- Should I pay off my mortgage early?
- Should I pay off my mortgage early
- 1. Does my mortgage have a prepayment penalty?
- 2. Will I still have money for emergencies?
- 3. Am I behind on retirement savings?
- 4. Do I have other debt?
- 5. How important is this goal to me?
- How to pay off your mortgage early
- 1. Refinance your mortgage
- 2. Switch to bi-weekly payments
- 3. Live on less than you earn and commit to paying extra
- Getting started
- Should You Pay Off Your Mortgage Early, Before You Retire?
- A middle ground
- Should You Pay Off Your Mortgage Early?
- Stocks are a risk, but your mortgage payment will always be due.
- Few people regret paying off debt.
- No! Paying your mortgage early is silly
- Your home will be a disproportionate percentage of your net worth.
- You won’t realize the benefits of extra mortgage payments for many years.
- If you lose your job, you could be screwed.
- Mortgage interest is tax-deductible.
- Refinancing is worth considering
- Read more:
Should I pay off my mortgage early?
Determining whether to pay off your mortgage early can be both an emotional and financial decision. If your mortgage is one of your highest monthly expenses, paying it off early may sound a good idea to help you save money on interest and eliminate a costly monthly bill.
If you're considering refinancing or other methods to help you reach your financial goals, then consider using online marketplace Credible. Credible can help you compare rates and lenders within just minutes. Plus, it's 100% free.
But do the numbers add up in terms of what you’d save? And if so, how can you successfully shave years off your mortgage?
Should I pay off my mortgage early
There are a lot of factors to consider when deciding whether to pay your mortgage off early. Before making any financial decisions, make sure you step back and see the big picture before you pay off your home. Here are five questions to answer to help you make the right decision.
- Does my mortgage have a prepayment penalty?
- Will I still have money for emergencies?
- Am I behind on retirement savings?
- Do I have other debt?
- How important is this goal to me?
1. Does my mortgage have a prepayment penalty?
One of the first things you might want to do is contact your mortgage lender to see if there is a prepayment penalty. With a prepayment penalty, you could be charged an extra fee for paying off your mortgage early.
According to Consumer Finance, prepayment penalties normally apply if you pay off a large amount of your home loan or your entire balance at once within a certain number of years. Usually, this penalty can be worked into the terms of original loan terms, so it’s important to check and make sure you fully understand the terms if a prepayment penalty exists.
You can use Credible as your refinance guide. Their online marketplace allows you to compare multiple mortgage lenders at once and find the best refinancing deals available.
HOW OFTEN CAN YOU REFINANCE YOUR MORTGAGE?
2. Will I still have money for emergencies?
Paying off your mortgage early is no small feat. If you decide to do this, you’ll also have to continue paying for all your other expenses including home maintenance and repairs. It’s important to make sure you have an adequate amount of emergency savings lined up. That way, you can be prepared for any unexpected expenses along the way.
3. Am I behind on retirement savings?
When you pay off your mortgage early, you automatically save money on interest. However, you may be able to earn more from your money by putting it to work somewhere else – the stock market.
Consider whether committing to paying off your home will cause you to halt or stall other goals investing in your retirement and diversifying your portfolio.
“Most Americans have inadequate retirement savings,” says Dominique Henderson, a certified financial planner. “If you’re in that boat, you may consider foregoing the acceleration of your mortgage and instead use extra funds for investment to play ‘catch-up’ in your retirement plan.”
SHOULD YOU REFINANCE YOUR MORTGAGE IF YOU'RE RETIRED?
4. Do I have other debt?
Mortgage interest rates are typically lower than with other types of debt, so it makes sense to pay off all your consumer debt first. This includes accounts your auto loan, student loans, and credit card balances.
5. How important is this goal to me?
Owning your home outright can provide peace of mind by knowing that no one can take your house away from you. If this makes financial sense for your situation, then you’ll want to move forward with this goal.
the current mortgage rates, it may be a good time for you to refinance. To see how much you could save, crunch the numbers, and compare rates and mortgage lenders using Credible's free online tools.
How to pay off your mortgage early
After answering all of those questions, you may be confident in your financial decisions — including the choice to end your loan term early. If you're ready to move forward, here are some easy ways to pay off your mortgage early and save some extra money.
