Should you pay off your mortgage early?

Making your final mortgage payment and owning your home free and clear is a massive milestone. Reaching that finish line ahead of schedule can save you thousands of dollars in interest and eliminate a major monthly expense.

However, as fantastic as a mortgage-free life sounds, paying off your mortgage early isn't always the right choice for everyone. Depending on your budget, interest rate, current savings, and your future goals, tying up all your extra cash in your home could actually hold you back in other areas.

You may find yourself asking, "Should I pay off my mortgage?" Let’s explore when it makes sense, when it might not, and ways you can get it done.

Pros and cons of paying off your mortgage early

It’s often the case that major financial decisions come with trade-offs. Whenever you have extra cash on hand, you have options for how to use it. To help you decide if accelerating your payment timeline makes sense for your budget, let’s explore the primary advantages and disadvantages of paying off your mortgage early.

Benefits of paying off your mortgage early

If you have the ability to eliminate your largest monthly expense, it comes with undeniable perks. Here is a look at the most significant benefits of paying off your mortgage early:

• Save money on interest: Mortgages are amortized, which means a large portion of your early payments goes toward interest rather than the principal. By paying down your principal faster, you decrease the amount of time interest has to accrue. This can save you tens of thousands of dollars in interest over the life of the loan.
• Free up monthly cash flow: Without a monthly mortgage payment, you instantly recoup a large portion of your income. You can redirect this cash flow toward daily expenses, travel, investments, child care, or elder care.
• Increase your home equity: Your home equity is the portion of your property that you own outright. It’s calculated by taking the current value of your property and subtracting what you still owe on the mortgage. Accelerating your payments builds that equity much faster, which gives you more borrowing power if you ever need to tap into it later.
• Gain financial security and peace of mind: Owning your home free and clear provides an empowering sense of security. If you ever face job loss or a sudden medical issue, you won’t have to worry about a looming housing payment or the possibility you could lose your home if you fall behind.
• Guaranteed return on your investment: When you pay down debt, you effectively earn a return equal to the interest rate on that debt. If your mortgage interest rate is 6%, paying off your loan early guarantees a 6% return on your money by eliminating that ongoing cost. That’s because your lender can no longer charge 6% on the principal that you’re paying off.

Downsides of paying off your mortgage early

While living without a mortgage sounds ideal, rushing to pay off your home loan isn't without its risks. Here are the potential downsides of paying off your mortgage early:

• Delaying other financial goals: Every dollar you put toward your mortgage is a dollar you can’t use toward the monthly budget or paying off debt. While you can save money on interest, you’re less with less money to complete necessary renovations or start a new business venture.
• Lower ROI than other investments: While paying off your mortgage guarantees a return equal to your interest rate, the stock market historically averages higher annual returns. If your mortgage rate is low, you might earn a much higher return on investment (ROI) by investing your money rather than paying off your house.
• Reduced liquidity for emergencies: Once you put your cash into your home, it becomes illiquid, meaning you can’t simply withdraw it, even in case of an emergency. Instead, you would have to take out a second mortgage, refinance, or sell the house.
• Loss of mortgage interest tax deduction: If you itemize your taxes, you may currently benefit from deducting the interest you pay on the first $750,000 of your mortgage debt. Once your loan is paid off, you lose this annual mortgage interest deduction.
• Potential prepayment penalties: Some lenders charge a fee if you pay off your loan early. Be sure to check your loan documents for a prepayment penalty clause before making a large lump-sum payment.

When you might want to pay off your mortgage early

Depending on your financial situation and priorities, here are some reasons paying off your mortgage ahead of schedule can make sense:

• You want to reduce your monthly expenses: If you’re nearing retirement or your income has changed, wiping out your housing payment drastically reduces your baseline living expenses.
• You want to save money on interest: If you plan to stay in your home for the long haul, early payoff can help you reduce the overall cost of your mortgage.
• You have a high mortgage rate: If you bought your home when interest rates were high, prioritizing your mortgage payoff can help you save that much more.
• You want to prioritize peace of mind: For many people, the psychological benefit of being completely debt-free is worth far more than the potential financial gains of investing in the stock market.

