The majority of homeowners spend 30 years paying off their mortgage, or even longer if they move or refinance. But depending on your financial situation, you may be able to pay off your mortgage early, freeing up money in your budget for spending or saving.
There’s plenty to consider if you’re ready to pay off your mortgage early, including what else you could use that money for. If you aim to be debt-free, keep reading to learn some of the pros and cons of paying off early, plus some strategies you can use to pay off your home loan.
Can you pay off a mortgage early?
The short answer is, yes, you can pay off a mortgage early. Each mortgage loan comes with a set term, usually 30 years, but 15-year and 10-year mortgages are also available. To pay off your loan ahead of schedule, you’ll need to pay more than the minimum required payment.
Since interest only applies to your current loan balance, paying off your mortgage early means you’ll pay less interest over time than you otherwise would have.
For example, suppose you bought a $300,000 home and put down a 5% down payment, meaning your mortgage balance is $285,000. If your mortgage interest rate is 5%, you’d have to make monthly payments of $1,530 to cover the principal and interest. Over your 30-year loan term, you would pay $265,779 in interest.
But what if you paid a bit extra on your loan each month? If you paid just $100 more per month, you would pay off your loan nearly four years early and pay $39,613 less in interest. Increase your extra payment to $250 a month, and you’ll pay off your loan nearly eight years early and save yourself $79,859 in interest.
Pros and cons of paying off your mortgage early
If you’re considering paying off your home loan early, look at the pros and cons. While there are some clear advantages, there are also some downsides. It’s not the right choice for everyone.
Pros
Own your home outright: A clear benefit of paying off your mortgage early is owning your home outright. This benefit is as much an emotional one as a financial one.
Free up money in your budget: Once you’ve repaid your mortgage, you’ll have more money available in your monthly budget to put toward other expenses or goals.
Save money on interest: The sooner you pay off your mortgage, the more money you’ll save in interest.
Get rid of PMI early: If you’re paying PMI on your loan because you put down less than 20%, extra payments could help you get rid of PMI ahead of schedule.
Cons
Less money for other goals: If more money each month is going toward extra mortgage payments, you’ll have less available to spend or save.
Opportunity cost: When you make extra payments on your mortgage instead of investing the money, you forgo the gains you could have earned on other investments.
Possible prepayment penalty: Depending on your lender and how long you’ve had your mortgage, you could be subject to a prepayment penalty for paying off your loan early.
Lost tax deduction: If you itemize your tax deductions, paying off your loan early means you’ll lose out on annual tax savings.
What to consider before paying off your mortgage early
Paying off a mortgage early can be a good financial decision for some borrowers, but it’s not right for everyone. Here are a few things to consider before choosing to repay your loan ahead of schedule.
Do you have to pay a prepayment penalty?
One thing to look out for before paying off your mortgage early is a mortgage prepayment penalty. Prepayment penalties are often put in place by your lender to discourage you from selling, refinancing or paying off your mortgage too quickly after entering into the loan.
Prepayment penalties typically apply if you pay off your mortgage in the first three to five years. Not all lenders will penalize you, and few mortgages carry these penalties outside the first five years. Regardless, it’s worth checking with your lender or reviewing your monthly billing statement first.
What’s the trade-off of your other investments?
Paying off your mortgage early requires putting more money toward your mortgage payments rather than other investments that might produce a better overall return. In other words, the amount you save on interest payments by paying down your mortgage may not outweigh the amount you could earn if you invested that money elsewhere.
If you’re unsure whether paying off your mortgage early is worth the trade-off, start by running the numbers. Compare your mortgage interest rate to the average return of the other investments where you would otherwise put your money. If one number significantly outweighs the other, it could be an easy decision.
Do you have other loans?
Mortgages typically offer lower interest rates than most loans, so while they’re a long-term commitment, they’re also a useful tool for allowing you to do more with your money. Consider paying off higher-interest loans or credit card balances you have first. It could be helpful to solidify your overall financial picture before choosing to pay down your mortgage early.
What is your cash and savings situation?
Before deciding to put your disposable income toward extra mortgage payments, make sure you have sufficient savings in case of a financial emergency, including job loss. Emergency savings are even more important if your income is variable or unpredictable.
Also, look at whether you’re on track for retirement. An online calculator can tell you how much you should be putting aside per month and how much you should have saved by your age based on your financial goals. If you aren’t on track to retire on time, it may be worth prioritizing retirement savings over repaying your mortgage early.
How does inflation affect your loan?
