- Paying off your mortgage early: Pros and cons
- Should you pay off your mortgage early?
- Pros and cons
- Pros of paying off your mortgage early
- Cons of paying off your mortgage early
- Is it a good idea to pay off your mortgage early?
- Should You Pay Off Your Mortgage Early, Before You Retire?
- A middle ground
- 5 Ways To Pay off Your Mortgage Early | Pros & Cons
- Why pay off your mortgage early?
- Five ways to pay off your mortgage early
- 1. Refinance to a shorter term
- 4. Recast your mortgage instead of refinancing
- 5. Reduce your balance with a lump-sum payment
- Questions to ask before paying off yourmortgage early
- Should you pay off your mortgage early or refinance?
- Recap of ways to pay off your mortgage faster
- When Should You Pay Off Your Mortgage Early?
- Can you pay off your mortgage early?
- 1. Will other investments beat paying off a mortgage early?
- 2. Will all your cash be tied up in the mortgage?
- 3. How will you use the money if you don’t pay off your mortgage early?
- 4. How much do you value peace of mind?
- Tips to pay off your mortgage early
- Bottom line
- Learn more:
- Paying Off Your Mortgage Early: Pros and Cons
- Reasons You Should Pay Off Your Mortgage Early
- Reasons Not to Pay Off Your Mortgage Early
- Tax, Credit and Retirement Considerations
- Savings vs Opportunity Costs
Paying off your mortgage early: Pros and cons
A mortgage will ly be your biggest, lengthiest investment. And if you're many homeowners, you have a 30-year mortgage and seemingly never-ending monthly payments.
Whether it's three decades or a 20-year or 15-year mortgage, this debt doesn't go away easily — and it constantly weighs on you when you plot out your financial goals. This has some borrowers dreaming about how to pay off their mortgage early to eliminate that bill. A mortgage payoff is not an insurmountable task. It can be done with proper planning.
The first thing you should do is explore your home loan options by visiting sites Credible. Learn more about refinancing with different mortgage lenders and save money long-term.
If you're already ready to pay off your mortgage early and you don't need any help doing so, then you should read on to learn about the positives and negatives of this option.
Should you pay off your mortgage early?
“There is no clear-cut answer on whether to pay off your mortgage early. The best option really depends on your financial situation and your money goals,” Sarah Pierce, head of operations at online mortgage lender Better.com, said.
You may be thinking: What is the downside to paying a loan off early? Well, you'd be surprised. While it's nice to no longer be burdened by monthly mortgage payments or lingering debt — there are actually some downsides to ending your home loan early.
“The decision is rarely a black-and-white one,” Pierce said.
If you're looking to expedite the process by changing your loan terms, monthly payments, or more, you should consider refinancing into a shorter-term loan to pay it off quicker.
5 WAYS TO PAY OFF YOUR MORTGAGE EARLY
Pros and cons
Before making the decision to pay your mortgage off early, understand all of the pros and cons. Here are some of the most popular lines of thought when it comes to a home loan payoff.
Pros of paying off your mortgage early
There are obvious pros to paying off mortgage loans early. For starters, you don't have to make any more monthly payments, and you'll have peace of mind knowing your home is your own. By eliminating that monthly payment you will have more disposable cash on hand each month.
There would be no need to squirrel away mortgage money or worry whether you made the payment on time. The extra cash can more easily go toward other things hobbies, traveling, investing, or saving. It also gives you the freedom to start investing, saving money for home improvements, boosting your savings accounts, or more.
In short, you're no longer tied to your home loan.
Looking forward to finishing up monthly mortgage payments once and for all? Credible can also help you determine if you're ready to refinance your mortgage.
Aside from the obvious, there are some other pros of an early mortgage payoff, including:
- Improving your creditworthiness
- Saving money on interest
HOW A HOME REFINANCE COULD SAVE YOU MORE MONEY
Improving creditworthiness: While experts agree that closing your mortgage has little effect on your actual credit score, a mortgage that is paid in full will be reflected on your credit report for 10 years.
By eliminating your mortgage and having it show as a closed account in good standing, you will be more attractive to lenders and it also lowers your debt to income ratio.
Ryan Dibble, COO of Flyhomes, told Fox an early mortgage payoff also lowers the risk of your home being foreclosed on.
If you have a strong credit history and credit score, then you'd qualify for lower refinance rates. See what kind of rates you prequalify for today through Credible.
