Quick answer
There are pros and cons to paying off your mortgage early. The main benefits are that you’ll save money on interest and own your home outright sooner. However, it also ties up money that could be invested elsewhere for potentially higher returns. Generally it makes sense to pay off your mortgage early if:
- You have a high interest rate mortgage (over 4-5%)
- You plan to stay in the home long-term
- You don’t have other higher interest debt
- You have enough savings and investments
- You want the security of owning your home
If your mortgage rate is low, you may want to just make regular payments and invest extra funds instead. Consider your full financial situation.
Should you make extra mortgage payments?
Paying off your mortgage early can make a lot of sense in the right circumstances. Here are some key factors to consider:
Your mortgage interest rate
The higher your mortgage rate, the more impact extra payments can have. Most mortgages today are in the 3-5% range. If your rate is above 5%, paying off the mortgage faster could save you thousands in interest costs over the long run. At lower rates, the savings may be more modest. Run the numbers to see how much extra payments could accelerate payoff and reduce total interest paid.
Your time horizon
The longer you plan to stay in your home, the more worthwhile it is to pay off the mortgage faster. If you’ll move again in just a few years, extra payments may not produce enough savings to justify tying up the cash. But over 10-15 years or more, the savings can really add up. Make a realistic assessment of your long-term plans.
Opportunity cost
Money put toward extra mortgage principal could also be invested elsewhere. While paying off a 4% mortgage guarantees 4% returns, investing may yield higher average long-term gains. Evaluate whether you’re comfortable giving up potential higher investment returns for the certainty of eliminating your mortgage debt faster.
Other debts
It usually doesn’t make sense to make extra mortgage payments if you have high interest credit card, auto or personal loan debt. Pay those off first since mortgage rates are generally lower. Only focus extra funds on the mortgage once other debts are paid off.
Emergency savings
Financial experts recommend having 3-6 months of living expenses set aside in an emergency fund before making extra mortgage payments. Make sure you have a strong cash safety net first.
Retirement contributions
Many experts suggest fully funding retirement accounts like 401(k)s up to any employer match before making extra mortgage payments. Make sure you’re saving enough for the future.
Pros of paying off mortgage early
Here are some of the main benefits of making extra mortgage payments and paying off your home loan faster:
Interest savings
Each extra mortgage payment goes directly toward reducing your principal balance. This reduces the total interest you pay over the life of the loan. The savings can really add up, especially on a larger mortgage or at a higher interest rate.
Pay off mortgage sooner
Making consistent extra payments each month can shave years off your payoff timeline. Even just an extra $100 / month can make a difference. Run the numbers to see how much faster you can be mortgage-free.
Equity and ownership
As you pay down your mortgage, you build equity in your home. This increases your net worth. Eliminating your mortgage also means fully owning your home sooner.
Reduced monthly expenses
Once your mortgage is paid off, your required housing payment drops way down. You’ll just need to budget for property taxes, insurance and maintenance costs. This can free up significant monthly cash flow.
Peace of mind
Owning your home free and clear provides financial security and stability. You reduce a major monthly obligation and risk of foreclosure.
Forced savings
Extra mortgage payments force a type of savings each month. This can help ensure you’re steadily building wealth.
Cons of paying mortgage off early
While paying your mortgage off ASAP has advantages, there are also some drawbacks:
Less flexibility
Extra payments tie up funds that could be used for other needs and goals. This reduces your financial flexibility month-to-month.
Lost investment opportunities
Money toward extra mortgage principal is money that can’t be invested elsewhere. You may miss out on higher returns from investing those funds.
Penalties for overpayment
Some mortgages charge prepayment penalties if you pay off the loan too early. Make sure to review your loan terms.
Mortgage interest tax deduction
Paying off your mortgage faster reduces the interest you pay. This can lower the amount of mortgage interest you can claim as a tax deduction each year.
Unknown future plans
Your circumstances may change down the road, like job relocation or a major home renovation need. Having a paid off house reduces leverage for these scenarios.
Opportunity risks
Putting extra money toward your mortgage means you may miss out on other financial opportunities as they arise, like a strong investment market.
Should you refinance your mortgage?
Refinancing your existing mortgage potentially lets you lower your interest rate and monthly payments. Here are key factors in deciding if you should refinance:
Interest rates
To make refinancing worthwhile, you’ll want to lower your current mortgage rate significantly, such as by 1% or more. Compare current rates to your existing rate to see potential savings.
