Paying a Mortgage Off Early: What You Need to Know

Should I Pay Off My Mortgage

Are you wondering if paying off a mortgage earlier makes sense?

Many people ask themselves, “Should I pay off my mortgage?” As a homeowner, having your home paid off early is likely enticing.

Who wants to pay a monthly mortgage if they don’t have to? But, as with every big financial decision, it is essential to consider all factors before paying your mortgage early.

Even though getting rid of your mortgage will save you money on interest, the risks must be weighed against the benefits you anticipate.

Only once you have a clear idea of the pros and cons of paying your mortgage off can you make an informed decision.

At first glance, getting rid of a home loan sooner is a clear winner. However, financial management, retirement planning, and investments generally require careful planning to get right.

Before you can be sure of what decisions are best for you, you must consider your monetary goals, spending habits, the market, and other factors.

A Low Mortgage Rate Could Influence Your Decision

For example, if your mortgage interest rate is low, holding onto your cash might make more sense—or even investing it. Doing so could make even more sense if you know you’ll get a higher return rate than what you pay on your loan. ( I will get into this more later.)

That is why it is always a good idea to talk to a financial advisor before making any significant financial decisions—they are trained to help you identify risks and potential rewards based on your unique circumstances.

There are solid reasons more and more people are customizing their home mortgage loan terms. Lenders realize that offering borrowers more flexibility with the length of their mortgage is a good thing.

For example, you may want to tie the length of the end of your loan to when you are retiring.

Before you talk to an advisor, though, it never hurts to do your research. The following information can help you understand the benefits and drawbacks of ending a mortgage before its term has concluded.

Pros of Paying Off a Mortgage Early

You may want to consider paying off your mortgage in advance.

1. A Significant Financial Burden is Removed From Your Life.

To end a loan early requires some severe financial discipline.

You’re probably thinking about how great it will feel to be mortgage-free. Right? Let’s face it: paying a mortgage every month is a financial responsibility that most homeowners share.

Most people are not free and clear of their loans. For homeowners with high debt loads, paying the bills each month can add additional stress.

Paying off a mortgage is exceptionally liberating. You can sleep soundly at night knowing you don’t have an obligation. Even for folks who have no financial worries, it brings peace of mind to be able to say you’re mortgage-free.

I have first-hand experience with this, paying off my mortgage twelve years early. The feeling of not having to worry about a home loan payment can be exhilarating.

Does Making Additional Payments Make Sense?

Making extra principal payments each month doesn’t always make financial sense for everyone. It is essential to distinguish whether you should be paying down your mortgage balance.

Many people consider paying off their mortgage when they are heading into their retirement years. They do not want to make mortgage payments when they no longer have a steady income stream.

Removing the loan early can make much sense to remove that financial burden.

2. You No Longer Have to Weigh The Cost of Your Mortgage Against Other Investments.

Investing is a balancing act that requires careful planning to avoid working against yourself. Your mortgage is probably the most significant loan you have taken out, and the cost of the interest you are paying adds up over the years and decades.

You can and should make certain investments even if you have a mortgage—like your 401K or IRA investment accounts; others are less clear. For an investment to make sense while you owe money to the mortgage company, it will need to deliver a rate of return that exceeds your mortgage interest.

Otherwise, you would be better off paying down the mortgage. But if you have paid the loan off, you do not need to weigh your investments against your home loan—because you are no longer paying interest.

When money is cheap with rock-bottom interest rates, the pendulum usually swings in favor of keeping a mortgage. On the flip side, if you have a high mortgage interest rate, paying off your mortgage could make more sense.

Of course, if you decide keeping your mortgage makes more sense than paying it off early, you would be foolish not to refinance into a lower interest rate.

You can get a no-points, no-closing-cost loan and keep the same number of years to amortize the mortgage. This will give you a lower interest rate while also paying off the loan in the initially scheduled time frame.

3. You Can Put Your Money in Less Risky Investments.

Once you end your mortgage, you can use the money you were paying towards your loan to invest in safe investments.

That’s not to say your home is a risky investment because it’s not. However, there is always the possibility that housing prices could drop, and your home could wind up being worth less than you expected or fail to keep up with inflation. This rarely happens, but theoretically speaking, it could.

Treasury securities and bank-insured certificates of deposits are incredibly safe investments you could pour your money into for a secure investment.

However, it is unlikely that these investments would deliver a higher return than your mortgage interest rate. That is why they are not as desirable for those who have mortgages.

4. You Can Invest in Higher-Risk Investments Like Stocks.

Treasury securities and bank-insured certificates of deposits are not high-yield investments, which is expected when an investment is extremely low-risk.

You can diversify your portfolio by investing in stocks more likely to yield higher dividends.

