Should You Pay Off Your Mortgage Early? Pros and Cons

The basics: how paying off your mortgage early works

Every time you make your monthly mortgage payment, your loan servicer applies a portion of the payment toward paying down your loan balance, while the remainder pays for interest.

Although you pay a fixed amount each month, the split changes with every payment. At the beginning of your loan term, a larger portion of your payment pays for interest. But as you pay down the loan balance, your interest fees decrease. Over time, the split reverses — and a larger chunk of the monthly payment applies to your loan balance than to interest fees.

See the table below for an example of how the interest fee and loan balances changed over time with regular payments.

Example of how mortgage payments amortize over time

After 30 years of monthly payments, you’d pay a cumulative total of $124,666 in interest and the loan balance in full.

Adding to your regular payment pays off your mortgage sooner

What happens if you pay an extra $100 every month toward the same loan’s principal balance? Two things: you pay less in overall interest, and you pay off your loan faster. That’s because the extra payments accelerate paying down the mortgage balance, which in turn reduces interest fees.

According to Freddie Mac’s Extra Mortgage Payments Calculator, you’d save $18,828 in total interest by the time you pay off the loan in our example. You’d also pay off the balance four years earlier than if you didn’t add an extra $100 to your monthly payment.

Pros of paying off your mortgage early

Nearly 40% of homeowners don’t have a mortgage. Here’s why it pays off to accelerate your home loan payments and join this enviable group:

Pay less interest over the life of the loan

By paying off your mortgage loan early, you’ll save on interest expenses over the life of the loan. Depending on your loan terms and the amount you prepay, your savings could add up to thousands of dollars, keeping more money in your pocket over the long term.

Free up cash for other purchases or investments

Recent data from the Mortgage Bankers Association shows that the median monthly housing cost for homeowners with a mortgage is $2,167, which only accounts for the principal and interest payments. Additional expenses, like homeowners insurance, property taxes, and HOA fees, further increase the total cost of homeownership.

Now, imagine the financial freedom of having no mortgage payment. Without that monthly obligation, you could redirect those funds toward investments that accelerate your path to early retirement or perhaps even fund a dream vacation to Tahiti.

When you’re mortgage-free, cash that was once budgeted for mortgage payments can be used toward other financial goals, says Moore.

Gain peace of mind

If you’re risk averse, paying off your mortgage early may take a weight off your mind, knowing that you own your home outright. “For some, the piece of mind that comes with being debt-free far outweighs any financial benefits,” says Moore.

Limbird agrees, adding that while there may be reasons why it’s better not to pay off your mortgage early, “for some people … it’s almost a sense of accomplishment to have your home paid for.”

Transform your financial outlook and mindset

A staunch advocate for paying off all debt regardless of the type, financial guru Dave Ramsey recommends venturing into investment properties to accelerate wealth after paying off your home loan, not before. When you pay off your mortgage, Ramsey says, “it changes the way you operate the rest of your money because you’re standing on such a more solid foundation to live your life.”

Cons of paying off your mortgage early

A mortgage-free life may offer a sense of accomplishment and freedom, but diverting excess cash to your home loan could limit you in other ways. These are some reasons why allocating your extra budget elsewhere may prove a better use of your money.

You could lose out on a tax benefit for having a mortgage

If you itemize deductions on your federal tax return, you won’t be able to itemize the mortgage interest tax deduction after your home loan is paid off, since you’ll stop making interest payments. However, you’d still be able to deduct property tax expenses if you qualify.

For most homeowners, the lost deduction won’t affect their taxes. According to IRS data, only about 10% of individual tax returns include itemized deductions. The majority of individual tax filers opted for the standard deduction, which doesn’t allow for an itemized interest deduction.

It may be wiser to channel extra income to higher-interest debt

If you carry credit card or personal loan debt along with a mortgage loan, it probably makes sense to divert extra funds toward that higher-interest debt before paying off your mortgage. The Business Insider reports that the average annual percentage rate (APR) for credit cards in their database ranges from 11% to 30%.

When compared to the 3% to 4% mortgage interest rates many homeowners obtained in 2020 or 2021 or earlier, it’s likely that you’ll save more on interest fees per dollar borrowed if you prioritize high-interest consumer debt first before your mortgage.

You might benefit more by investing extra income

Limbird points out that, with the historically low mortgage interest rates many homeowners secured in recent years, if you have additional income, paying off the mortgage may not be the best option.

“It might be more advantageous for someone to be putting that extra money into a retirement plan instead,” she says. Limbird also encourages homeowners to speak with their financial advisor about potential investments. “If your interest rate is 2.5% or 3% … If you could earn more than that [investing], then you’re gonna come out ahead.”

Moore agrees that there’s potential to earn more overall by investing extra cash instead of paying off a low-interest-rate mortgage. In some cases, homeowners “can position themselves to pay off the mortgage balance from their investments down the road,” she suggests.

