Should You Pay Off Your Mortgage Early? (2024)

Is It Worth It To Pay Off Your Mortgage Early?

If you find yourself with a little extra cash at the end of the month, should you put it toward your mortgage loan or refinance to a shorter term? There’s no simple answer. Risks and benefits exist when paying off your loan early or switching loan terms, so the right decision differs for everyone.

In this section, we’ll look at a few instances in which it makes sense to pay off your mortgage early – and when it doesn’t.

When Paying Off Your Mortgage Early Works

You might assume that you need to shell out hundreds of extra dollars each month to pay off your mortgage early. The truth is, a small monthly amount or a single annual payment can make a major difference over the course of your loan.

Contributing just $50 extra a month can help you pay off your mortgage years ahead of schedule. You don’t need to find a way to earn an extra $10,000 a year to pay off your mortgage.

If you’re looking for a tool that can help you understand amortization and estimate what paying off your mortgage early would cost you, try using our Rocket Mortgage® amortization calculator. It’ll help you see for yourself how a small amount can impact your loan. Your result might surprise you. Most people can manage to save at least a few thousand dollars in interest with a small monthly extra payment. This is especially true if you start paying more on your loan in the early years of your mortgage.

The best candidates for early mortgage payoffs are those who already have enough money to cover an emergency. You’ll want at least 3 – 6 months’ worth of household expenses in liquid cash before you focus on paying off your mortgage. This is because it’s much more difficult to take money out of your home than it is to withdraw money from a savings account.

When Making Minimum Monthly Mortgage Payments Works Better

It may not be a good idea to focus on paying off your mortgage early if you have other debt to worry about. Credit card debt, student loan debt and other types of loans often have higher interest rates than most mortgages. This means they accrue interest faster.

By paying these debts down, you’ll save more than you would if you put all your money toward your mortgage. It’s best to review your financial paperwork and compare interest rates of your other debts to your mortgage interest rate. If your other debts have a higher interest rate, you should pay them down first.

Understanding Prepayment Penalties

You also may want to avoid paying your loan off early if it carries a prepayment penalty. This is a fee your lender charges if you make all payments your mortgage prematurely. Prepayment penalties are usually equal to a certain percentage you would have paid in interest.

So, if you pay off your principal very early, you might end up paying the interest you would have paid anyway. Prepayment penalties usually expire a few years into the loan.

Consult your mortgage lender and ask about any prepayment penalties on your loan before you make a large extra payment. Prepayment penalties are also noted in your mortgage contract.

When Balancing Early Mortgage Repayment And Other Financial Responsibilities Works

While it’s possible to take cash out of your home equity with a refinance, this process takes time, which you may not have in an emergency. Make sure you have plenty of money set aside for emergencies before you put any extra toward your mortgage loan.

You may want to delay paying off your mortgage if you have another big expense coming up or you’d rather put money into your 401(k) or IRA. You might also want to consider diverting your extra money into a child’s college fund or into savings for an upcoming vacation or wedding.

There’s no point in paying off your mortgage if it means you might end up going into debt in the future.

Should You Pay Off Your Mortgage Early? (2024)

FAQs

Is it smart to pay off your house early? ›

You might want to pay off your mortgage early if …

You want to save on interest payments: Depending on a home loan's size, interest rate, and term, the interest can cost hundreds of thousands of dollars over the long haul. Paying off your mortgage early frees up that future money for other uses.

Is there a negative to paying off mortgage early? ›

Prepayment penalties are usually equal to a certain percentage you would have paid in interest. So, if you pay off your principal very early, you might end up paying the interest you would have paid anyway. Prepayment penalties usually expire a few years into the loan.

What does Dave Ramsey say about paying off a mortgage? ›

Paying off your mortgage early seems impossible but it is completely doable and people do it all the time, but how can you do it and why would you want to put in the extra effort? Paying off your mortgage early will rev up your wealth building.”

