How we plan to pay off a larger mortgage

Homeowners are reluctant to sell right now, and for good reason. On the one hand, taking advantage of the steep increase in home values—which are up by 47% from 2020—means you can net a sweet profit when you sell. But it also means dealing with expensive interest rates and high home prices if you need to buy a new property. 

My husband and I found ourselves in this scenario in 2024. Selling our condo would provide enough money to make a 20% down payment on a larger single-family house, but we were pretty nervous about our prospects in the new housing market. 

We decided to take the plunge, and our mortgage payment more than doubled in the process, going from $2,150 to $4,650. We can afford the larger payment and we’re happy we gained more privacy, more space and the freedom to customize our property. 

But it’s always important to plan for budget changes and even save money when possible. So before taking on the mortgage, my husband and I mapped out several ways to deal with the larger payments and save on interest costs. We also learned about other strategies that we’re not using at the moment, but other homeowners could look into. Here’s what we found out, starting with the easiest approach.

Biweekly mortgage payments

This strategy is one of the easiest ways to save on interest costs and pay off your home loan ahead of schedule. It involves splitting your monthly mortgage payment in half, then making that payment every two weeks instead of sending the full payment once a month. 

You’ll end up making 13 full payments over the course of the year instead of 12. And when you make more frequent payments toward the loan, interest compounds on a smaller principal balance. You also build equity faster. 

Setting up biweekly payments was quick and easy for us. I made a 10-minute phone call to our loan servicer, signed and submitted a form, and paid a one-time $75 fee. If we stick to the biweekly payment schedule for the entire loan term, we’ll save $144,080.38 in interest and will pay off the loan about four and a half years early.

Refinance when rates drop

We were lucky enough to close on our first mortgage with a 2.75% interest rate. But since rates have shot up in the last few years, we had to accept 6.49% this time around. So we plan to refinance as soon as rates settle—which could happen in the near future.

In its October 2024 Economic and Housing Market Outlook, the National Association of Realtors predicts the average 30-year fixed mortgage rate will fall to 5.8% by the end of next year. 

Of course, “There is no guarantee that rates will go down,” said Jennifer Beeston, a branch manager and SVP of mortgage lending at Guaranteed Rate Mortgage. With this unknown variable, Beeston said we should make sure we can afford the monthly payment with the current rate. (We can.)

We’re also planning to potentially use our current mortgage originator in the refinance, which is waiving closing costs on a new loan. However, Beeston cautions, lenders that offer no-closing-cost refinances usually increase your interest rate to recoup their costs. 

So we plan to get quotes from multiple lenders and negotiate when it’s time to refinance. But we’re also keeping in mind that a no-closing-cost refinance can still put us ahead as long as we’re lowering our current rate. 

Rent out a room

Renting out a room or any space on your property can be a great way to offset a portion of your monthly mortgage payment. This strategy, known as house hacking, “has become all the rage,” said Nicole Rueth, a branch manager and SVP at Movement Mortgage.

We see this as a good long-term plan, since our new house comes with a completely renovated basement and our town is a desirable location with loads of amenities. We plan to direct the rent money—around $1,500 per month—as an extra payment toward the mortgage loan principal. If we faithfully make the extra payment, it should save us $436,575 in total interest and shave 15 years off the repayment term. 

If you’re thinking about leveraging your own property somehow, Rueth suggests researching rental prices in your area and understanding the tax implications at your tax bracket. It’s also important to “make sure you’re comfortable sharing spaces and have a clear agreement in place to avoid any misunderstandings,” she said. 

Get a rate buydown

A rate buydown allows you to temporarily lower the interest rate on your mortgage in exchange for making an upfront deposit. The goal is to help you ease into your mortgage payments, especially during periods of high interest rates. 

For instance, if you get a “2-1 buydown,” the interest rate is lowered by 2 percentage points in the first year and 1 percentage point in the second year. The rate then rises to the regular, permanent rate in the third year. 

The deposit you make for the buydown can be pretty expensive. A 2-1 buydown on a $500,000 home with a 6.5% permanent rate, for example, would cost about $9,100 upfront. Your loan servicer keeps the deposit in a bank account and withdraws money each month to subsidize your mortgage payment. 

While you temporarily reduce your payments, this strategy only saves you money if someone else (like your lender or the seller) covers the upfront deposit. 

“Otherwise, you’re actually better off paying a higher interest rate and keeping your money in the bank,” said Melissa Cohn, the regional vice president of William Raveis Mortgage. “Then dribble out money from your savings to help you carry the larger payment in the beginning.” 

With our home loan, no one paid for a rate buydown on our behalf, so the savings won’t apply to our situation. But you can keep this option in mind for yourself. 

Recast the mortgage

Recasting a mortgage loan is one way to lower your monthly payments and pay less interest without refinancing. 

The strategy involves putting a lump sum (such as $20,000) toward your loan principal and asking your loan servicer to recalculate the remaining payment schedule based on the new, lower balance. 

Borrowers often do a recast when they don’t want to change their mortgage rate and they have a large amount of cash on hand. It can also make sense when you’re several years into your repayment term, since your balance will be much smaller compared to when you originally took out the loan. This can help further shrink your new monthly payments.

If you’re considering a mortgage recast, you’ll need to discuss it with your loan servicer in advance. Some companies won’t recast loans, and ones that do may set a minimum lump-sum payment and charge a one-time fee.

When will we pay off the mortgage?

Though our current repayment term is 30 years, we’d like to pay off the debt in half that time. It’s hard to pinpoint a specific date when we’re not sure where mortgage rates will go and whether we’ll always have extra funds to put toward the loan. 

Some options, like making biweekly mortgage payments and putting rental money toward the loan principal, can help with this goal right now. Other options, like refinancing and recasting, may come into play at some point. 

But together, these strategies will help lower our interest costs, put less of a burden on our budget and help us get out of debt faster.