It’s tough to withdraw equity from your home if you need it fast

By making extra loan payments, you increase the amount of equity you have in your home. Home equity, considered an illiquid asset that can’t easily be withdrawn, isn’t easy to tap into if you’re in need of funds fast.

If you’re saddled with an unexpected expense or have an emergency, it takes time to access funds tied up in your home. You’ll either need to sell your home or refinance to access cash from your home equity. If you don’t have an emergency fund that’s easy to access, you may want to reconsider paying down your mortgage balance first.

You may need the extra funds for more pressing priorities

Other financial goals could take precedence over paying off your mortgage. You may want to establish a college account or retirement fund before you channel extra funds to your mortgage. Or perhaps you’re ready to retire an old vehicle. It may make sense to attend to other financial obligations before your home loan balance.

Your loan servicer might charge a prepayment penalty

Some lenders charge a penalty fee if you pay off your loan early, or if you pay a specific amount above what you owe for the month. Prepayment penalties don’t apply to all loans, and lenders must disclose whether a penalty applies to your loan before you sign the loan documents. Under the Truth in Lending Act (TILA), prepayment penalty terms must appear on an applicant’s loan disclosures.

Penalty amounts vary depending on the specific loan terms. Some lenders charge a percentage of the loan amount or interest fees for a set number of months. Other lenders charge a flat penalty fee or apply a sliding fee schedule, where a prepayment early in the loan term triggers one fee, while a prepayment five years later triggers a different penalty amount.

If you decide to pay off your mortgage early, commit to a strategic plan

You’re committed to paying off your mortgage early, but how should you do it? That all depends on your financial standing and comfort level. “I don’t feel that one method of paying off your mortgage early trumps the rest,” says Moore. “The best decision for you is based on your current mortgage terms, financial situation, risk tolerance, and personal goals.”

To determine a strategy for paying off your mortgage, select a method that suits your financial profile. If you receive a pay raise, for example, you may want to commit that extra $200 every month to your loan payment. But if you receive a one-time inheritance, you might consider a single, lump sum payment to reduce your principal loan balance.

Pro tip: If you pay down your balance by submitting loan payments higher than your monthly minimum, Limbird says to make sure the loan servicing company applies the excess payment toward your balance, not as a prepayment for future months. Call your lender before you make the payment and confirm the company applies the correct amount to your balance when you receive your loan statement.

Methods for paying off your loan early

Compare the following payoff strategies by calculating how each method impacts your interest savings and payoff timeline. Use an online calculator such as Freddie Mac’s Extra Mortgage Payments Calculator to run the numbers. Then select the solution that works best for you.

Bi-weekly payments, or one extra monthly payment each year

When you set up a bi-weekly payment schedule with your loan servicer, you pay half of your monthly payment amount every other week. At the end of the year, you end up making 26 total payments, which adds up to 13 monthly payments instead of the usual 12.

Some mortgage servicers charge a fee for this service, but the Consumer Financial Protection Bureau (CFPB) says you can also make monthly payments as usual and add a 13th payment on your own. You’ll achieve the same result.

Monthly payment

You can also choose a specific dollar amount that you’re comfortable budgeting and commit to adding that figure to your monthly mortgage payment. So if you owe $1,000 per month, you may feel comfortable allocating an extra $100 for a total of $1,100 each month.

Since you aren’t obligated to make the extra $100 each month, you can always skip the add-on amount if you find yourself in a temporary financial pickle. On the flip side, you could also choose to increase the add-on amount if you find extra room in your budget.

Refinanced loan

Another strategy is to pay off your mortgage early by refinancing to a shorter loan term. With the refinance strategy, you apply for a new loan that pays off your existing mortgage. If your current loan term has 24 years remaining, for example, you could pay off your mortgage sooner by applying for a 10-year mortgage.

To determine whether refinancing fits your financial goals, calculate your interest savings and weigh the risk of taking on a higher monthly payment. And don’t forget — you typically incur closing costs when you refinance.

Moore points out that refinancing to a shorter loan term often requires a higher monthly payment amount, which you’re locked into for the duration of the loan. You’ll want to compare interest fee savings before you commit, she advises. “If your [current] interest rate is competitive and there are no prepayment penalties, it’s worthwhile to compare how much interest you’ll save with a refinance versus making additional payments,” says Moore.

Limbird also warns homeowners to consider carefully before choosing a shorter term and higher payment, particularly if their income fluctuates. If you rely on commissions or self-employment income, there’s a chance you could struggle with a higher payment during an economic downturn.

Lump sum payment

If you’d rather pay down your mortgage balance with a large chunk of extra cash, you could opt for a one-time additional payment. Your monthly payment remains the same, but a lower loan balance also reduces interest fees, which accelerates the balance payoff over time.

Weigh your options before paying off your mortgage early

Where you allocate extra funds can be a balancing act that requires strategic and individualized financial planning. Paying off a mortgage early can work well for one person’s finances but have a negative impact on another.

If you’re in doubt, consult with a reputable financial advisor for advice that fits your specific situation. Ultimately, whether it’s a good idea to pay off your mortgage early or not depends on you.

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