At what age should you pay off your mortgage? ›

To O'Leary, debt is the enemy of any financial plan — even the so-called “good debt” of a mortgage. According to him, your best chance for long-term financial success lies in getting out from under your mortgage by age 45.

What are the tax implications of paying off your mortgage? ›

Make a note to alert your accountant come tax season: You'll no longer have mortgage interest to deduct on your tax return. Watch your credit. Keep tabs on your credit score; after your mortgage loan is removed from your credit history, your score may drop slightly.

Is it good to be mortgage free? ›

If you're intending to stay in your current home during retirement, eliminating monthly payments might be a good move. However, for some homeowners, their financial situation and goals might mean it is prudent to focus on other priorities while chipping away at their home loan.

Should I completely pay off my mortgage? ›

If you can afford to make extra payments, overpaying your mortgage means you pay less interest in the future and pay off your mortgage sooner. This means you could save a lot of money.

What happens if I pay an extra $1000 a month on my mortgage? ›

When you pay extra on your principal balance, you reduce the amount of your loan and save money on interest. Keep in mind that you may pay for other costs in your monthly payment, such as homeowners' insurance, property taxes, and private mortgage insurance (PMI).

Is it better to pay off a mortgage or save money? ›

Putting money in savings, even with today's very low returns, may be better than paying down a mortgage. Paying down might result in a better 'return' than an alternative investment, but houses aren't liquid—they aren't a source of immediate cash—especially in today's market.

Does Suze Orman recommend paying off your mortgage early? ›

“If you're going to buy a house, be responsible with it. And if you're going to stay living it that house for the rest of your life, pay off that mortgage as soon as you possibly can,” she tells CNBC Make It. Orman recommends that you aim to be mortgage-free by the time you retire.

Why shouldn't you pay off your mortgage even if you can? ›

Key Takeaways

The money you save from not paying off your mortgage early can give you more financial flexibility. Investing extra funds can potentially earn higher returns than you would save on mortgage interest. With extra cash flow, you can work toward other financial goals, such as saving for retirement.

Do millionaires pay off their house? ›

In fact, the average millionaire pays off their house in just 10.2 years.

What percentage of Americans pay off their mortgage? ›

40% of Americans Pay Off Their House — Are They Doing Better Financially? For most Americans, a home mortgage is the biggest financial obligation they will ever have. A traditional mortgage spans 30 years and is often in the hundreds of thousands of dollars, so the interest charges can be enormous.

What age do most people have their mortgage paid off? ›

“Today's first-time buyers are due to pay off their mortgage at 65-years old on average, compared to 53 in 1990 as sky-high house prices force buyers to extend their mortgage term to make their payments more affordable. “Rising mortgage terms mean more of us will still have housing costs in retirement in the future.

Is 50 too old for a 30-year mortgage? ›

Age doesn't matter. Counterintuitive as it may sound, your loan application for a mortgage to be repaid over 30 years looks the same to lenders whether you are 90 years old or 40.

Is it beneficial to pay off home loan early? ›

Financial advisors recommend prepaying the home loan earlier as the money you prepay goes straight towards reducing the home loan principal and cutting the total interest cost.

What happens if I pay $1000 extra a month on my mortgage? ›

Throwing in an extra $500 or $1,000 every month won't necessarily help you pay off your mortgage more quickly. Unless you specify that the additional money you're paying is meant to be applied to your principal balance, the lender may use it to pay down interest for the next scheduled payment.

Is it better to pay off your house or keep cash? ›

It's typically smarter to pay down your mortgage as much as possible at the very beginning of the loan to avoid ultimately paying more in interest. If you're in or near the later years of your mortgage, it may be more valuable to put your money into retirement accounts or other investments.

What happens if I pay 3 extra mortgage payments a year? ›

Making additional principal payments will shorten the length of your mortgage term and allow you to build equity faster. Because your balance is being paid down faster, you'll have fewer total payments to make, in-turn leading to more savings.

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