Saving money on interest: By paying off your mortgage early you will save plenty of money on the interest that adds up over the years. When you make a mortgage payment, you are not just paying back your loan, you’re also paying interest on the remaining balance of your loan, said Pierce. “You’ll save thousands of dollars in interest payments,” she said.
However, if the current interest rate is a concern, don’t be shy about visiting Credible to compare the best interest rates and lenders.
THE SECRET BENEFIT OF PAYING YOUR MORTGAGE BIWEEKLY
Cons of paying off your mortgage early
Could leave you short for paying other debt: Although paying your mortgage off early eliminates one bill, using the bulk of your disposable cash on the mortgage could leave you short for paying off other debt or dealing with an unexpected crisis. Pierce said your extra cash will ly do more good if you are investing it or saving it than if you’re paying off a low-interest mortgage.
In other words, a mortgage ly costs you less to hang on to than other types of higher interest rate debt. Dibble added that spending a large sum of money on a mortgage payoff could also mean less money to put toward things renovating your home or creating an emergency fund for yourself.
SHOULD I REFINANCE MY STUDENT LOANS?
Could pay a prepayment penalty: It would be a shame to pay off your mortgage early just to face a hefty penalty for doing so. Experts advise you to be aware of this pitfall. Pierce said some borrowers are limited as to how much they can pay off and when.
“Though this may seem unfair, it's not all bad news,” she added because the types of loans that carry prepayment penalties often have lower interest rates or other perks that save you money.
But, she said future homeowners who plan to pay off their mortgage early will want to make sure to choose a home loan that allows for prepayment.
Eliminates tax deduction benefits: One of the greatest benefits of homeownership is the tax deduction that comes with it. Dibble said today’s mortgage rates today are at historic lows (around 3%), and mortgage interest can be deducted from your taxable income, further reducing the cost. He advises homeowners to consult their CPA before making a final decision.
There are other considerations for homeowners deciding to pay off their mortgage early. For instance, having a mortgage on your home de-risks your exposure to it, according to Dibble.
For example, if you own 20% of your home and the bank owns 80% and the home value falls by 50% then your losses are capped at 20%.
“If you've paid off your mortgage and you own 100% of the house, you would lose the full 50%,” he said.
WHAT ARE STUDENT LOAN REFINANCING RATES?
Additionally, he said if you prioritize paying off your home in lieu of ensuring you have savings, you could end up taking on higher interest debt in the event of an emergency.
Whether you pay off your mortgage early, it is important to remember to pay your property taxes and homeowners insurance, said Dibble, costs that are typically handled through your escrow account on your mortgage.
Is it a good idea to pay off your mortgage early?
Again, deciding to pay off your home loan early is not a one-size-fits-all decision.
It depends on things your ability to pay, the type of loan, how mature your loan is, whether your extra cash would be more useful in other investments, and how close you are to retiring, said Pierce.
“If paying off your mortgage means that you don’t have any cash saved up, you’ll ly have to take on high-interest debt to cover such emergency expenses,” she said, adding that it makes more sense to not pay off the mortgage and have some financial reserves.
If your primary goal is to reduce your monthly payments to free up extra cash, a mortgage payoff isn’t the only way. Refinancing your mortgage can also do the trick by giving you lower payments. Try visiting Credible.com to explore a variety of mortgage refinance options.
HOW OFTEN CAN YOU REFINANCE YOUR MORTGAGE?
Should You Pay Off Your Mortgage Early, Before You Retire?
Some people enjoy the peace of mind that comes with a debt-free retirement. But warm and fuzzy feelings should be weighed against solid financial facts.
When it comes to paying off your mortgage, for example, first take a look at the interest rate.
“If the rate on your mortgage is low, you might be better off holding onto your cash—or even investing it, assuming you’re reasonably confident you can get a higher rate of return than you’re paying on the loan,” says Rob Williams, vice president of financial planning at the Schwab Center for Financial Research. “But, at the same time, reducing debt, and ideally eliminating it, all else equal, should be on your list of goals before retirement.”
With interest rates are at a record low, including sub-3% mortgage rates, it may be tempting to refinance a mortgage or not pay it off.
But it’s worth keeping in mind, that it's hard to get a 3% guaranteed investment return from any investment today. Being “reasonable confident” you get a higher rate of return involves risk.
It’s important to evaluate your risk tolerance before making a decision.
Here are the pros and cons to consider before retiring a home loan.
- Limited income: Your monthly mortgage payment may represent a significant chunk of your expenses. Eliminating it can greatly reduce the amount of cash required to meet monthly expenses.
