Should I Pay Off My Mortgage Early?

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Should you pay off your mortgage as quickly as possible? Or are you better off paying it over 30 years and investing any extra cash? 

Paying off your mortgage early isn’t necessarily the right decision for every homeowner, but it can make sense for some.  Below, we’ll explore the benefits and drawbacks of paying off your mortgage early. We’ll also explore the situations where it makes the most sense to pay off your mortgage, like before your retirement. You can skip to the section that directly answers your query, or continue reading for a comprehensive explanation.

Should I Pay Off My Mortgage Early?

A lot of misinformation can be found online regarding an early mortgage pay-off. One argument against paying off your mortgage is that keeping your mortgage in place is crucial to maximizing your tax deduction.

But that’s not always a valid argument. For example, a family paying a federal rate of 28% plus a state rate of 5% is liable for 33% of taxable income. So, if your total mortgage interest is $12,000 this year, the math looks like this:

$12,000 interest – 33% tax liability of $3,960 =  $8,040 net after-tax interest

In other words, even after tax benefits, you are still paying 67% of the gross interest cost after allowing for the tax deduction. If you could eliminate the entire mortgage debt, you would save the after-tax interest of $8,040 per year. Plus, this allows you to itemize and pushes you above the standard threshold, so that you can take other deductions, too.

Besides the considerations above, here are some pros and cons to think about as you evaluate whether you’re a good candidate for an early mortgage pay-off.

Pros

    • Saves on interest: One of the main benefits of paying off your mortgage early is saving money on interest fees. Over the life of your home loan, that can add up to thousands of dollars.
    • Dependable return rate: When you invest your money in stocks or other kinds of securities, their value can go up or down. However, reducing the interest you pay on a loan is comparable to earning a risk-free return.
  • Frees up cash flow: Paying off your mortgage means that the amount you would have had to spend as a mortgage payment each month can be used for whatever you want. 
  • Peace-of-mind: Being debt-free can be a serious relief for many homeowners, especially for those who are in long-term mortgages.
  • More equity to use: If you pay off your mortgage, you have more potential equity to tap into later should you need to borrow from it in a home equity loan or home equity line of credit, but this comes at a cost.

Cons

  • Ties up liquidity and net worth: If your extra cash is going toward your home loan, it can mean that you have less money for other expenses. Depending on your financial situation, it can even affect your standard of living and give you less flexibility.
  • Miss out on higher returns from other investments: When you’re focused on paying down your mortgage early, your other investments might not see the gains you want since you’re not contributing as much to them and missing out on compounding returns.
  • Ineligible for mortgage interest federal tax: Homeowners will lose out on the mortgage interest deduction after they’ve paid off their mortgage. 
  • Smaller emergency fund: If you lose your job or face an unexpected medical expense, your extra cash might be tied up already and going into your mortgage payments. Of course, you can strategize so this isn’t an issue by building up a comfortable financial cushion before starting your extra mortgage payments. However, this is highly dependent on your financial situation; someone just making extra payments will be much different than someone who refinances from a 30 to a 15 and now has required payments.

Can I Pay Off My Mortgage Early?

Before you start making additional payments toward your mortgage, it’s important to ask if it makes sense given the terms and conditions of your particular home loan.  

First, you should talk to your mortgage company. Many home loan lenders have stipulations around additional mortgage payments. Some lenders may even charge you a prepayment penalty for the lost interest fees the company would make over the life of the loan since you’re paying it off early. If your lender charges a prepayment penalty, it’s critical to crunch the numbers and determine whether paying off your mortgage still ultimately saves you money. 

If you’re allowed to make an extra payment toward your mortgage, make sure that you include a note that you want it applied to the principal balance, not the following month’s mortgage bill. Why? Because mortgage interest is assessed based on the remaining loan balance. So, the smaller your principal, the fewer interest charges you’ll be on the hook for. 

Pro Tip: Paying into a mortgage accelerator program can be tempting, because it provides a structure of payments for you. But you don’t need to pay a company to help you pay off your mortgage early, you can do it by yourself by working with your lender. 

Tips to Pay Down Your Mortgage Early

If you decide that you want to try and pay down your mortgage early, it’s important to take into account your entire financial situation. Priorities like college savings, car loans, and other debts should influence your decision. Here are a few other tips to help you pay off your mortgage early:

  • Create a solid emergency savings fund: Before making extra payments to pay down your mortgage, beef up your emergency fund when you need liquidity. 
  • Pay down high-interest balances first: If you want to renovate your home but your kitchen is on fire, you wouldn’t start your renovation without first putting out the fire, right? That same concept applies to other debts you have. Before you settle on making extra mortgage payments, consider tackling your credit card debt or car loans that have higher interest fees.
  • Don’t forget about your retirement funds: Extra mortgage payments shouldn’t mean that you ignore your retirement savings. Keep investing in your retirement accounts, like a 401(k) or IRA, while paying off your mortgage.
  • Look into refinancing: If you’re in a 30-year home loan, it might be a good idea to refinance your mortgage into a shorter-term loan. If you can time your refinancing during an interest rate drop, that’s even more ideal. This will mean that you make larger payments, but it can save you tons of money in interest. However, it does mean you lose flexibility and the refinance will also cost you money.
  • Consider making biweekly payments: Biweekly payments usually mean that you make a full extra mortgage payment every two weeks. This simple setup can help kickstart your early payoff so you can focus on other financial priorities. 

Paying Down Your Mortgage Early: Is It Right For You?

Having a mortgage hanging over you for thirty years can be an intimidating prospect for many homeowners. Paying down your mortgage early is one way to get back peace-of-mind and might be especially helpful if you’re near retirement. Many retirees are on a fixed income, so paying down a mortgage before retirement can free up cash to use for living expenses and even luxury costs like travel. 

But even if you’re not close to retirement, paying off your mortgage early can mean that you save potentially thousands in interest costs over the life of the loan and build up equity you can use later. Sometimes, paying off your home loan early isn’t worth it, especially if the prepayment penalty outweighs what you’d save in interest or if it means you’re delaying paying off high-interest debt like balances sitting on your credit cards. The right decision for you will reflect both your short-term and long-term financial goals.

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