It’s the American Dream to own a home free and clear. Some loans have a prepayment penalty, though, making it hard to pay a loan off early. Luckily, FHA loans are not among them. You are free to pay the loan off at any time. Now the bigger question is, should you pay it off early?
How Much Will You Save Without the Prepayment Penalty?
You stand to save significant amounts of money if you pay your FHA loan off early. You won’t save on the principal – you have to pay that back. But you will save on the interest. The more you pay back early, the less interest you’ll pay. Without a prepayment penalty, it just makes sense.
How much you’ll save depends on how fast you pay down your loan. It also depends on how you pay it down. Some people pay a little bit extra here and there. Others are more methodical about it, figuring out how to cut off at least 10 years off their loan.
No matter how much you pay, just know that you’ll save money in the end. Even cutting a year or two off of the end of your loan saves you money.
How to Pay Your FHA Loan Off Early
Now comes the hard part. How do you actually pay your loan off early? There is no required method. It’s up to what you can afford. Here are a few ways you can make it reality for you:
- Figure out what how much extra money you can budget into your only payments. Even $100 can make a difference. That’s $1,200 per year that comes directly off your principal. Make consistent extra payments and watch your principal drop.
- Make one extra payment per year. If you prefer to make one lump sum payment, save up to make an extra principal and interest payment each year. This can knock several years off your loan.
- Make lump sum payments when you have it. Maybe you have a few times a year that you come into some money. Rather than spending it on frivolous things, put it towards your mortgage. Knocking a few thousand dollars off your principle could save you thousands in interest down the road.
Should You Pay Off Your Loan Early?
Now comes the question, does it make sense to pay your loan off early? It depends on your situation. If you don’t plan to live in your home very long, it might not make sense. If the home doesn’t appreciate in value much, paying more towards the principal won’t pay off.
On the other hand, if this is your “forever” home, paying the mortgage down faster can help. The longer you borrow the money, the more interest you pay. If you know you’ll pay it off within 5 years, you aren’t going to save much. If, however, you know you’ll borrow the money for the next 30 years or close to it, you’ll benefit by paying the balance down.
The Best Way to Pay Your FHA Loan Off Faster
If you aren’t aware of the FHA Streamline Refinance program, familiarize yourself with it! This can be your best chance at paying your loan off faster.
In short, the program allows you to refinance without verifying any income, assets, or the value of your home. You don’t even have to have a specific credit score. The biggest factor is your housing payment history. You must have made your last 12 payments on time. That’s it!
In exchange for a positive housing history, you can refinance into a lower interest rate. But, if you can afford it, you can even refinance into a shorter term. Let’s say you have a 30-year loan and you have 25 years left on it. Refinancing back into a 30-year term doesn’t make a lot of sense. But, refinancing into a 20 or 15-year term can help tremendously. You’ll benefit with a lower interest rate and by paying the loan off faster.
The FHA Streamline loan does require you to pay the funding fee again. That might not sound like a lot of fun, but you might save a bit. If you refinance your loan within 3 years of taking out your original FHA loan, you’ll save money.
The FHA provides a refund of the upfront MIP you paid on your original loan. The amount you receive depends on when you refinanced. The longer you wait after originating the loan, the less you receive back. The refunds start during the 7th month, where you can receive as much as 70% of your upfront MIP back. The amount decreases from there.
Since the FHA doesn’t charge a prepayment penalty, it may pay to pay your FHA loan off early. If you know you’ll be in your home for the long-term, start making extra payments when you can. This will help get you on the right track for paying off your loan and saving thousands of dollars on interest.