- Interest savings: Depending on its size and term, a home loan can cost thousands or even tens of thousands of dollars over the long haul. Paying off your mortgage early frees up that future money for other uses. While it’s true you may lose the mortgage interest tax deduction, the savings on servicing the debt can still be substantial. Besides, the closer you get to paying off the loan, the more of each monthly payment goes to principal, decreasing the amount you can deduct.
- Predictable return: Investments can go up—and they can go down. But no longer paying interest on a loan can be earning a risk-free return equivalent to the mortgage interest rate. Being relatively confident of earning a return that exceeds the mortgage rate is not the same thing as being certain of earning that rate. There's a risk of loss too.
- Peace of mind: Numbers aren’t everything, so if you’re determined to retire your mortgage, consider tapping taxable accounts first. “If you withdraw money from a 401(k) or an individual retirement account (IRA) before 59½, you’ll ly pay ordinary income tax—plus a penalty—substantially offsetting any savings on your mortgage interest,” Rob says.
- Insufficient retirement savings: If you aren’t contributing enough to your 401(k), IRA or other retirement accounts, this should probably be your top priority. Savings in these accounts grow tax-deferred until you withdraw them.
- Insufficient cash reserves: Rob recommends keeping a cash reserve of three to six months’ worth of living expenses in case of emergency. “You don’t want to end up house rich and cash poor by paying off your home loan at the expense of your reserves,” Rob says.
- Higher-interest debt: Before you pay off your mortgage, first retire any higher-interest loans—especially nondeductible debt that from credit cards.
- Opportunity costs: One way to determine if investing the funds is preferable to paying off your mortgage is to compare your mortgage interest rate to the after-tax rate of return on a low-risk investment with a similar term—such as a high-quality, tax-free municipal bond (assuming the issuer is from your home state. You may have to pay taxes on out-of-state municipal bonds). If your mortgage is costing you less than you’d earn, you might consider keeping it.
- Diversifying your investments: Maintaining your mortgage allows you to hold more of other asset classes. And overconcentration carries its own risks—even when it’s in something as historically stable as a home.
A middle ground
If your mortgage has no prepayment penalty, an alternative to paying it off entirely is to chip away at the principal. You can do this by making an extra principal payment each month or by sending in a partial lump sum.
This tactic can save a significant amount of interest and shorten the life of the loan while maintaining diversification and liquidity. But avoid being too aggressive about it—lest you compromise your other saving and spending priorities.
You could also consider refinancing. Current interest rates are relatively low, and depending on the type of loan you have, refinancing might make sense for you.
If this is something you’re interested in pursuing, make sure you do a thorough cost-benefit analysis before pulling the trigger. If you refinance, though, avoid the temptation to take out more equity, or increase your debt.
The goal, ideally, should be to reduce debt on your primary home over time—not increase it.
5 Ways To Pay off Your Mortgage Early | Pros & Cons
Many homeowners with 30-year mortgages feel they’llnever be without the burden of debt.
Fortunately, there are several good waysto pay off your mortgage faster and save big on interest payments.
Even better, not all methods require spending a lot of extra money.
But consider your options carefully. If you have extra cash to spend on your mortgage, it may generate more value elsewhere.
Here’s what you should know.
See if you qualify for a shorter loan term (Mar 25th, 2021)
In this article (Skip to…)
Why pay off your mortgage early?
Few people keep a 30-year loan for its full term. In fact, homeowners stay put just 13 years on average — and their loans might have an even shorter lifespan if they refinance at some point.
Homeowners who plan to sell their home orrefinance soon usually aren’t concerned about paying off their mortgage early.
But what about homeowners who stayput for the long haul? Those 30 years of interest payments can start to feel a burden, especially compared to the payments on today’s lower-interest-rateloans.
You may find yourself wonderinghow to pay your mortgage off faster so you can live debt-free and have fullownership of your home.
Here are five strategies you canuse to meet those goals.
Five ways to pay off your mortgage early
There are a number of ways to shorten your loan term and save a ton of money in interest on your mortgage.
1. Refinance to a shorter term
The 30-year home loan is mostpopular, but lenders offer shorter loan terms, too. A 15-year loan is acommon alternative, and many lenders also offer 10-, 20-, and 25-year loans.
Shorter repayment periods mean higher monthly payments, butless interest over the life of the loan.
Let’s compare a 20-year term to a30-year term.
Most 20-year mortgages carry lowerrates than 30-year mortgages. Typically, 20-year rates can beanywhere from one eighth (0.125%) to a quarter percent (0.25%) lower.
