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Should You Pay off Your Mortgage Early?

Find Out if Making Extra Mortgage Payments Makes Sense for You

When you pay off a mortgage early, this involves making extra payments to eliminate your loan balance before the scheduled mortgage payoff date. Some homeowners want to pay off their mortgage early to eliminate a monthly payment, acquire debt-free ownership of their house, and save on interest.

There are both pros and cons to early mortgage payoff, and you should consider both the benefits and disadvantages before you decide if this financial move is right for you.

What it Means to Prepay Your Mortgage

Prepaying your mortgage means paying off your mortgage ahead of your mortgage term.

Most mortgages have 15-year or 30-year terms. If you make extra payments to your loan, you can pay it off sooner. This will allow you to save on interest, take lien-free ownership of your home, and free up your money for other things once your mortgage payment is gone.

How can you pay off a mortgage loan early? You could prepay your mortgage in several different ways, including making biweekly mortgage payments instead of monthly, adding a lump sum to each monthly payment, or making periodic extra payments when you have the funds to do so.

What are the Advantages of Paying Off Your Mortgage Early?

There are some significant advantages of paying off your mortgage early. Here are the biggest benefits:

You can own your home free and clear. You don't have to worry about foreclosure if you can't make future mortgage payments. The value of your house is 100% yours after paying off your mortgage early.
You can save on interest. If you pay off your loan ahead of schedule, you will not pay as much interest. The sooner your debt is paid off, the more interest you save thanks to paying off your home mortgage early. The savings can be substantial, even if you shorten your mortgage term by a few years.
You can eliminate a monthly bill. Although you will still have to pay property taxes and homeowners insurance once your mortgage is paid in full, you will not have to send money to your mortgage company each month. Eliminating your monthly mortgage payment allows you more flexibility in your budget to do other things, like saving more for retirement.

Consider these advantages when answering the question, “Should you pay off your mortgage early?”

How Much Money Will You Save by Making Extra Payments?

Making extra payments reduces your principal balance faster because the entire payment goes to principal (instead of to interest). Reducing your balance more quickly can save you thousands of dollars in interest and cut years off your mortgage payoff time.

Consider this example for a 30-year fixed-rate mortgage with an interest rate of 6%. The table assumes you start making extra payments from the start of your loan and that you pay an extra $200 per month toward your mortgage. If you did this, you would pay off your mortgage 6 years and 8 months earlier.

Affected Item	Without making extra payments toward the principal balance of the mortgage	With extra payments made toward the principal balance of the mortgage every month
Loan amount	$300,000	$300,000
Interest rate	6%	6%
Monthly principal and interest payment	$1,799	$1,799
Extra monthly payment made toward the principal balance of the mortgage	$0	$200
Total monthly payment (including additional payments made toward the principal balance of the mortgage)	$1,799	$1,999
Total potential savings on interest by making extra payments	$0	$91,174
Time to pay off the loan	30 years	23.25 years

What are the Disadvantages of Paying Off Your Mortgage Early?

While there are benefits to paying off your mortgage ahead of schedule, there are also some disadvantages. Here are some downsides of early payoff:

There's an opportunity cost to pay off your mortgage early: Your return on investment is the interest saved when you pay off your loan ahead of schedule. You may be able to earn a better return on your money doing other things, such as investing in the stock market. So, make sure you really consider if it's worth paying off your mortgage early or could you get better value for your money elsewhere?
You'll give up your mortgage interest tax deduction: If you itemize your income taxes, you can deduct mortgage interest paid on loans up to $750,000. If you pay off your loan early, you'll lose this deduction.
Mortgage payments effectively get cheaper over time. If you have a fixed rate, your payment stays the same for the life of the loan. However, inflation reduces the value of money, so your mortgage payment effectively gets cheaper over time ($1,500 today is worth a lot more than it will be 30 years from now). Paying it off early removes this financial benefit.
You could face prepayment penalties. Some mortgage loans have prepayment penalties. If you owe an added cost for early payoff, this reduces your interest savings. Freedom Mortgage never charges prepayment penalties.
You end up with a lot of money locked in your home. A home is an illiquid asset. Getting money out of your house requires selling or borrowing against your home equity. When you pay off your loan early, you end up with more of your money tied to your home , instead of investments you could access more easily if you need cash.

