Reasons for paying off your mortgage early include eliminating monthly mortgage payments, saving money in interest, reducing financial stress, and more. But, just because you can pay your mortgage off early doesn’t necessarily mean you should.
Key Points
• Paying off a mortgage early can potentially increase your monthly cash flow and reduce financial stress.
• Not all financial situations justify early mortgage payoff, especially if you have a competitive interest rate.
• Refinancing to a shorter term can help you pay off your mortgage faster.
• Ensure that you have an emergency fund in place before focusing on paying off your mortgage.
• Consider the mortgage tax deduction and whether you have high-interest debts to pay off before making a decision about paying your mortgage off early.
Should You Consider an Early Mortgage Payoff?
It can be tempting to rush to pay off your home loan when you have the ability to, especially if you’ve struggled with debt management. And why wouldn’t you want to pay off your mortgage? Getting rid of debt could potentially increase cash flow.
When it comes to your mortgage loan, paying it off early depends on your unique financial situation and goals — there is no one right answer.
Reasons Not to Pay Your Mortgage Off Early
While it may seem like there are no reasons not to pay off your mortgage early, that is actually not the case. Here are a few reasons why it may not be a good idea to pay off your mortgage loan early:
You Have a Competitive Interest Rate
Unless you’ve reached all of your financial goals, it may not make the most sense to pay off your mortgage early when you have a competitive interest rate.
For example, if you are saving to send your child to college or you’re trying to rebuild your emergency fund after a home repair, those projects might take priority.
You could also possibly earn more by investing your money as opposed to paying off your loan. If that’s the case, it doesn’t make sense to pay off your mortgage early unless you want the peace of mind that comes with no mortgage debt. Investment decisions should be based on specific financial needs, goals, and risk appetite.
You Would Have Nothing Left in Savings
If you only have enough in the bank to cover your mortgage, it is not advisable to pay it off. Having an emergency fund is necessary and may take priority over not having a mortgage payment.
You Might Face a Prepayment Penalty
Make sure to review your mortgage terms closely. Some lenders charge an early payoff penalty, usually a percentage of the principal balance at the time of the payoff.
You Might Miss Out on the Mortgage Tax Deduction
For many people who itemize, having a mortgage helps push their itemized deductions higher than the standard deduction. It’s worth discussing the mortgage tax deduction with your accountant or other tax professional before you resolve to pay your mortgage off early.
You Have Other High-Interest Debt
If you have other high-interest debt, such as credit card debt, personal loans, or student loans, it may make sense to pay those off in full prior to paying your mortgage off early. Home loans typically have the lower interest rates of other forms of debt and are considered “good debt” by lenders. It only makes sense to pay off your mortgage early if you have no other debts in your name.
When an Early Payoff May Make Sense
On the flip side, there are some situations in which paying off a mortgage early might make more sense than waiting. Reasons to pay off your mortgage early may include:
You’ve Met All of Your Financial Goals
If your emergency savings account is right where you feel it needs to be and you’re diligently contributing to your retirement accounts, there may be no reason not to pay off your mortgage early.
Another idea, however, is to purchase an investment property instead of paying off your mortgage early. This can create a monthly cash flow in addition to the value of the property potentially appreciating over the years.
You’re Interested in Being 100% Debt-Free
Sometimes, just the idea of having loan payments can be mentally taxing, even if you’re in a good place financially. Money is not just about numbers for many; it’s also about emotions.
If paying off your mortgage loan early relieves anxiety because it’s helping you become debt-free, then that might be something to consider.
Of course, reflecting on why you want to become debt-free is important when thinking about paying your mortgage off. If, for example, it’s because you’re approaching retirement and will no longer be getting a steady paycheck, it might make sense to pay off your mortgage.
Recommended: How to Pay Off a 30-Year Mortgage in 15 Years
Ways to Pay Off a Mortgage Early or Faster
If you’ve decided it makes sense for your financial situation to pay off your mortgage early, here’s how you can do it:
Lump sum. The easiest way to pay off your mortgage early is by making one lump-sum payment to your mortgage lender. Contact your lender prior to making the payment so you can make sure you’re paying exactly what you owe, including any possible prepayment fees.
Extra payments. You could potentially pay more toward your mortgage principal each month if you got a raise at work or you’ve trimmed some fat in your budget.
If you make extra payments toward your mortgage, it could lead to paying off the loan faster than if you were just to make the set payment each month. Make sure to contact your lender prior to making extra payments, though, so you know the extra amount is being applied toward the principal amount only, not the principal and interest.
Refinancing. Another option for paying off your mortgage early is refinancing. Refinancing your mortgage means replacing your current mortgage with a new one, ideally with a better rate and/or term.
If you shorten your loan term from 30 years to 15 years, for example, it may increase your monthly payments but in turn allow you to pay your mortgage off faster. Home loans with shorter terms often come with lower interest rates, too, so more of your monthly payments will be applied to the loan’s principal balance.
The Takeaway
Should you pay off your mortgage early? Maybe. If your retirement account is fully-funded, you have no other high-interest debts, and you’re interested in becoming 100% debt-free, it may make sense to pay off your mortgage early. However, if you do not have fully funded retirement and emergency savings accounts or you could make more money by investing rather than paying off your mortgage debt, it could be best to hold off on paying your mortgage off early.
One way to save on interest and possibly pay off your mortgage early is by refinancing. Refinancing can allow you to lower your interest rate and shorten your loan term, if desired.
SoFi can help you save money when you refinance your mortgage. Plus, we make sure the process is as stress-free and transparent as possible. SoFi offers competitive fixed rates on a traditional mortgage refinance or cash-out refinance.
FAQ
Is it ever worth paying off your mortgage early?
It can definitely be worth paying off your mortgage early in some circumstances. If you have enough money in your emergency fund and your retirement savings, and you can’t make more money investing elsewhere, it may make sense to pay your mortgage off early. And if you’re in good shape financially and averse to debt, it can make sense to pay your mortgage off early for peace of mind.
Is there a tax disadvantage to paying off your mortgage early?
If you pay off your mortgage, you will no longer be able to take a deduction on your mortgage interest. It is possible that this could mean you can’t itemize, which might increase the amount you have to pay in taxes.
What happens after you pay off your mortgage?
Once you’ve paid off your mortgage, you fully own your home and don’t have to make payments on it every month. You will, however, have to pay property taxes and homeowners insurance.
Do extra payments automatically go to principal?
No, when you pay extra money on your mortgage, it does not necessarily go to principal. Not all lenders accept principal-only payments, but you can check with yours to see if they do and find out what the process is. After you start making the payments, it’s a good idea to check and make sure they are being applied properly.
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