- Let’s say you’re financing a$250,000 loan on a 30-year term at 3.75%. Your principal and interest paymentswould be about $1,150 per month
- Using the same loan amount, but with a20-year term at 3.625%, your monthly payment would be $1,450
- You’d pay a few hundred more per month, butyou would be mortgage-free a decade sooner
The best part? The savings in interest onthat 20-year mortgage would be over $65,000 if you kept the loan untilit was paid off.
Another benefit of refinancing toa shorter term is that you don’t have to start over with 30 more years.
For many homeowners who are wellinto their original mortgage term, starting over with another 30 years’ worth of interest mightnot make sense.
But with a 15-year refinance, you could lock in a low interest rate and a shorter loan term to pay off your mortgage faster. Just note: the shorter your mortgage term, the higher your monthly mortgage payments will be.
Verify your refinance eligibility (Mar 25th, 2021)
Another way to pay off your home loan faster is to simply payextra when you’re able.
Most mortgage loans issued after Jan. 10, 2014, do not chargeprepayment penalties.
This means you can pay extra money toward yourmortgage balance each month — or make a larger, lump sum payment on yourprincipal each year — without facing a penalty for paying off your loan early.
Many homeowners make extra payments on their loan’s principal when they get an income tax refund. Extra principal payments can have a big impact.
Here’s an example.
- Let’s say you took out a home loanfor $300,000 on a 30-year term and rate of 4%
- That’s a principal and interest payment of$1,370
- 360 payments of $1,370 per month meansyou’ll have paid $492,500 over the life of the loan —that’s $192,500 in interest payments over 30 years
Using the same numbers for theloan amount and interest rate:
- If you make extra principalpayments of $250 per month, you’d shave seven years and four months off yourterm
- And, you’d save more than $59,000 total ininterest payments
There are benefits aside from interest savings, too.
Paying off your mortgage early lets you use the money youwould have paid each month for other purposes, investing.
Let’s continue with the example above. Instead of paying$1,370 per month on the mortgage, you could put the same amount of money in aninvestment account.
With a 5% rate of returnoverseven years and four months, your redirected mortgagepayments would equal $135,000. Not only did you save $59,000 in interest, butyou have an additional stash of cash after your original 30-year loan term.
Many homeowners choose to make oneextra payment per year to pay off their mortgage faster.
One of the easiest ways to make an extra payment each year isto pay half your mortgage payment every other week instead of paying the fullamount once a month. This is known as “bi-weekly payments.”
When you make bi-weekly instead of monthly payments, you end up adding one extra payment each year.
However, you can’t simply start making a payment every two weeks. Your loan servicer could be confused about getting irregular, partial payments. Talk to your loan servicer first to arrange this plan.
You could also simply make a 13th payment at the end of theyear. But this method requires coming up with a lump sum of cash. Somehomeowners to time their extra payment with their tax return or with ayearly bonus at work.
However you arrange it, making an extra payment each year isa great way to pay off a mortgage early.
As an example, if you took out amortgage for $200,000 on a 30-year term at 4.5%, your principal and interestpayment would be about $1,000 per month.
Paying one extra payment of $1,000per year would shave 4½ years off your 30-year term. That saves you over$28,500 in interest if you see the loan through to theend.
Paying down your mortgage balance quickly has otheradvantages, too.
For example, lowering your balance means you can stop payingprivate mortgage insurance (PMI) premiums sooner. Conventional loans let youcancel PMI when you’ve paid off 20% of the loan’s original balance.
4. Recast your mortgage instead of refinancing
Mortgage recasting is different from refinancing because you get to keep your existing loan.
You just pay a lump sum toward theprincipal, and the bank will adjust your payoff schedule to reflect the newbalance. This will result in a shorter loan term.
One major benefit to recasting isthat the fees are significantly lower than refinancing.
Typically, mortgage recasting feesare just a few hundred dollars. Refinance closing costs, bycomparison, are usually a few thousand.
Plus, if you already have alow interest rate, you get to keep it when you recast your mortgage. If you havea higherinterest rate, refinancing might be a better option.
Check with your lender or servicer if you this option. Not all companies will allow a mortgage recast.
5. Reduce your balance with a lump-sum payment
An alternative to recasting is to makelump-sum payments to your principal when you can.
Have you inherited money, earned largebonuses orcommission checks, or sold another property? You could apply these proceeds to yourmortgage’s principal balance and be debt-free a lot sooner.
Since VA and FHA loans cannot be recast, lump-sum payments might be thenext best thing. Also, you’ll save yourself the bank fee for recasting.