What is a Mortgage Prepayment Penalty

Some loans include a mortgage prepayment penalty, which means you are charged a fee if you pay your loan off ahead of schedule.

You should always check if your loan has this penalty before determining how to pay off your mortgage early. If you do, paying the penalty would reduce the amount of money you save.

Some mortgage prepayment penalties only apply during the first few years of the mortgage. If you're close to the end of your loan's prepayment penalty period, it may be better to wait.

Making Extra Mortgage Payments vs. Refinancing

When you are deciding how to pay off mortgage loan early, you have two primary options:

You can choose to pay off your mortgage early by making extra payments on your current loan. If you do this, you won't change the official terms and conditions of your loan. You'll just send payments to your lender on whatever schedule you prefer. This is the easiest and most straightforward option when figuring out how to pay off your mortgage sooner.

You can also refinance to a new loan and choose a shorter mortgage term. For example, if you currently have 25 years left on a 30-year mortgage, you could refinance to a 15-year loan. That would cut 10 years off your payment schedule.

Refinancing to a loan with a shorter term can often lower your interest rate and typically greatly reduces the amount of interest you pay on your mortgage. However, reducing your loan term usually increases the amount of your required monthly payment, because you pay more principal each month.

There is also a cost to refinancing your loan. Closing costs can add up to around 2% to 5% of your loan's value. You'll want to make sure these costs are less than the amount of money you save with the refinance loan.

Traditionally, some homeowners relied on the 2% rule, which said refinancing made sense if you could drop your rate by 2%. However, rising housing prices have made this rule obsolete and you may save a significant amount of money if you can drop your rate by 1% and sometime even less. You should calculate how much you will save by refinancing, as well as your upfront closing costs, and determine how long it will take to break even and eventually benefit from a refinance.

Doing this break-even calculation will help you decide if refinancing makes financial sense, when compared to how long you plan to remain in your home.

How to Pay off Your Mortgage Faster

Here's a summary of strategies you can use to pay off your mortgage faster:

Making biweekly payments. Divide your monthly mortgage payment in half and make biweekly payments. Since you will make 26 payments annually with this approach, it results in 13 full monthly payments instead of 12. The extra payment goes directly to reduce your principal balance. This option for paying off a mortgage early often works well for people who are paid biweekly.
Paying extra when you have the money. You can make extra payments whenever you have extra money in your account, such as when you get a bonus at work or a tax refund.
Adding a set amount each month to your regular mortgage payment. For example, you may decide to pay an extra $100 or $200 every month. The more you add, the sooner you pay off your loan and the less interest you pay.
Refinancing your loan. You can refinance to a new loan with a lower rate and/or shorter payoff time. If you do this, simply paying the minimum required will help you pay off your loan faster.
Making a one-time extra payment. You can schedule a one-time extra sum to be deposited once per year, such as at the start or the end of the year.

Before you start making extra payments, though, be sure to take the time to consider the pros and cons and make an informed choice when answering, Should I pay off my mortgage early?

Final Thoughts: Is Paying Off Your Mortgage Early a Good Idea?

What happens when you pay off your mortgage?

You take title free and clear, and your entire home's value becomes your own. Paying off a mortgage early makes sense if you want to be debt-free and you can comfortably afford to refinance to a new loan that has a shorter term, or you can afford to make one-time or periodic extra payments.

A mortgage specialist can help you to determine if refinancing for an early payoff makes sense and how much money it could save you. Talk to a Freedom Mortgage expert to get started today on exploring your loan options and making informed choices about your home loan.