Closing costs
Refinancing comes with upfront fees and closing costs, often 2-5% of your loan amount. Make sure the interest savings exceed closing costs over your time horizon.
Your time horizon
It takes time to recoup refinancing costs through a lower rate. Make sure you plan to stay in the home long enough to realize worthwhile interest savings.
Loan type
Refinancing lets you change your loan term or type, like from a 30-year to 15-year mortgage. This impacts payoff timeline and interest costs.
Cash out
Some homeowners refinance to cash out home equity for other uses, like home improvements. This should be done carefully, adding to your debt.
Run the numbers with a mortgage specialist to see if refinancing makes sense for your situation.
Should you take money out of your home?
Home equity loans or lines of credit let homeowners borrow against the equity in their home. This provides access to funds, but should be done carefully:
Interest rates
Home equity loan rates are often higher than mortgage refinance rates, so this can be an expensive way to borrow. Compare interest rates and fees.
Payback terms
Home equity loans have set repayment terms, often 10-20 years. Lines of credit have flexible draw and repayment periods. Understand the payback expectations.
Loan amount
Most home equity products let you borrow up to 80-90% of your home equity. This can put you at risk by reducing your remaining equity. Borrow only what you need.
Use of funds
It’s best to use home equity to pay off higher interest debts or make important home improvements vs discretionary spending. Have a clear plan for using the funds.
Impact on mortgage
Withdrawing home equity adds to your total debt secured by your home. This can impact mortgage refinancing options and increase foreclosure risk if used irresponsibly.
Home equity loans make sense for some major financial goals, but shouldn’t be over-used. Proceed with caution.
What are the best ways to pay off your mortgage faster?
Here are effective strategies for paying off your mortgage ahead of schedule:
Make an extra principal payment each month
Consistency is key. Add even $100 or more to your payment to go toward principal every month. This can shave years off your timeline.
Make one extra mortgage payment per year
Adding the equivalent of one extra monthly payment annually can save interest and accelerate payoff.
Pay half your annual bonus to the mortgage
Use a portion of any annual bonuses, tax refunds or other windfalls to make a lump sum principal payment.
Refinance your mortgage
Refinancing at a lower rate results in more of your payment going to principal. You can also shift to a shorter term.
Make biweekly instead of monthly payments
This effectively gives you one month extra payment per year, reducing interest costs.
Round up your payment amount
Even rounding your payment up by $10 or $20 can make a dent over time. Set up automatic rounding through your lender.
Temporarily pause retirement funding
You can pause retirement account contributions for a period to focus on extra mortgage payments (not recommended long-term).
Shift to a 15-year mortgage
Refinancing into a shorter term means more payment goes to principal. Just be sure the higher payments fit your budget.
Consistency and time are key to paying your mortgage off faster. Stick to your accelerated plan.
Tips for managing your mortgage
Here are some additional tips for managing your mortgage effectively:
- Review your monthly statement closely – check for rate changes, added fees, allocation of payment, etc.
- Update your home insurance information with your lender annually
- Provide updated contact info to your lender if you move
- Explore mortgage assistance programs if facing financial hardship
- Consider setting up biweekly auto-payments to reduce interest
- Sign up for online account access to easily manage your mortgage
- Keep records of payment history in case of discrepancies
- Monitor your credit – damaging credit can affect mortgage rates
Staying engaged with your mortgage and lender from day one can help avoid issues and ensure your loan stays in good standing.
The pros and cons of paying off your mortgage early
| Pros | Cons |
|---|---|
| Save money on interest payments | Less flexibility with your money each month |
| Pay off mortgage and own home faster | Lost opportunity to invest money elsewhere |
| Build home equity and net worth | May incur prepayment penalties |
| Reduce monthly expenses earlier | Lower mortgage interest tax deductions |
| Peace of mind of owning your home | Unknown future plans could change |
| Forced monthly savings | Miss out on other financial opportunities |
Conclusion
Determining if you should pay off your mortgage early depends on your full financial situation – income, other debts, savings, investment opportunities and more. Run the numbers for your specific mortgage and circumstances.
For many homeowners, making consistent extra principal payments can pay off big in interest savings over time. But you also want to balance mortgage pay down with saving adequately for retirement, college and other goals.
Aim for a diversified financial plan. Keep an open line of communication with a mortgage specialist to explore your options fully. With prudent planning, you can target your mortgage payoff date while still enjoying financial flexibility.