Of course, there is more risk, but you can mitigate it by investing in stock index funds.

Talk to your financial advisor about long-term investing strategies. This will allow you to get advice that pertains to your unique situation and specific goals.

Over the long term, the stock market is a great place to have your money. If your investment horizon extends several years, having a large chunk of your financial portfolio in stocks makes sense.

With inflation at a historical level of 2-3 percent, stocks have given investors a 7-8 percent return a year. People get into trouble when they try to time the market. When you have a longer investment time frame, buy and hold is the way to go.

5. You Free Up Cash Flow For Your Household.

Not having a mortgage payment each month will free up a lot of cash for you and your family. The more cash flow you have, the less stress you will experience when you are hit with the many unexpected and expected expenses that come your way.

More cash flow also gives you options for saving or investing that you would not have otherwise.

6. You Can Stop Paying PMI.

Most lenders require private mortgage insurance until you reach 20% equity in your home. The sooner you get 20%, the sooner you can stop paying PMI and put that money to use better.

PMI offers no benefits to homeowners. As long as you continue to pay private mortgage insurance, you will lose a significant amount of money annually.

Private mortgage insurance protects the lender from default and nothing more.

7. You Can Convert Your Equity to Cash.

The more you pay off your mortgage, the more equity you will build in your home, and the better your financial options become for leveraging that equity. Eventually, you can get a home equity line of credit,t or a cash-out refinance.

You can use the cash from these new loan options to renovate your home, pay for emergencies, or invest in another property.

Understanding Prepayment Penalties and How to Avoid Them

While they are rare today, it’s crucial to understand the concept of prepayment penalties. Some lenders impose these fees when you pay off your loan before the agreed-upon term ends. The rationale behind these penalties is to compensate the lender for the interest payments they’ll miss out on.

However, most mortgages don’t have prepayment penalties.

To navigate this potential obstacle, review your mortgage documents or speak directly with your lender to determine if a prepayment penalty applies to your loan. If it does, calculate the penalty cost versus the interest savings from early repayment to make an informed decision.

In some cases, focusing on other high-interest debts or investment opportunities until the penalty period expires might be more financially prudent.

For those determined to proceed, there are strategies to minimize or avoid these penalties altogether. Some lenders allow for a certain percentage of the principal to be paid off early each year without triggering a penalty. Alternatively, refinancing your mortgage could be viable, especially if you can secure a lower interest rate or better terms that justify the costs involved.

Cons of Paying a Mortgage Off Early

You may not want to pay off your mortgage in advance.

1. You Lose Liquidity Paying Off a Mortgage.

Liquidity refers to how easy it is to access and spend the money you have. You lose liquidity when you pour all of your cash into your home.

If an emergency sprung up and you needed cash, for example, you would have to get a home equity loan or sell the home to access your money.

If you held off on ending the loan and kept some cash in a savings account, you could get to the money immediately. It is essential to weigh your need for liquidity against your desire to be done with the mortgage.

Most people who decide to pay off their mortgage early have no worries about having extra cash.

2. You Lose Access to Tax Deductions on Interest Payments.

You can deduct your mortgage interest payments each year when you file taxes, although not as much as you used to.

That means you get more money back each year because of the money you pay towards interest. Once you pay your home off, you will lose those tax deductions.

However, the amount of mortgage interest you can deduct has recently changed for the worse.

When you own a home now, you can only claim an itemized deduction for interest on a mortgage up to $750,000 if married and $375,000 if married filing separate status. These limits are in place until 2025. The debt limits under the old tax code were $1,000,000 and $500,000.

Additionally, under the old tax code, you could deduct mortgage interest up to one hundred thousand of home equity debt, or fifty thousand if married, filing separately.

Under current law, you can only deduct interest on home equity debt used to acquire or improve your residence, subject to the $750,000/$375,000 limits.

Under the new tax laws, carrying a mortgage has become less appealing. There are fewer tax breaks for homeowners.

3. You Could Get a Small Knock on Your Credit Score.

One factor that goes into your credit score is your credit mix—the different loans you have at any time. When you pay your mortgage off, it drops out of your credit mix. That could lead to a slight drop in your credit score.

The credit mix you possess contributes ten percent of your overall credit score. Considering this, it should be understood that other creditors see you paying your mortgage each month as a good thing.

When they determine your viability as a borrower, it’s excellent they see you making your monthly payments on time.

4. You Cannot Put The Money Towards Other Investments.

Paying the loan off early will probably take a focused financial push. All that money you pour into the mortgage could be put into other investments that might yield higher returns.

The average return on the S&P stock market index over the past 90 years was around 10%, whereas the rate on a standard 30-year mortgage is about 4.5%.