When you might not want to pay off your mortgage early

There are also cases where keeping your mortgage schedule as is and directing your extra cash elsewhere may be the wiser strategy. You might want to hold off on early repayment if:

• You have other financial goals you want to prioritize: If you want to start a business or help your children pay for college, you’ll likely need liquid cash on hand to make those goals a reality. Some homeowners would rather pay off their mortgage as scheduled in order to finance bigger priorities.
• You don’t have other savings: Before you can think about making extra mortgage payments, it is crucial to have a robust emergency fund in place. It’s advisable to have at least 3 – 6 months' worth of living expenses saved in case of an emergency. You’ll also want to prioritize saving for retirement so the money in those accounts can grow over time. Tying up your cash in your home when you don't have a liquid safety net leaves you vulnerable.
• You have other high-interest debt: Credit cards and personal loans almost always carry significantly higher interest rates than mortgages. It makes the most financial sense to clear those expensive debts first before tackling your home loan.
• You could have a higher return on your investment elsewhere: If your mortgage rate is very low, you might grow your wealth faster by investing your extra cash. Deciding whether to pay off your mortgage or invest comes down to the math between your mortgage rate and your expected investment returns.

How to pay off your mortgage early

If you've reviewed your finances and have decided to pay off your mortgage ahead of schedule, here are several early mortgage payoff strategies you can use to reach the finish line faster.

1.  Increase your monthly payment

One of the simplest methods is to add a little extra money to your standard monthly payment. For example, let’s say you’re 5 years into a 30-year, $300,000 loan at a 6% interest rate and you decide to add just $150 extra to your payment each month. You’ll end up paying off your mortgage 3 years and 11 months sooner, saving you a whopping $47,373 in interest.

2.  Switch to a biweekly payment schedule

Instead of making one full payment per month, a biweekly schedule involves paying half of your monthly mortgage payment every 2 weeks. Because there are 52 weeks in a year, this strategy results in 26 half-payments, which equals 13 full payments per year. Setting up biweekly mortgage payments is a way to sneak in an extra full payment annually and speed up your payoff timeline.

3.  Make extra payments when you can

If you don't want to commit to a permanently higher monthly payment, you can simply make extra payments whenever you have spare cash. Whether it's an annual work bonus, a tax refund, or a lucky windfall, directing these funds toward your home loan will steadily accelerate your progress. When doing this, be sure to instruct your lender that these funds should be applied as an additional principal payment, rather than prepaying next month's interest.

4.  Make one lump-sum payment

If you have accumulated enough savings or experienced a massive financial windfall, you can choose to pay off your entire remaining loan balance at once. Before sending the funds, you’ll need to request a mortgage payoff statement from your lender. This document provides the exact amount required to close your account on a specific date, accounting for any daily interest charges or remaining fees.

5.  Refinance to a shorter loan term

Another option is to refinance and change the structure of your loan altogether. When you refinance, you can swap your current mortgage for a shorter loan term. For example, let’s say you want to switch from a 30-year to a 15-year mortgage. While this increases your monthly payment, it also means paying off the home in half the time. Switching to a shorter loan term can also help you secure a lower interest rate.

Before making this move, it’s important weigh the up-front costs of refinancing against your long-term savings. You can use our mortgage payoff calculator to see how much faster you could be debt-free.

6.  Recast your mortgage

If you come into a large sum of cash but don't want to change your loan terms, you might choose to recast your mortgage. Recasting involves making a large, lump-sum payment toward your principal balance. Your lender then reamortizes your loan based on that new, lower balance.

While recasting doesn't change your interest rate or your repayment term, it does lower your required monthly payment. This frees up money in your budget, which you can then apply as an additional principal payment each month to tackle the remaining balance even more quickly. When comparing recasting to refinancing, it’s worth noting that the administrative fee to recast is typically just a few hundred dollars - far less than the thousands of dollars you would typically pay in closing costs for a full refinance.

The bottom line: Paying off your mortgage early can save you money

If you have the funds available, paying off your mortgage early can save you a substantial amount in interest and provide profound peace of mind. However, it requires tying up cash that could otherwise be used for investing, building an emergency fund, or pursuing other life goals. By weighing the pros and cons and evaluating different early payoff strategies, you can make a confident decision that supports your long-term financial health.

If you've crunched the numbers and you’re ready to accelerate your timeline by refinancing into a shorter loan term, you can start the refinance process today with Rocket Mortgage.