With some mortgage servicers, youmust specify when extra money is to be put toward principal. Otherwise the extra money couldbe split between the interest and the principal as it is divided within aregular monthly mortgage payment.
Check with your servicer if you don’t know howadditional payments will be applied.
Check your mortgage options (Mar 25th, 2021)
Most financial experts encourage homeowners to puttheirextra money into retirement accounts instead of paying off mortgagesearly.
The reason? For almost a century, the stockmarket has earned a 10% average annual rate of return. That means homeownerscould potentially earn more by investing in the stock market than they’d save by paying downtheir mortgage balance.
Plus, some homeowners write off their mortgage interest payments as a tax deduction which means they could get some of that money back at tax time.
There are other potential drawbacksto consider before paying off your mortgage early:
- Using all your extra funds to paydown a mortgage may tie up too much of your net worth in your home,making it harder to access later. You’d need a cash-out refinance or a second mortgage ( ahome equity loan) to generate cash flow from your home investment
- You may miss out on higher returns from investments whose rates of return could exceed the amount ofinterest you’re paying on the mortgage. But keep in mind that stocks don’talways go up. You could avoid big losses by applying extra funds toward yourmortgage. A deposit toward your mortgage is a guaranteed return equal to yourcurrent interest rate
- If the real estate market dips when you’rethinking of selling, you may not receive as much as you had hoped
- Money you deposit into an IRAinstead of paying down your mortgage can grow tax-free. Focusing on building ahealthy retirement fund when you’re younger gives your savings more time togrow, plus you can deduct contributions to your traditional IRA up to the IRS’sannual limits
Finally, before paying extra on the mortgage, many personal finance experts recommend building an emergency fund in case you lose a job, get injured, or face other financial troubles. Without emergency funds in a savings account, you may have to use higher-interest credit cards to pay unexpected expenses.
Questions to ask before paying off yourmortgage early
Is paying off your mortgage earlythe best financial decision for you and your family? Itdepends on your unique situation and financialgoals.
Here are a few questions to helpguide your decision:
- How long do you plan to stay inyour home? If there’s a good chance you’ll sell the home within a coupleyears, the benefits of refinancing or paying down your mortgage will be lessly to pay off. Your dollars may be better invested elsewhere
- How much extra money do you haveto work with? Do you have enough flexibility to pay down the mortgage and work toward other financial goalssimultaneously? If so, you’ll have an easier decision
- What mortgage interest rate wouldyou qualify for? Today’s average mortgage rates are historically low —especially for 15-year loans. But your rate depends on your credit score,debt-to-income ratio, and other personal finances. If you can’t qualify for asignificantly lower rate, refinancing will make less sense
- Do you have an emergency fund? If your savings account couldn’tabsorb at least three months’ worth of living expenses, consider saving up anemergency fund before paying more on your mortgage
If your main objective is to bedebt-free as soon as possible, then look into one of the five strategies aboveto pay off your mortgage faster. You may have already paid off other personal debt student loans or credit cards; it could make sense to target your mortgage,too.
This can be especially appealingif you’re close to your mortgage finish-line and starting over with a refinancewouldn’t make sense.
Should you pay off your mortgage early or refinance?
Do you want to pay off yourmortgage faster because you’re worried about how much you’re spending oninterest?
If you’re simply concerned about your mortgage interest rate, consider refinancing to a lower rate — and maybe a shorter term — instead of making extra payments on your existing mortgage.
But if you already have a competitive interest rate and anideal loan term, you probably don’t need to refinance. You may be tempted topay less interest by paying off your mortgage faster.
As you make your decision, consider whether you could earnmore investing in securities than you’d save by paying down your mortgagebalance more quickly. Investing that money in a tax-preferred IRA could offermore financial peace of mind than owning your home outright sooner.
Any kind of investing can be risky. Check with a personalfinancial advisor before making any big moves if you’re not sure about therisks you’re taking.
Verify your refinance eligibility (Mar 25th, 2021)
Recap of ways to pay off your mortgage faster
If you decide you want to pay off your mortgage early, ask your mortgage lender about:
- Refinancing to a shorter mortgage term
- Making extra principal payments
- Making one extra mortgage payment per year
- Recasting your mortgage
- Making a lump-sum payment
Whatever you choose, make sure you’ve weighed all your options to find the best use for your hard-earned cash.
Verify your new rate (Mar 25th, 2021)
When Should You Pay Off Your Mortgage Early?
When you own a home, the thought of a mortgage hanging over your head for decades can be daunting for many people — and it’s natural to want to pay off your mortgage as soon as possible.
