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Paying off your mortgage early can be a wise financial move. You'll have more cash to play with each month once you're no longer making payments, and you'll save money in interest.
Making extra mortgage payments isn't for everyone, though. You may be better off paying off other debt or investing the money instead. Here are the pros and cons of paying off your mortgage early.
There are some pretty big advantages to paying off your mortgage early. You'll save on interest, free up cash flow, and have more money to put toward other financial goals you might have. Here's a look at some of these benefits in more depth:
Mortgage interest is charged based on the balance you have remaining on your loan, so as you reduce that balance, you pay less in interest. (And the quicker you do that, the more you save.)
Depending on how much you borrowed and your interest rate, paying off your mortgage early could save you tens of thousands of dollars. For example, if you took out a $400,000, 30-year mortgage loan at a 6% rate, but paid off the remaining balance in year 10, you'd save nearly $241,000 in interest.
Once you pay off your mortgage, you own the home outright. That means if you hit a financial rough patch, there's no chance of losing the house — and you won't be on the hook for expensive mortgage payments.
You also have a hefty nest egg you can rely on if you need to — because once you sell, all those profits go straight to you (not your mortgage lender).
One of the best parts of paying off your mortgage is you no longer have monthly payments. By eliminating monthly mortgage payments, you free up that cash flow to put toward other things. For example, you could invest the extra money or pay for your child's college tuition.
The average monthly mortgage payment is currently $2,883 on a 30-year fixed mortgage, according to data from the Department of Housing and Urban Development and the National Association of Realtors, so paying off your mortgage could free up a sizable chunk of cash for you to save or put toward other expenses.
There are lots of benefits to paying off your mortgage loan early, but the strategy isn't perfect. There are some drawbacks you should consider, too. These include:
While paying off your mortgage early can save you on interest, you actually might earn more by investing — rather than putting it toward your loan.
The average mortgage interest rate right now is around 7%. The average stock market return over 10 years is about 12%. So if you pay your mortgage off 10 years early vs. invest in the stock market for 10 years, you'll most likely come out on top by investing the money instead.
If you drain your savings or put a ton of cash toward paying off your mortgage, it could leave you with very little money left for emergencies. While you can always sell your house, that's not a very liquid option — and could take a while to produce the money you need in a pinch. It's always best to have a flush emergency fund on hand just in case.
Paying off your mortgage early doesn't have to mean a huge lump sum payment. There are a number of ways to do it gradually, putting small amounts toward the loan over time. Here are some strategies to pay off a mortgage faster:
One option is to make extra payments toward your loan's principal balance. You can do this by adding an extra few hundred dollars onto your payment each month (just make sure to clarify with your lender that this will go straight to the principal), or make an extra payment when you get a windfall — maybe with your annual tax refund or holiday bonus.
Another strategy is to take your monthly mortgage payment, divide it into two, and then pay that amount to your lender every two weeks. Making biweekly mortgage payments results in one full extra payment annually (26 half-payments, since there are 52 weeks in a year) and can shave years off your loan. It also may work with your pay schedule better, especially if you get paid every other week.
Finally, you can also refinance your mortgage into a shorter term, say from a 30-year to a 15-year mortgage. This will increase your monthly payments, but it will allow you to pay off your loan sooner and with less interest paid.
Is it always smart to pay off your mortgage early? Chevron icon It indicates an expandable section or menu, or sometimes previous / next navigation options.
It depends on your financial goals, interest rate, and alternative investment opportunities. Often, investing your money in the stock market or other assets could be better for your finances. For some people, though, freeing up cash flow and reducing debt are higher priorities.
How much faster can I pay off my mortgage? Chevron icon It indicates an expandable section or menu, or sometimes previous / next navigation options.
That depends on how much extra you put toward your principal balance and how often you do it. You can use an online early payoff calculator to experiment with different payment amounts and strategies.
Are there penalties for paying off a mortgage early? Chevron icon It indicates an expandable section or menu, or sometimes previous / next navigation options.
There can be prepayment penalties for paying off your loan early, but these fees aren't very common anymore. Check with your loan servicer and read your loan documents to be sure.
Should I pay off my mortgage early or invest? Chevron icon It indicates an expandable section or menu, or sometimes previous / next navigation options.
The answer to "Should I make extra mortgage payments?" depends on your level of risk tolerance and your overall financial goals. To start, compare your mortgage rate to the potential returns of other investments you might consider. Often, investing can net you more money, though it comes with more risk. Paying off your mortgage loan, however, is better if you want to free up cash flow or own your home outright.
Could extra payments hurt my credit score? Chevron icon It indicates an expandable section or menu, or sometimes previous / next navigation options.
No, making extra payments won't hurt your credit score. Having a history of on-time payments can only help you score. However, closing your account altogether might have a minor impact on your score, though it should be only temporary.
Use our free mortgage calculator to see how paying off your mortgage early could affect your finances. Plug in your numbers, then click on "More details" for information about paying extra each month. You can also use a formula to figure out your monthly principal payment, though using a mortgage calculator is generally easier.
