Paying off a mortgage early, if doable, seems like the smartest plan in the world. But the question remains: Should you pay off your mortgage early? Dedicating most of your money to a home loan means you may not be able to fund your business, investments, a college fund, an emergency fund, travel, or fun purchases.
There are a lot of scenarios where your money may be put to better use elsewhere.
Here’s what to consider before you decide to go all-in on paying off your mortgage early.
When Should You Pay Off Your Mortgage Early?
Sometimes paying off your mortgage early could make sense. For example:
You Have a Rainy Day Fund
You have emergency savings, the three to six months of living expenses in reserve that most experts recommend.
And your college savings plan, if that’s a need, is funded.
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
Your Retirement Is Fully Funded
You’re contributing the max to your 401(k), IRA, and other retirement accounts. If that’s not the case, you may want to do that before paying off the mortgage.
You Want to Reduce Monthly Expenses Ahead of Retirement
If a mortgage takes up a large portion of your monthly expenses, it may make sense to eliminate the mortgage payment if you know you’re going to be on a limited income soon (such as retirement).
You Want to Save on Interest Costs
Take a look at the loan you signed, or any mortgage calculator tool for that matter. On many standard 30-year loans, you will pay just as much in interest as you do in principal. Paying off a home mortgage loan early could save you a lot of money in interest over the life of a home loan.
Reasons to Hold Off on Paying Off Your Mortgage Early
If you’re in the fortunate position of paying off your mortgage early, there are a few reasons to rethink doing so.
Investment Offers Possibility of Higher Return
If investments provide a return greater than the interest rate you’re paying on your mortgage, it may make sense to hold off on paying off your home loan. Remember, past performance doesn’t guarantee future returns.
Many investments also have better liquidity than a mortgage. It is generally considered inadvisable to use borrowed money to fund investments. Make sure to consider your risk tolerance and investment objectives when deciding to invest instead of paying down your mortgage.
What about buying a rental property instead of paying off a mortgage? Purchasing investment property could generate cash flow.
And adding to a real estate portfolio is one way to build generational wealth.
You Can Use a Home Equity Loan
As long as you still have a mortgage, you may take out a home equity loan — a catch-all term for fixed-rate home equity loans, home equity lines of credit (HELOCs), and cash-out refinancing.
So you might want to hold on to your mortgage if a kitchen remodel is in the plans.
You Still Have High-Interest Debt
Mortgages tend to have much lower interest rates than credit cards do. If you’re a “revolver” who carries balances from one month to the next, or in a family of revolvers, paying off that debt first makes sense.
Nearly half of U.S. families report having revolving balances on one or more of their credit cards, with the average revolving family owing over $8,000, recent data shows.
How to Pay Off Your Mortgage Early
If paying off your mortgage makes sense for your financial situation, it’s helpful to know how to pay off your mortgage early. A handful of strategies may work for different mortgage kinds.
Biweekly or Extra Monthly Payment
One strategy homeowners use to pay off their mortgage early is to pay biweekly. If you pay every two weeks instead of monthly ($1,000 every two weeks, for example, instead of $2,000 a month), by the end of the year you’ll have made a full extra payment. Mortgage servicers may charge fees if you do this, though.
If you want to get more aggressive, making an extra payment every month will decrease the principal quickly. You’ll want to make sure the payment is applied to principal only.
Paying a bit extra every month is one sure way to shrink total interest paid and the loan term. For a mortgage loan of $450,000 at a 5.6% fixed rate for 30 years, total interest paid would be $480,008. Putting $400 more toward the mortgage payment every month would whittle total interest paid to $329,881 — a savings of $150,127. And the mortgage would be paid off in 21 years and 10 months instead of 30 years.
Refinance to a Shorter Term
Changing a 30-year mortgage to a 15-year term with a mortgage refinance will likely result in a larger monthly payment (depending on how much you owe) but a substantial amount in interest savings.
With a shorter mortgage term, payments eat into the principal more quickly. If you stack extra payments on top of a 15-year mortgage, you’ll quickly decrease your loan balance on your way to a paid-off mortgage.
Recast Your Mortgage
Recasting your mortgage involves making a large lump sum payment and having your lender reamortize the mortgage. Your monthly mortgage payment will be recalculated based on how much you owe after the large payment. The term and interest rate will stay the same.
With a recast, you don’t have to go through the application process, and the administrative fee is usually a few hundred dollars.
To decide on a mortgage recast vs. refinance, weigh the pros and cons of each.
Make Lump-Sum Payments
Making lump sum payments will go far toward paying down your mortgage. Just make sure the payments go directly toward the principal.
Get a Loan Modification
A loan modification alters the terms of your original loan to make it more affordable, which could ultimately lead to an earlier mortgage payoff date. This mortgage relief option is reserved for those experiencing financial hardship.
Changes to the terms of the mortgage are designed to potentially lower the mortgage payment so that the homeowner avoids foreclosure. Talk to your lender if you’re thinking about going this route.
Recommended: Help Center for Home Loans
The Takeaway
Paying off your mortgage early is a lofty goal, but if you have other financial needs or can make a better return elsewhere, it may make sense to keep your mortgage.
Whether you’re shopping for a mortgage or refinancing one, SoFi may be able to help you meet your financial goals.
SoFi Mortgages come with competitive rates, flexible terms, and knowledgeable loan officers to help you along the way.
FAQ
Do property taxes go up when you pay off your mortgage?
No. Property taxes do not change based on whether or not you’ve paid off your mortgage. If you do pay off your mortgage, it might seem like you’re paying more because you’ll pay taxes all at once.
What happens to escrow when you pay off your mortgage?
When a mortgage is paid off, an escrow account, if one was in place, is closed. Homeowners will need to contact their property insurance company and taxing entity to have the charges sent directly to them. If there is extra money in the escrow account, it will be sent back to the homeowner when the mortgage is paid off and the escrow account is closed.
How does paying off your mortgage early affect your credit score?
Your credit score won’t be greatly affected by paying off your mortgage early. The account will remain on your credit for 10 years as a closed account in good standing.
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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