But before you decide to use an inheritance, raise or your savings to pay off your mortgage (or even before you decide to make extra payments), it’s important to take a step back and determine whether it really makes financial sense for you.
In some cases, the amount you save on interest when you pay off your mortgage early might not exceed what you would earn if you put the money to work elsewhere. On the other hand, sometimes it’s not about the return on other investments and more about peace of mind or freeing up cash flow for other opportunities.
Here’s what you need to know as you decide whether to pay off your mortgage early.
Can you pay off your mortgage early?
If you’re considering paying off your mortgage early, first contact your mortgage lender or servicer.
the terms of your loan, you might find out you’re subject to a prepayment penalty if you pay off your mortgage sooner than your payment schedule spells out, or that you can only make payments within certain parameters.
Knowing this information upfront can help you map out a payoff plan that works for you and your lender or servicer.
1. Will other investments beat paying off a mortgage early?
Your biggest consideration might be whether to pay off your mortgage or invest. What if, instead of putting money into getting rid of your mortgage early, you invested the cash elsewhere?
“Sadly, the math tells us it’s almost always better to invest in other places than in your mortgage,” says Richard Bowen, CPA and owner of Bowen Accounting in Bakersfield, California.
Mortgage rates are at all-time lows, so if paying off your mortgage early leads to a return equal to your interest rate, that return would ly be lackluster compared to the annualized return for the S&P 500 — roughly 10 percent over the last 90 years.
A potentially better use of the funds might be to take the cash you’d use to pay off your mortgage and leverage it into buying a cash flow-positive property multi-family real estate or single-family homes that have the potential to offer higher long-term returns, Bowen points out.
Any choice is a risk, however. Even after paying off your mortgage early, real estate prices could plunge, leaving you with a potential loss. Carefully consider which risks you’re willing to take. Ultimately, you might be better off not paying your mortgage off early.
“The thing is, no one can give you a guarantee on an investment,” Bowen cautions. “You can put your money in the stock market and lose it. You can put your money in real estate and it doesn’t perform as well as you expected it to.”
2. Will all your cash be tied up in the mortgage?
Before taking a large chunk of your wealth and using it to pay off your mortgage early, don’t forget to look at liquidity. Your home is considered a non-liquid asset because it can take months — or longer — to sell the property and access the capital.
“If you start paying down your mortgage too fast, you risk depleting your liquidity,” says Amanda Thomas, a client advisor at Mission Wealth in Santa Barbara, California. “The kind of liquidity you have is important, too. You don’t want too much cash tied up in retirement funds because you can get slammed with fees if you have to withdraw early.”
One approach is to have an emergency fund, as well as assets stocks, mutual funds, U.S. Treasuries, bonds and marketable securities available in a taxable investment account. That way, in addition to having money tied up in tax-advantaged retirement accounts and your home, you still have some liquid cash or other investments that are easy to convert to cash in a pinch.
Bowen suggests maintaining a cushion that protects you for at least six months before you consider using a large portion of your liquidity to retire your mortgage early.
3. How will you use the money if you don’t pay off your mortgage early?
Be realistic about what you’re ly to do with your money if you don’t use it to pay off your mortgage early. Will you actually use it to get ahead?
It might make sense, for example, to put the money into paying off your mortgage early if you struggle with keeping money in the bank. Your home can be a forced-savings tool, and making extra mortgage payments can save you thousands of dollars in interest over time, plus help you build equity in your home faster.
“The right thing to do is the thing you will do,” Bowen says. “All of this has to do with personal habits. If you’re going to blow through the extra money anyway, then it’s better that you put it into your house than spend it.”
4. How much do you value peace of mind?
Sometimes it’s less about the bottom line and more about peace of mind. If you own your home free and clear, that can provide benefits that can’t be measured in strictly financial terms. For many, eliminating a monthly mortgage payment ahead of retirement can provide mental relief when considering living on a fixed income.
“Personally, I’m paying down my mortgage,” says Thomas of Mission Wealth. “It feels good to have it paid off before retirement. It might not always make financial sense, but it offers peace of mind and it might allow for better budgeting.”
Another potential advantage is the ability to borrow against the equity in your home. Having a considerable amount of equity can allow you to establish a home equity line of credit (HELOC), providing a source of emergency income, as well as allowing you to make home improvements or make progress toward other financial goals.