- Refinance your mortgage
- Switch to bi-weekly payments
- Live on less than you earn and commit to paying extra
1. Refinance your mortgage
Refinancing your mortgage can help you save thousands on interest and even shorten your repayment term. If you refinance a 30-year mortgage to a 15-year fixed-rate home loan, your monthly payment may increase but you’ll be able to pay your home off earlier.
Even if you refinance to a new 30-year loan but lock in a lower rate, that means more of your payment can go toward the principal instead of interest. Shop around for the best mortgage refinancing offers for free with Credible’s home refinancing tool.
You’ll receive up-to-date mortgage quotes from top lenders and you can compare quotes and cost breakdowns to find the best offer for your situation.
HOW A HOME REFINANCE COULD SAVE YOU MORE MONEY
2. Switch to bi-weekly payments
Do you get paid bi-weekly? If so, split your mortgage payment up so you’re making bi-weekly payments instead of paying the entire amount once a month. There will be some months when you receive three paychecks and this will allow you to pay extra on your mortgage.
If you keep doing consistently over time, you can shave years off your mortgage repayment without even thinking about it.
Whether you seek to refinance your current loan or are currently shopping for a new home, the best place to start when making mortgage decisions is to compare rates and lenders via an online tool Credible.
THE SECRET BENEFIT OF PAYING YOUR MORTGAGE BIWEEKLY
3. Live on less than you earn and commit to paying extra
See if you can lower your living expenses to free up more money to put toward your mortgage. Go through your budget and see which expense categories you can cut while still living comfortably. Maybe you can cook more at home and order take out less, lower some of your insurance premiums, or downsize to become a one-car family, for example.
Then, make a conscious commitment to pay more than your minimum mortgage payment each month. When you’re making extra payments, make sure it’s going toward the principal balance and not taxes or insurance.
5 WAYS TO PAY OFF YOUR MORTGAGE EARLY
When deciding whether to pay off your mortgage early, it’s important to consider three main factors:
- Your financial goals
- Your values
- What makes sense financially
“Since each dollar spend can only be spent once, you have to consider if the peace of mind for having no mortgage outweighs growing your retirement nest egg,” says Henderson.
“This is a ‘values and goals’ decision and, therefore, won't have the same answer for each person.
Although there isn't a necessarily wrong or right answer (from the traditional sense), there is certainly an answer that could be wrong for your situation.”
However, if you are learning toward paying off your mortgage early, you can start by doing things switching to bi-weekly payments or shopping around for a refinancing quote.
Use a mortgage payment calculator to see how much you could save by refinancing and realize that even putting a little extra money toward your mortgage can help shorten your loan, so you can retire your house payment earlier than expected.
HOW TO DECIDE IF YOU SHOULD 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.
Should You Pay Off Your Mortgage Early?
Should you pay your mortgage off early?
If you’re a homeowner and are fortunate enough to have accomplished the first several steps on the road to financial security — you’ve saved an emergency fund, paid off high-interest debt and are saving for retirement — you’ll ly begin to fantasize about living mortgage-free. You could be done paying interest, done with big monthly payments and own your home free and clear.
If you’ve given any serious thought to paying off your mortgage early, you’ve ly come across two competing opinions on the matter:
- Yes! There’s no such thing as “good debt.” Pay off your mortgage as soon as you can, get a guaranteed return on your money equal to your mortgage interest rate. It’s the only sensible thing to do.
- No! With mortgage rates so low, you should be investing any extra money at a higher interest rate. Plus, mortgage interest is tax deductible, providing an additional incentive.
- Another option! Going for a mortgage refinance to open up another sum of money at a competitively low interest rate. If you’re intrigued by the mortgage refi route, start here.
Stocks are a risk, but your mortgage payment will always be due.
The biggest argument against paying off your mortgage early is that you could get a much higher rate of return by investing. The S&P 500 has yielded an average annual return of about 10% for the past 88 years.
But those returns have also been wildly inconsistent. For example, since 2000 there have been two major reversals in the stock market, and we might be going through another one right now.
