that over time more of that payment will go toward the principal, rather than the interest.

What are prepayment penalties?

Before you start adding to your monthly payments to pay off early, do your research. You could have agreed to a prepayment penalty when you closed on your home loan, so make sure to check your loan agreement and consider the potential expenses as you decide whether to pay off your home loan early. Whether you are subject to a prepayment penalty depends on what type of loan you have and its terms. Not all mortgages have them — but some do, and they can be hefty.

Is there a way to calculate all of this?

Paying a little extra each month, especially toward the principal, could help cut down on the interest you pay and get you to your goal of paying off your mortgage faster. To crunch the numbers and see how Mr. Cooper could help you fast-track your loan payoff, use our mortgage payoff calculator.