- Eliminates your monthly mortgage payment, freeing up cash flow that can be useful, especially during retirement
- Saves you money on interest, potentially thousands of dollars
- Can receive a predictable rate of return, equal to the interest rate on the balance you’re paying off
- Grants peace of mind knowing you own your home outright
- Can tap the equity in your home if you need money later
- Ties up a good chunk of your liquidity and net worth in your home, which might make it harder to access later
- No longer eligible for the federal mortgage interest tax deduction
- Could miss out on potential higher returns from other investments
- Might not realize as much from your home as you had hoped if the market drops and you have to sell quickly
Tips to pay off your mortgage early
If you decide that it makes sense to pay off your mortgage early, be careful not to put your other financial goals at risk. Here are some tips.
- Pay off high-interest debt before making extra mortgage payments – Other debt credit card balances might have much higher interest rates than your mortgage, so if you pay off your mortgage early instead of tackling that, you could end up behind. Credit card debt, personal loans and even car loans usually cost you more, and the interest isn’t tax-deductible. It might be wiser to get rid of other debt first.
- Make sure you’re investing for retirement – When deciding whether to pay off your mortgage or invest, don’t forget to consider retirement. Make sure you’re putting money into a tax-advantaged retirement account, a 401(k) or IRA, first. If your company offers a match, take advantage of it and work on building your nest egg. Having a good retirement account on top of having your house paid off by the time you retire can be a good combination.
- Build up an emergency fund – As Bowen points out, it’s a good idea to have an emergency fund before making extra mortgage payments. That way, you still maintain some liquidity and can access funds in a pinch.
- Work on other goals – You might have other financial goals, a car purchase or saving for a child’s education. Make sure you’re on track for those goals first.
- Refinance – Think about refinancing your mortgage to a shorter loan term, such as switching to a 15-year loan from a 30-year mortgage. You’ll be making higher payments each month, but it’s a way you can save on interest and still be debt sooner.
- Consider making biweekly payments – One way to get started with making extra mortgage payments is to set up a biweekly schedule. This amounts to making a full extra monthly payment each year and can reduce the time spent with a mortgage. Starting with biweekly payments can help you get ahead on your mortgage while allowing you to keep working toward other financial goals.
- Check for a prepayment penalty – Don’t forget to check for mortgage a prepayment penalty. If you pay off your mortgage early, you might be charged an extra fee. Run the numbers to see if you still come out ahead after paying a penalty.
When considering whether to pay off your mortgage early, it’s important to figure out what works best for your situation and is most ly to help you reach your short- and long-term financial goals. Sometimes, with financial planning, it’s not a straight assessment of what’s best by the numbers. People want to feel good about where their money is going — no matter what the spreadsheet says.
For some, owing money causes stress, and paying off a mortgage early can bring peace of mind. For people nearing retirement, a paid-off mortgage means they have that much more free cash flow from their fixed income when they stop working.
“My wife s having money in the bank, whereas I’d rather invest it,” says Bowen. “But if money is a tool, then that money is buying her happiness, so it’s working.”
Paying Off Your Mortgage Early: Pros and Cons
By clicking “See Rates”, you'll be directed to our ultimate parent company, LendingTree. your creditworthiness, you may be matched with up to five different lenders.
Borrowers should pay off their mortgage early when they have large amounts of cash, well in excess of what they need for emergencies and retirement contributions, and want to reduce their overall interest expenses.
It’s natural to want to pay off your mortgage as quickly as possible, but early repayment only makes sense if it allows you to save money and achieve your long-term financial goals.
As with anything, there are benefits and drawbacks to paying off your mortgage early, so make sure it's the best decision for your own situation before you divert funding from your 401(k) or savings account.
Reasons You Should Pay Off Your Mortgage Early
If you want to reduce the overall interest you pay on your mortgage or free up cash for other uses, paying off your mortgage early can help.
Every month you have a mortgage, you pay interest on the total balance left. By paying that balance off early, you eliminate years of added interest payments charged for the loan.
Depending on how much is left on your mortgage, this could equate to thousands of dollars in savings.
Paying off your mortgage in full also frees up cash flow each month. This reduces financial strain on your household and gives you more resources to invest or save—a move that could net you higher returns in the long run. Having your mortgage paid off can also help in retirement, lowering your monthly household costs and stretching your retirement dollars further.
You don’t even have to pay off your mortgage in full to enjoy benefits. Paying a large lump sum toward your loan balance lowers your overall interest costs and helps build equity.
Once you have 20% equity in the property—meaning you have paid off 20% of the total loan—you can cancel your private mortgage insurance (PMI) and lower your monthly costs even further. PMI can cost homeowners between 0.
5% and 5% of their original loan balance.
