Four ways to pay off your mortgage early

If you can afford it, it might be simple to pay off your mortgage earlier. But should you?

That is a complicated question.

Homeowners with low mortgage rates may be better off putting extra money in a Roth IRA or 401(k), both of which might offer a higher return than paying off the mortgage.

Then there's the college-aid factor. If you are applying for need-based aid for your kids, that home equity could count against you with some colleges because some institutions view equity as money in the bank.

If, after those caveats, you want to pay off your mortgage early, here are four ways to make it happen.

You can pay off the mortgage in another 15 years by refinancing into a 15-year mortgage.

Let's say you have a 30-year fixed-rate mortgage for $200,000 at 4.5 percent. Then, five years later, you can refinance into a 15-year loan at 4 percent. Doing so pays off the mortgage 10 years earlier and saves more than $60,000 (if you exclude closing costs on the refi).

Refinancing isn't quick or free. It requires filling out the application, providing documentation and having an appraiser visit. There are closing costs.

And even with a lower interest rate, that quicker payoff means higher monthly payments. And this method is a lot less flexible.

If you decide that you don't have the extra money one month to put toward the mortgage, you are locked in anyway.

Unless the new interest rate is lower than the old rate, there is no point in refinancing.

Without a lower rate, you will get all the same benefits (and none of the extra costs) by just increasing your payment a sufficient amount.

The result: You make the equivalent of 13 payments in 12 months.

Let's say you have a $200,000 mortgage at 4.5 percent. After five years of making the minimum payments, you add an extra 1/12 of a month's principal and interest to each monthly payment. Doing so pays off the mortgage three years and three months earlier and saves more than $18,000 interest.

Before you make anything beyond the regular payment, call your mortgage servicer and find out exactly what you need to do so that your extra payments will be correctly applied to your loan.

Let them know you want to pay "more aggressively" and ask the best ways to do that.

Some servicers may require a note with the extra money or directions on the notation line of the check.

Instead of paying a little more each month, make one extra monthly payment each year.

One way to do this is to save 1/12 of a payment every month, and then make an extra payment after every 12 months. This gives you the flexibility to use the extra savings for something else if a more pressing expense arises.

Let's say you do this starting the first month after getting a 30-year mortgage for $200,000 at 4.5 percent. That would save more than $27,000 interest, and you would pay off the mortgage four years and three months earlier.

Get a bonus? A tax refund? An unexpected windfall?

However it ends up in your hands, you can funnel some or all of your newfound money toward your mortgage.

Doing so pays off the mortgage two years and four months earlier, and saves more than $19,000 in interest.

The upside: You are paying extra only when you are flush. And those additional payments toward the principal will cut the total interest on your loan.

The downside: It's irregular, so it's hard to predict the mortgage payoff date. If you throw too much at the mortgage, you won't have money for other needs.