If inflation rates are higher than your mortgage interest rate, you’re coming out on top with an active mortgage. While the value of the dollar depreciates, your payments are fixed and your house presumably continues to appreciate in value. Additionally, as inflation causes the cost of living to rise, some of that extra money each month is better put toward other expenses.
Can you take advantage of tax benefits?
There are several tax incentives for homeowners, and one of them is the ability to lower your taxable income by claiming your mortgage interest as a deduction. You won’t be able to benefit from this tax credit if you pay off your mortgage early, though you will ultimately pay less overall in interest.
You can only deduct your mortgage interest if you itemize your deductions. If you choose the standard deduction instead of itemizing, it may not be worth holding onto your mortgage for tax purposes.
How will it affect your credit score?
One small factor to consider is that paying off your mortgage early could cause your credit score to dip. However, the negative impact on your credit is likely to be minor, and if you have other active accounts that you pay on regularly, your score should recover quickly.
Ways to pay off your mortgage early
There are a number of methods for paying off your mortgage early. Review your financial circumstances carefully to determine which works best for you.
Pay a bit extra each month
The easiest way to pay off your mortgage early is by paying a bit extra each month. You can do this by adding more to each monthly payment or by making additional payments here and there where possible.
Another trick some people use is to make biweekly payments. Most months, you’ll pay the same amount you normally would. But by the end of the year, you’ll have made two full extra payments. Just make sure to speak to your lender to ensure your extra payments will be applied directly toward the principal balance.
Use your cash windfalls
Throughout the year, many of us receive small or large cash windfalls that can be used as extra payments toward our mortgage. The most common example of such a windfall is the tax return many receive each spring. If you put that money toward your mortgage each year, you’ll pay off your loan ahead of schedule. Other examples of cash windfalls could include extra paychecks or bonuses, inheritances and more.
Refinance to a shorter term length
The most common path for paying back a mortgage early is by refinancing. This is particularly useful if interest rates decline and you can secure a lower rate for the remainder of your mortgage. You can also change the loan term, allowing you to complete it ahead of schedule for your original loan. CNET’s online mortgage calculator can help you determine your new monthly payment.
When you refinance, you’re taking on a new mortgage that will pay off your old one, so you’ll need to plan for fees like closing costs. An online calculator can help you determine whether the upfront costs of refinancing outweigh the money you’ll save on interest by repaying the loan early.
Recast your mortgage
A mortgage recast allows you to make a lump-sum payment toward the principal balance of your loan. Once you do this, your lender will reamortize your mortgage, creating a new schedule with a lower balance based on the additional payment. The term and interest rate of your loan will remain the same through this method, but you’ll reduce your monthly payments. Not all lenders offer this option, but if yours does, you must contact the lender to request a recast.
Final steps to paying off your mortgage early
Once you’ve made your final mortgage payment, you’ll have to finalize everything so you can put the loan behind you and enjoy your fully paid-off home.
Request your mortgage payoff statement
After you make your final mortgage payment, you’ll have to request your mortgage payoff statement from your lender. The statement shows that you no longer owe anything on your mortgage.
Inform your city of ownership status
You or your lender will have to inform your city or municipality that you’re the owner of the property. You can often do this online or request your lender do it for you. Since most mortgages pay your property taxes on your behalf from your escrow balance, that becomes your job when your mortgage is paid off.
Inform your insurance company
Now that your home is in your name, you’ll be responsible for paying your insurance provider directly. Inform your insurance provider that you own the home and will make payments.
Inquire about escrow funds
When you’re paying off your mortgage, your lender may keep funds for homeowners insurance and property taxes in an escrow account. Once you’ve paid off your mortgage, you can ask your lender to transfer any remaining escrow balance back to you.
What is the best way to pay off your mortgage?
Your mortgage is one of the largest financial commitments you’ll take on. It’s essential to give a lot of thought to how you want to tackle it, and there’s no one correct answer for everyone. When you’re weighing whether to pay off your home loan early, you’ll have to decide based on your financial situation and comfort level.
You can choose to pay off your loan on schedule over a period of 30 years or the length of your term. Many borrowers like this predictability, knowing they’ll be able to afford their monthly mortgage payments while having money to spend on other goals.
Some homeowners run the numbers and decide that paying off the loan early makes more financial sense. Others make the decision based on their emotions rather than numbers. If your mortgage is an emotional and financial burden, you might decide it’s best to pay it off early.
As long as you’re making at least the minimum payments on time each month, there’s no wrong way to pay off your mortgage. Consider how the loan fits into your overall financial picture and other goals to make the best decision for your situation.