If you've paid off a significant amount of your loan, you have the option of leveraging that equity to secure a home equity line of credit or cash-out refinance.
These mortgage options essentially convert your equity into cash, which can then be used for renovation costs, emergencies or even tuition expenses.
Although cashing out equity will increase your loan expenses and add another lien on your property, it can be a useful source of emergency funding that's far cheaper than an unsecured personal loan.
Reasons Not to Pay Off Your Mortgage Early
If you’re thinking of using cash reserves or savings to pay off your loan, you should understand that this may increase your risks and may not be the most prudent use of your cash. While paying off your mortgage loan early is usually a good idea, there are situations where it may not be best use of your free cash flow.
Though you would still have your home equity to tap into, selling your home and accessing those funds may prove difficult. Your ability to do so will depend on other factors, including the local market, interest rates and supply and demand. These factors are hard to predict and could change by the time you need to sell.
Therefore, it’s important to maintain a minimum level of cash to meet emergency expenses.
There are also market concerns to consider. Inflation actually devalues any cash you hold uninvested. Assuming inflation continues to rise, the purchasing power of every dollar you hold in cash erodes over time.
However, by making all your payments at once, rather than hoarding it in cash savings, your money—and the house you put it toward owning—could be better protected from inflation and changing market conditions.
While this may vary your unique real estate market, home values generally appreciate at a rate faster than inflation.
You should also consider potential investment opportunities you may lose out on by paying off your loan early.
Every time you make a mortgage payment, you're essentially making a risk-free investment by reducing your risk load and investing at your mortgage's interest rate.
By comparison, investing your money into stocks and interest-bearing accounts offers the chance to earn returns beyond your mortgage risk-free rate. Every dollar you put toward your mortgage is a dollar you can’t invest in these higher-yield ventures.
For reference, the average return on the S&P 500 stock market index was just over 9% over the past 90 years, while the average rate on a 30-year conventional mortgage is just over 4.5% as of the date of this writing.
While this doesn’t mean you should invest all your money in stocks instead of your mortgage payments.
This is another thing to consider if you have extra cash to invest, and can be especially important if you weigh the advantages of investing your funds in a tax-advantaged 40(k) account, as described in the segment below.
Keep in mind that some lenders may also charge a prepayment fee for borrowers who pay off their loans early. Make sure you’re aware of your lender’s prepayment policies and factor those into your savings/loss calculations.
Tax, Credit and Retirement Considerations
Paying off your mortgage in its entirety eliminates any tax deductions on your interest payments you can write off as a borrower.
Currently, homeowners are allowed to write off the interest they pay on first mortgage loans up to $1 million. This lowers your taxable income and often increases your refund as a result.
Paying off your mortgage altogether would eliminate this tax advantage.
Alternatively, paying your mortgage off early diverts funds that could have been otherwise applied to your tax-free retirement contributions. You could lose out on any interest you could have potentially earned on that account.
Pre-tax 401(k) contributions are not taxed until withdrawn for retirement.
Putting those same funds toward your mortgage—rather than your retirement efforts—would both reduce the future tax write-offs on your mortgage and cost you the interest that could have been earned with those funds.
Finally, paying off your loan early could also be negative for your credit. Payment history, credit length and variety can all influence your score, and credit companies prefer more loan variety than less, all else held equal.
Mortgage loans improve your credit mix and offer you a chance to prove your creditworthiness.
Early payoff closes a credit account and may result in a slight drop in your credit score and the loss of future opportunities to improve it.
Savings vs Opportunity Costs
When deciding whether to prepay your mortgage, always evaluate what the best use of your cash is, given your unique circumstances. Borrowers should review their individual credit profiles and potential earnings opportunities—things interest, PMI, etc.—versus the cost to prepay, including lost tax deductions, exposure to inflation and forgone returns on investments.
It’s important to consider the impact of putting your funds toward early loan pay-off versus other investments, savings and financial endeavors.
Determine if this plan is ly to net you more returns in the long run, without impairing your ability to retire comfortably, pay for your child’s college tuition or achieve your long-term financial goals.
Consider the future repercussions of paying off your loan early, and factor in the volatility of the housing market. Selling your home and cashing in on your home equity may be more difficult than you think, especially if the market goes south.
Remember, your decision isn’t limited to these two options. Refinancing also offers you the option to shorten your loan term, lower your monthly payment and free up cash you can dedicate towards retirement or other investments. The main goal is to choose the route that will deliver the greatest returns and lihood of financial success in the long-run according to your unique situation.