Few would advise you to dump all your money into stocks instead of your mortgage—stocks carry much more risk—but it is worth remembering that you could earn more from stocks.

If you have high-balanced credit cards, it might also make sense to pay them down first. You may save more money with their higher interest rates in the long run.

Similarly, paying off student loans first could be more beneficial.

5. You Might Not Be Able to Put as Much Away into a Retirement Account

With extra money to pay down a home loan, you might be unable to max out your retirement accounts. Your retirement plan will not grow as quickly without maximum funding.

It is an opportunity cost that will need to be weighed carefully.

The Role of a Mortgage Payoff Calculator in Early Repayment Plans

Using a mortgage payoff calculator is an indispensable step for homeowners contemplating the early repayment of their mortgage. These calculators offer a detailed projection of how additional payments affect the total interest paid and the loan’s term. You can explore various scenarios of extra payments and their impact on your mortgage by inputting your current loan details, including the outstanding balance, interest rate, and remaining term.

For instance, making bi-weekly payments instead of monthly can significantly reduce your interest costs and shorten your loan term. Similarly, adding a fixed amount to your monthly payment or making an annual lump sum payment towards the principal can accelerate your path to being mortgage-free while saving thousands in interest.

A mortgage payoff calculator also helps in strategic financial planning by allowing you to compare the benefits of early mortgage repayment against other potential investments or debt repayment strategies.

This analytical tool ensures that your decision is grounded in thoroughly understanding its financial implications.

A calculator for paying off loans will determine the remaining time, differences in payoff time, and how much interest you’ll save with the payoff options.

Perhaps you would like to pay off a mortgage earlier for some specific timeline or reason.

You can use a calculator to determine when to be mortgage-free early for your circumstances. Based on the input data, the mortgage payoff calculator will determine exactly how much mortgage interest will be saved.

How to Pay Off a Mortgage Early

Let’s look at the ways to pay off a mortgage.

Make Extra Mortgage Payments

There are several ways to go about paying off a mortgage before the initial term. The most common is making extra mortgage payments. Doing so can be accomplished in two ways. You can either make an additional principal payment each month or a lump sum payment during the year.

You can pay before it’s due based on what’s comfortable for your finances. However, it is essential to let your mortgage lender know if any extra payments should be applied toward the principal.

Set Up Bi-Weekly Mortgage Payments

Many borrowers believe that making bi-weekly payments gives you one extra mortgage and an extra mortgage interest. Most lenders allow you to set up bi-weekly payments.

If, for some reason, they don’t, you can still add what you would have paid bi-weekly to your regular monthly mortgage payment, accomplishing the same thing.

Refinance Your Mortgage With Better Terms

Doing mortgage refinancing makes sense when you can get a lower mortgage rate or reduce the loan term.

For example, if you can go from a 30-year loan to a 15-year loan, you can save a ton of mortgage interest. You must ensure the shorter-term mortgage does not negatively impact your monthly household budget.

Refinancing into a shorter term should only be done when you’ve got a comfortable financial cushion. A well-funded emergency fund will be essential.

You can use the mortgage payoff calculator above to see payment scenarios.

Make a Large Principal Payment

Making lump-sum payments is possible when money unexpectedly falls into your lap.

If you are fortunate to come into a large cash windfall, you can put it toward a mortgage payoff. Paying off the loan in this fashion can happen when you get a tax refund, a large work bonus, or possibly coming into an inheritance.

See if Your Mortgage Lender Will Recast the Mortgage

Mortgage recasting occurs when you pay a lump sum towards the principal, and the lender adjusts the amortization schedule to reflect the new balance.

Recasting will lower monthly mortgage payments, but your interest rate and loan terms don’t change. The benefit of recasting is that it doesn’t cost nearly as much as refinancing. Mortgage fees for recasting are usually only a few hundred dollars.

You’ll need to confirm with your lender a mortgage recast is an option.

Confirm There are No Prepayment Penalties

Today, mortgage lenders rarely have a prepayment penalty, but it is vital to check nonetheless. An extra monthly payment is commonplace with those looking to lower mortgage debt.

Paying off a home loan quickly should never be a problem.

What Happens When You Pay Off Your Mortgage?

You may wonder what happens when a mortgage is paid off. When your loan is finished, your lender will provide a few documents.

The documents are referred to as a mortgage release or mortgage satisfaction. You’ll be mailed a letter from the lender stating your mortgage has been paid in full. You will also receive a canceled promissory note signed when you purchase your home. It should be recorded in the local registry of deeds. This may take a few months, so following up and ensuring your lender completes this step is essential.

FAQS

1. What is the average age to pay off a mortgage?

Many experts who recommend having your mortgage paid off say it should be done by the time you hit fifty years of age.

