Should You Pay Off Your Mortgage Early?

Paying off your mortgage early can be a relief. Without a mortgage payment, you’ll notice more room in your monthly budget. However, despite the feeling of freedom that often comes with an early mortgage payoff, it doesn’t necessarily mean you should pursue this financial path.

Let’s explore the mechanics of how to pay off your mortgage early, and the advantages and disadvantages to be aware of.

How Paying Off Your Mortgage Early Works

When you make your monthly mortgage payment, a portion of the funds goes toward your principal, and the rest goes toward interest. Throughout your loan term, the amount put toward your principal balance increases and the amount put toward interest decreases by a process known as amortization.

You only make progress with paying off your loan by decreasing the principal owed. By making extra principal payments, you can knock years off your loan term, and you’ll likely save a significant amount of money in mortgage interest.

For example, let’s say you borrow $400,000 with a 30-year mortgage at a 7% fixed interest rate to purchase a home. In this scenario, you would pay $447,261 in total interest. But if you put an extra $200 per month toward your mortgage, you’d pay $327,861 in total interest instead. That’s a savings of $119,400 over the life of the loan.

If you want to pay off your mortgage early, it’s important to make sure any extra payments are going toward the principal. Without you specifying what the extra payments are for, the lender might put them toward interest, which won’t accelerate your loan repayment.

Ways to pay off your mortgage early

If you want to pay off your mortgage early, here are some strategies to make that happen:

• Make an extra payment per year. If you have enough flexibility in your budget, consider making an extra mortgage payment each year. These funds could come from a tax return or earnings from a side hustle.
• Make biweekly mortgage payments. Making biweekly payments means paying half of your monthly mortgage payment every two weeks. This results in an extra month’s worth of payments made over the course of a year.
• Refinance to a shorter loan term. A shorter loan term will help you eliminate your mortgage debt faster, without having to voluntarily make extra payments. Before you pursue this option, make sure the refinancing costs are worth it.
• Pay off your balance in cash. If you have enough saved up or come across a financial windfall, you could pay a lump sum to eliminate your mortgage in one fell swoop. Just make sure you have enough funds left over for your emergency savings.

What Is a Prepayment Penalty?

Some mortgage lenders charge a prepayment penalty when you pay off your mortgage early. If there’s a prepayment penalty tied to your loan, don’t move forward with an accelerated repayment schedule until you understand the costs.

If you took out your mortgage after January 2014 and you pay it off within the first two years of securing the loan, lenders are allowed to charge you 2% of the remaining principal. If you pay it off before the third year of your loan term is over, lenders can charge a fee worth 1% of the remaining principal.

“Prepayment penalties are designed to protect lenders from having their money paid back early, as they have already budgeted for a certain amount of interest payments over the life of the loan,” says Michael Branson, CEO of All Reverse Mortgage Inc. in Orange, California. “But if you calculate that the penalties, compared to the extra interest payments, make it more worthwhile to pay the loan off early, then you can do exactly that.”

The best way to deal with a prepayment penalty is to learn the rules of your mortgage. Read the fine print of your closing disclosure to determine if your lender imposes a prepayment penalty, and when it applies. If your mortgage has a prepayment penalty attached, it might only be in effect for the first few years of the loan.

Factors To Consider Before Paying Off Your Mortgage Early

While your mortgage is a significant part of your financial situation, it’s not the only factor to consider. Before you pay off your mortgage early, it’s important to look at your overall financial picture.

Your money may be put to better use elsewhere

Paying off your mortgage early can take a significant amount of money. It may be more worthwhile to put your money toward other purposes, such as investing.

For example, the S&P 500 has returned an average of 10% per year since 1926.[1] Of course, past performance isn’t a guarantee of future success. But if you want to invest and save for retirement, paying off your mortgage early could delay those plans.

Other debts may be a priority

Not all debts cost the same. Mortgages tend to have lower interest rates than other kinds of debt. For example, credit cards tend to have much higher interest rates. Paying off high-interest debts first can be a more efficient financial strategy.

You may drain your savings

A key part of financial stability is your liquid assets, which are cash and assets that can be easily converted to cash. If you use all your spare cash to pay off your mortgage, you’ll have less money for any unexpected expenses that life throws your way.

Before you start paying down your mortgage ahead of schedule, consider building an emergency fund. Once you can cover several months’ worth of expenses if needed, you’ll be in a safer position to pay down your mortgage.

Pros and Cons of Paying Off Your Mortgage Early

Here’s a closer look at the pros and cons of paying off your mortgage early.