How would it be for you if you accumulated $100,000 in your stock portfolio over the past 10 years – instead of paying off your mortgage early – only to see an ugly bear market wipe out 50% of your portfolio?
One of the inherent problems with investing in risky assets is that the returns are neither consistent nor guaranteed. However, when you owe money on a debt, especially a very large one a mortgage, your liability is fixed. That is to say that even if your stock portfolio takes a big hit, your mortgage will be a fixed obligation. That includes both the balance owed and the monthly payment.
Few people regret paying off debt.
There are huge psychological benefits to a debt-free life.
Even with a relatively low interest rate on your mortgage (let’s say 4%), paying it off provides a guaranteed return, plus the elimination of your monthly mortgage payment.
No matter what the historic track record of the stock market is, there is no guarantee that your portfolio will perform at that level over the next 10 or 20 years.
How much better would you sleep with no mortgage payment?
As much as we might think of financial decisions as being a numbers game, they do come with the potential for both psychological and emotional problems. If you don’t think that you could stomach losing a bunch of money on your stock portfolio while you still owe a fortune on your house, you’re almost certainly better off focusing on paying off your mortgage.
If being debt free is more important to you than having a large investment portfolio, concentrating your efforts on paying off your mortgage is the better course.
No! Paying your mortgage early is silly
We already know that the common argument against paying off your mortgage early is to earn larger returns in the stock market. The historic return on stocks invested in the S&P 500 has been on the order of 10% per year going all the way back to 1928. It doesn’t make sense to pay off a mortgage that has a 4% interest rate, and give up ly returns on equity investments of 10%.
It could be argued that once your mortgage is paid off, you’ll have more money to invest in stocks. But even if you’re able to reduce a 30 year mortgage to 15 years, you will still have lost 15 years of compound investment earnings. That’ll be close to impossible to make up.
But this is risky, and there’s nothing wrong with forgoing larger (but riskier) returns for a guaranteed return and peace of mind. But there are other, perhaps more compelling, arguments against paying down a mortgage early.
Your home will be a disproportionate percentage of your net worth.
By paying off your mortgage early, it’s ly that a large amount of your net worth will be tied up in your home. This comes with its own risks. Real estate is often considered a safer investment than stocks, but it’s not without risks. If you need to sell your home during a soft real estate market, you may lose money or — worse — be unable to liquidate at all.
Similarly, consider what would happen if a life event required you to come up with a lot of cash — more than you have in emergency savings. Imagine you become unemployed for many years, need extensive medical care, or decide to invest in a business.
Stocks can be easily sold to finance such needs, but if your net worth is tied up in your home, you would either have to sell your home or rely on a home equity loan (going back into debt). If you don’t mind the idea of tapping home equity, then this argument is less persuasive.
And indeed, if you do pay off your home early, taking out a home equity line of credit (just in case) can be a good idea, even if you never plan to use it.
You won’t realize the benefits of extra mortgage payments for many years.
With the exception of swashbuckling business people who use massive loans as leverage to acquire millions, most of us want to become debt free. But not everyone has a willingness to make it happen. There’s no ignoring the fact that paying off a massive debt a mortgage will require a whole lot of sacrifice. Are you willing to pay that price?
As an example, let’s say that you have a $250,000 30-year mortgage at 4.25% that you want to pay off in 15 years. Your current principal and interest on the loan is $1,230 per month. In order to pay it off in 15 years, you’ll have to increase the monthly payment to $1,881. That’s an increase of $651 per month, or $7,812 per year.
Coming up with that extra money every year will be a huge commitment. It’s certainly possible, but you’ll have to understand the sacrifices required to get there.
- If you have a fixed-rate loan, you won’t realize any benefit until the loan is actually paid in full. (Your payment will not go down as you pay down the mortgage balance.)
- If you abandon the early payoff effort before you complete it, you will have even more money tied up in your home than you have now; this is sometimes referred to as dead equity since it has no return, and produces no immediate benefit.
- As we mentioned above, if you need money from the equity in your home — because that’s where all of your extra cash has gone over the past few years — you will have to borrow the money out with a second mortgage or home equity line, which will reverse all of the good that was done with the early payoff effort.