2. What is the most significant downside of an early payoff?

The biggest drawback of paying off a mortgage is reducing your liquidity. It is far easier to get money out of an investment or bank account than it is to get money from the equity you’ve built in your home.

3. What effect will paying $100 a month have on paying down my mortgage?

Adding just one hundred dollars towards the mortgage principal each month will significantly impact the life of the loan.

Paying $100 extra will reduce the life of your loan by five to six years.

4. Do extra payments automatically go toward the principal?

No. It would be best to let the lender know the extra funds should be applied to the principal balance.

Some lenders will apply the money to the interest first, which you do not want. It is rare, but you should also ensure no pre-payment penalty.

5. What happens when you pay off your mortgage sooner?

When you have paid off your loan, the lender can send you your original promissory note with the words paid in full. There should be an explanation that you have paid off your debt in full.

6. Will paying off my mortgage impact the amount of income taxes I pay?

Yes. You will no longer be afforded a tax deduction when you pay off your mortgage. This is one of the arguments for not paying off your loan early.

For example, if you have been writing off $5000 of loan interest a year and pay a 25% federal tax, the tax liability would rise by $1250 when you no longer have this deduction.

7. What’s the best way to pay down your mortgage?

You can pay off your mortgage faster by making one or more additional mortgage payments a year or contributing an extra amount each month.

Another option, as discussed, is to pay your mortgage bi-weekly, which will, in essence, provide the lender with more payments each year.

8. Is it better to get a 15-year mortgage or pay extra on a 30-year mortgage?

The answer depends on what you can afford to pay each month. A 15-year mortgage has a lower interest rate, so if you are comfortable making a higher monthly payment, this would be the route to take.

On the other hand, if you are not sure your income will remain steady or you’ll take on more debt, having the flexibility to choose the amount to pay would be better.</p>

9. What are the fastest ways to pay off a mortgage?

The quickest ways to pay down a mortgage are to set up bi-weekly payments, send the lender more each month, give the lender extra money, or select a shorter loan term.

Of course, you could combine the above to make the payoff happen even sooner.

10. Does paying off your mortgage hurt your credit scores?

Paying off your mortgage will have a negligible effect on your credit scores. They may drop slightly, but not enough to worry about.

11. Do millionaires pay off their mortgages?

Yes. Most millionaires are mortgage-free. The average millionaire will pay off their mortgage in eleven years. Over 65 percent live in homes mortgage-free.

Final Thoughts 

Whether or not it makes sense to get rid of your loan early depends on individual financial and life circumstances. What may be right for one party may not make sense for another.

Your financial situation should dictate whether to terminate earlier makes sense.

Research and possibly contact a financial advisor who can study your circumstances more closely. The advantages and disadvantages of paying off a mortgage sooner are not always clear, cut, and dry.

Other Mortgage Resources Worth Reading

Would you like more helpful mortgage guidance? Before buying a home, look at some excellent Maximum Real Estate Exposure resources.

• Why do home mortgages get transferred – have you ever wondered why you start with one lender and end up with another? Mortgages getting sold is a common practice in the lending industry. See what you need to know about this financial practice.
• What questions should I ask lenders? When you purchase a home with a mortgage, the lender’s questions are vital to making wise financial decisions. See what information you should be getting from the lender you ultimately choose.
• How to pick a lender—one of the most important aspects of purchasing a home is choosing a mortgage lender. See some of the most important factors in making the right lender choice.
• How do you get the lowest mortgage interest rate – a significant fin? Your interest rate will be a factor for many years to come when purchasing a home will be your internet and the most attractive financing.
• Mortgage myths – are you aware of many mortgage falsehoods and half-truths? See some of the most common mortgage myths and avoid them.
• What are the best mortgage programs for first-time buyers? Do you know specific mortgage programs work well for first-time home buyers? Take a look at the detailed review of first-time home buyer mortgage programs.

Become educated on financing a home with each of these mortgage-related articles.

About the Author: Bill Gassett, a nationally recognized leader in his field, provided the above real estate information on paying off a mortgage early. Bill has expertise in mortgages, financing, moving, home improvement, and general real estate.

Learn more about Bill Gassett and the publications in which he has been featured. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-625-0191. For the past 38+ years, Bill has helped people move in and out of Metrowest towns.

Are you thinking of selling your home? I am passionate about real estate and love sharing my marketing expertise!

I service Real Estate Sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Natick, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton, and Uxbridge Massachusetts.

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Paying Off a Mortgage Early: How to do it and Pros & Cons

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Is paying off a mortgage early the right financial move? See the pros and cons of owning a home without a mortgage.

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Bill Gassett

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Maximum Real Estate Exposure

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