Advantages of paying off your mortgage early

These are some benefits of paying off your mortgage early:

• You eliminate your monthly mortgage payment. Your mortgage payment might take a big bite out of your monthly budget. Once you’re free of this debt obligation, you may have more money to put toward other ventures or investments.
• You save money on interest. By paying off your mortgage ahead of schedule, you can potentially save thousands in interest payments. For example, if you make biweekly payments on a 30-year mortgage, you could eliminate five to six years of interest payments.
• You’ll have all your equity to access. Once you’ve paid off your mortgage, you’ll have access to all the equity in your home. This can be useful if you want to tap into it later, such as with a home equity line of credit.
• You may have greater peace of mind. A significant reason for paying off your mortgage early is the feeling of financial security. For example, if you lose your job or the economy enters a recession, you’ll have one less debt to worry about.

Disadvantages of paying off your mortgage early

Here are some downsides to paying off your mortgage early:

• You reduce your liquid assets. The equity you build in your home is valuable, but it’s not liquid. If you have an unexpected expense pop up, you won’t have the funds on hand to immediately pay for it.
• You can’t deduct mortgage interest on your taxes. Homeowners can write off their mortgage interest payments on their tax returns. Without a mortgage payment, you won’t have the opportunity to claim this tax benefit.
• You may have to pay a prepayment penalty. If your lender will charge you a prepayment penalty, you should do the math to determine if paying off your mortgage early is worth it.
• You’ll have less to save for other financial goals. You may have other financial goals, such as investing, retiring early, or paying off additional debts. If you choose to pay off your home early, you’ll have less money to put toward these other goals.

7 Steps To Pay Off Your Mortgage Early

If you’ve decided that you want to pay off your mortgage early, here’s a step-by-step guide:

1. Contact your lender and ask for a payoff letter. A payoff letter will let you know how much of your mortgage you still need to pay. It includes any prepayment penalties, additional fees, interest owed, and the outstanding balance. By requesting a payoff letter from your lender, you’ll let it know you want to pay off your mortgage early.
2. Pay off your mortgage. You’ll pay the amount outlined in the payoff letter through a wire transfer or by other approved means.
3. Send the mortgage discharge to your county’s registry of deeds. A mortgage discharge is a letter that your lender signs to show proof you’ve paid off your mortgage. You’ll need to send it to the registry of deeds in your county to show you’ve cleared the title to your home.
4. Seek refunds. You may be entitled to a refund from your escrow account.
5. Cancel automatic mortgage payments. This will help ensure you don’t send any unnecessary payments to your lender.
6. Contact your tax collector and insurance company. Sometimes tax statements or insurance bills are sent to your lender. Now that you don’t have a lender anymore, you’ll want to let your tax collector and insurance company know they can mail directly to you.
7. Continue saving for the ongoing costs of homeownership. Just because your mortgage is paid off doesn’t mean you’re free from property taxes or homeowners insurance. Make sure to still leave room in your budget for these costs.

When Paying Off Your Mortgage Early Makes Sense

You aren’t obligated to pay off your mortgage early. However, there are several situations where it can be worth it.

For example, if you have a high mortgage rate, you may determine that the savings on interest payments makes paying off your mortgage early a worthwhile decision. If you won’t be charged a prepayment penalty, it can make even more sense.

Ultimately, the most important thing to consider before paying off your mortgage early is if you have the funds for it. If you have robust savings and a goal to own your home outright, then becoming debt-free ahead of schedule can be worth the peace of mind.           

When Paying Off Your Mortgage Early Doesn’t Make Sense

If you have credit card debt or don’t have an adequate emergency fund, then paying off your mortgage early might not make sense. Instead, consider paying down your high-interest debt and building up your savings before working toward this other goal.

Additionally, take a look at the interest rate attached to your mortgage. If you were lucky enough to lock in an interest rate that was low, then it might make sense to prioritize other financial milestones. For example, you might choose to invest for retirement instead of paying off your low-interest mortgage debt.

Is Paying Off Your Mortgage Right for You?

Paying off a mortgage early isn’t the most efficient financial strategy for everyone. But it could be the right strategy for you.

Before you accelerate your repayment timeline, run the numbers. At minimum, you shouldn’t have any high-interest debt, and you should have an adequate emergency fund.

Aside from doing your due diligence, it’s important to consider how you feel about your mortgage. For many, the thought of debt is uncomfortable. Freeing up room in your budget may give you the confidence to pursue other financial goals you’ve postponed, such as starting a business.

FAQ: Paying Off Your Mortgage Early

Here are answers to some frequently asked questions about paying off your mortgage early.

The Bottom Line on Paying Off Your Mortgage Early     

Paying off your mortgage ahead of schedule is a major financial accomplishment. But it’s not always the most efficient way to allocate your funds. If you’re on the fence about paying off your mortgage early, run the numbers to determine the right decision for your situation.