Since it will ly take at least 10 or 15 years to pay off a mortgage early, it’s best if you have a large emergency fund so that you are not repaying your mortgage with money that you can’t afford to lose. Un paying off other debts, credit cards or car loans, a mortgage loan is a long-term project, and you need to be ready for contingencies.
If you lose your job, you could be screwed.
Let’s drive home again the point that your home is not a liquid asset. There are only two ways to get cash the home:
- Borrow against it
- Sell it
We just discussed how borrowing money against your home will virtually defeat the purpose of paying it off early. But there is an additional complication if you lose your job: it’s unly that you will be able to obtain a loan against your home if you’re unemployed.
During a period of prolonged unemployment, your only choice may be to sell your house in the event that cash is especially tight.
Once again, a plan to pay off your mortgage early should come with a companion commitment to building up a large emergency fund that will see you through a time of prolonged unemployment.
Mortgage interest is tax-deductible.
For most people, home mortgage interest is the single largest income tax deduction they have. It’s even possible that paying off your mortgage will make it impossible for you to itemize deductions on your tax return.
This points to another tax related consideration: If your current mortgage rate is 4.25% , but you have a combined federal and state marginal tax rate of 40% , the effective rate on your mortgage is only 2.55% (4.25% x .60).
Realizing that your effective rate is that low could make you more willing to entertain the risks of pursuing higher returns in the stock market.
Refinancing is worth considering
If you’re considering paying off your mortgage early, you may have some equity built up. That makes you a great candidate for a refinance. You may be able to get a lower interest rate and/or reduce your monthly payments to free up some extra money. You can then put that excess aside or invest it.
It’s never been easier to refinance your loan, thanks to tools Credible. Credible shops lenders and provides multiple quotes for your refinance without affecting your credit score. You can review those quotes and decide if refinancing is the best option for you.
Credible also lets you do a cash-out refinance, which is something to consider if you’re thinking about paying your mortgage off early. With a cash-out refinance, you can take some of your home’s equity as a loan. In some cases, your monthly mortgage payment won’t change and you’ll have some extra funds to save, renovate your house, pay off debt, or whatever else you need.
Figure is another online lender that makes refinancing a breeze. Credible, Figure helps with cash-out refinancing, but they also do home-equity lines of credit. Of course, you can do a straight refinance if you want to lower your monthly payment or change the terms of your loan (Figure offers 15- and 30-year fixed terms).
You can even opt for a cash-out jumbo refinance, if you have a high-cost property. You can refinance up to $1,000,000, with a $500,000 cash-out max. Or, if you’re just looking for better loan terms, figure offer jumbo rate refinancing up to $1,500,000.
You’ll also get quotes from multiple lenders with one quick application with Figure. One great feature in Figure’s favor is how quickly you’ll have access to your funds if you’re doing a cash-out refinance. In some cases, your funds will be in your account in less than a few days.
¹ For Figure Home Equity Line, APRs can be as low as 2.49% for the most qualified applicants and will be higher for other applicants, depending on credit profile and the state where the property is located. For example, for a borrower with a CLTV of 45% and a credit score of 800 who is eligible for and chooses to pay a 4.
99% origination fee in exchange for a reduced APR, a five-year Figure Home Equity Line with an initial draw amount of $50,000 would have a fixed annual percentage rate (APR) of 2.49%. The total loan amount would be $52,495.
Your actual rate will depend on many factors such as your credit, combined loan to value ratio, loan term, occupancy status, and whether you are eligible for and choose to pay an origination fee in exchange for a lower rate. Payment of origination fees in exchange for a reduced APR is not available in all states.
In addition to paying the origination fee in exchange for a reduced rate, the advertised rates include a combined discount of 0.75% for opting into Credit Union Membership (0.50%) and enrolling in autopay (0.25%). APRs for home equity lines of credit do not include costs other than interest.
Property insurance is required as a condition of the loan and flood insurance may be required if your property is located in a flood zone.
Paying a mortgage off does not come without risks. There is the risk of opportunity cost – that the return on an equal amount of money invested in stocks could be more beneficial than paying off your mortgage early. There is also the risk that you could face a prolonged career crisis that a large home equity position won’t help.
What are your thoughts on paying off your mortgage early? Do you think the benefits outweigh the risks?