Paying off your mortgage early: What homeowners need to know

Quick insights

• Potential advantages of paying off your mortgage early include saving on interest, building equity and lowering your monthly expenses.
• Potential risks include having less cash on hand, the opportunity cost of not investing those funds elsewhere and the potential tax implications.
• If you decide to pay off your mortgage early, avoid common mistakes such as not keeping an emergency fund, ignoring high-interest debt or not saving for retirement.

If you make your monthly payments on time and in full, you’ll eventually pay off your mortgage. But should you consider doing it early? We’ll walk through the pros and cons of doing so, and dive into the nuances of how to do it and common mistakes to avoid.

Should you pay off your mortgage early?

There’s no one-size-fits-all answer here. Every financial situation is different, and if you’re considering paying off your mortgage early, it’s worth researching your options and speaking with financial professionals. Here are some pros and cons to consider if you decide to pay it off faster.

Pros

Here are some of the upsides to paying off your mortgage sooner.

• Save on interest: You’ll pay less total interest over the life of the loan.
• Build equity: You’ll increase your home equity stake and accelerate the amortization schedule.tools-and-calculator-hl000066 In short, more of your home’s value will be yours.
• Lower monthly expenses: Removing your monthly mortgage payment can significantly lower your monthly expenses, allowing you to allocate those funds elsewhere.
• Personal satisfaction: Many people take pride in owning their home outright and enjoy the decreased stress of getting rid of long-term debt.

Cons

Here are some drawbacks to consider.

• Less cash on hand: Paying off your mortgage sooner may deplete your cash reserves. This can cause problems if unexpected expenses arise, like if you need to pay for repairs to a vehicle.
• Opportunity cost: If you spend the money on paying off your mortgage, you’re not allocating it elsewhere, like retirement savings or other potential investments. This could lead to a lower net worth in the long run.
• Tax considerations: You may be able to deduct home mortgage interest from your taxes.ec-irs-pub-936ec-irs-pub-936ec-irs-pub-936 However, if you pay off your mortgage, you won’t be able to utilize this deduction, which could increase your taxable income. To learn more about the tax implications consider speaking with a tax advisor.
• Potential prepayment penalties: While most conventional loans don’t have prepayment penalties, some mortgage loans do. This should be factored into any decision you make about whether or not to pay it off early.

How to pay off your mortgage early

If you ultimately decide that paying off your mortgage early makes sense for your financial situation, there are some different ways to go about it. You can also combine these tactics.

Refinance

Refinancingrefinance-hl000061refinance-hl000061refinance-hl000061refinance-hl000061refinance-hl000061 to a shorter loan term can be an effective way to pay off your mortgage sooner. Just keep in mind that you’ll owe closing costs again, and current interest rates will play a big factor in your new monthly payment.

Make extra payments

Making extra payments to your mortgage is another effective tactic for paying off your debt sooner. Make sure you specify that these payments should be applied directly to the principal balance. This will decrease the total amount you owe and save you interest over the life of the loan.

Make biweekly payments

Making biweekly payments versus monthly payments is a subtle change you can make to pay off your mortgage faster. If you make monthly payments, you’ll make 12 payments in a year. By paying biweekly, you’ll make 26 payments, which translates into an extra month’s payment every year. Over a 30-year mortgage, you’d save 2.5 years of payments.

Make lump-sum payments

Applying lump-sum payments is another option for paying off your mortgage early. For example, if you earn a bonus at work, get money back on your tax return or receive any sort of financial windfall, applying those lump sums directly to the principal can make a big difference.

Common mistakes to avoid when paying off your mortgage early

One of the underrated benefits of getting a mortgage is that it’s a common path to homeownership. Its popularity means there are a lot of personal experiences out there to learn from. Here are some common mistakes to avoid when paying off a mortgage early.

• Not considering prepayment penalties: Make sure you talk to your mortgage lender to find out if there are any prepayment penalties involved. You don’t want your moment of triumph to be undermined by an unwanted surprise.
• Neglecting an emergency fund: Paying off a mortgage early can deplete cash reserves. Make sure you have enough left for an emergency fund to help handle life’s rainy days. Worrying about funds adds stress to any emergency situation.
• Ignoring high-interest debt: If you have other high-interest debt, like credit card debt, you might be better off prioritizing that debt first.
• Not saving for retirement: With compound growth, the longer your money is invested, the longer it has to earn. So there’s a real opportunity cost to neglecting your retirement savings.

Alternatives to paying off your mortgage early

If you’re not sure whether paying off your mortgage early makes sense for your situation, there are other financially savvy things you can do with extra cash.

• Improve your home: Upgrading your home can help increase its value. This may be a smart investment, as your equity increases over the long term.
• Diversity your portfolio: Bonds, stocks and more volatile options—like cryptocurrency—are all potential areas of investment. A well-diversified portfolio could earn more over the long run than what you’d save on interest paying off your mortgage sooner.
• Increase retirement investments: Contributing the maximum amount to 401(k)s, IRAs or even just increasing the percentage you’re saving can make a big difference years from now. Compound interest is a powerful force.
• Pay down high-interest debt: Focusing on other debt with higher interest rates than your mortgage payment could also save you more over the long run.
• Invest in yourself: Maybe there’s a side hustle or potential business venture you’ve been considering. Or you could invest in your education. There are many ways to invest in yourself to increase your earning potential.

Frequently asked questions

Are there tax implications to paying off a mortgage early?

Yes, if you pay off your mortgage early, you will lose the ability to deduct your mortgage interest. This could increase your taxable income and may also affect your ability to itemize your deductions.tools-and-calculator-hl000066 To understand the nuances of the potential tax implications, a tax professional can provide more tailored advice.

Will paying off my mortgage early affect my credit score?

Paying off a debt can cause your credit score to drop slightly in the short term. However, the effects are usually temporary.

Does paying off my mortgage early impact my home insurance?

You’ll be solely responsible for your home insurance. There will be administrative changes—for example, removing the lender from your insurance policy and updating payments to go directly to the insurance provider instead of through an escrow account. This would also apply to how your property taxes are paid.

Final thoughts on paying off your mortgage early

Paying off your mortgage can feel like a significant accomplishment. It can also save you on interest and lower your monthly expenses. However, there is a significant opportunity cost. You may lose out on making other investments and could deplete your cash reserves. Make sure to consider your options carefully before committing to a course of action.