Buying a house is a major financial accomplishment — but the idea of making mortgage payments for the next 15 to 30 years can feel daunting.
Paying off your mortgage early eliminates a large monthly bill and reduces your overall loan cost, but it’s not always the smartest financial move. Learn more about the pros and cons of paying off your mortgage early and the key factors that should impact your decision.
There are many benefits of paying off your mortgage early. Here are some of the biggest advantages.
Your monthly mortgage payment includes both principal and interest. Principal is the amount of money you borrowed, and mortgage interest is what the lender charges you in exchange for providing the loan. The longer your loan’s repayment timeline, the more you’ll pay in interest. Conversely, the faster you pay off a loan, the more money you can save.
Here’s an example: Say you get a $300,000 mortgage with a 6.25% interest rate. With a 30-year loan, you’ll end up paying about $365,000 in interest on top of the $300,000 principal balance. However, if you can put an additional $100 toward your loan principal every month, not only would you shave nearly four years off your loan term — you’d also save more than $57,000 in the process.
A mortgage is more than a monthly bill — it can also be a source of stress. This can be especially true for retirees and others on fixed income. If you’re someone who tends to be uncomfortable with any kind of debt, you might gain some peace of mind by paying off your mortgage early.
For many people, housing costs are the single biggest expense in their monthly budget. While paying off your mortgage won’t eliminate your tax and insurance bills, it will dramatically reduce your overall housing costs by eliminating your principal and interest payments.
With the increased monthly cash flow, you could save or invest more aggressively, or spend it on other goals, like travel or philanthropy.
Read more: 4 ways to increase cash flow and pay off debt faster
Home equity is the portion of your home’s value that you own. When you make additional payments on your mortgage in an effort to pay it off early, you naturally build equity faster. Generally speaking, the more home equity you have, the more financially flexible you are. Equity gives you the option to borrow against your home, and it can increase your profits when you decide to sell.
Read more: 3 ways to access your home equity
When you buy a home with less than 20% down, you typically need to pay for private mortgage insurance (PMI). This insurance protects the lender in case you default on your loan, and you can request that it be removed once you reach 20% equity.
If you decide to pay off your mortgage early, you’ll likely reach this 20% threshold ahead of schedule — meaning you can stop paying PMI and pocket that extra cash.
Paying off your mortgage early has disadvantages, too. Weigh these considerations against the pros before making any extra mortgage payments.
Paying off your mortgage early might mean you might miss out on other wealth-building opportunities. If you’re putting all your extra cash toward paying off your mortgage, that’s less money you’ll have to spend, save, or invest.
For example, you may decide that because your mortgage interest rate is lower than the average stock market yield, you’d prefer to invest your extra cash instead of repaying your loan ahead of schedule. In this case, you’d likely earn more from your investments than you’d save by prepaying your mortgage.
When you prepay your mortgage, more of your wealth is tied up in your home, which isn’t a liquid asset. If a financial emergency happens, you can’t easily access that cash.
Homeownership can involve expensive repairs, so having an emergency fund is key. Be careful about paying extra toward your mortgage if it means lowering your emergency buffer to an uncomfortable level.
Though uncommon, some lenders charge a fee when you pay off your mortgage early. Known as a prepayment penalty, this charge is meant to make up for the interest the lender would have earned if you’d paid according to the original schedule.
Before prepaying your mortgage, check your loan agreement to make sure early payments won’t lead to penalties.
Mortgage loans typically have lower interest rates than many other types of debt. Because higher-interest debt grows faster, it often makes sense to pay off credit cards or personal loans before prepaying your mortgage.
Paying off your mortgage early involves trade-offs and benefits, many of which depend on your finances and other factors. Consider the following before making a mortgage payoff plan:
If you lucked out with a low mortgage interest rate when you took out your loan, you may not feel any pressure to pay off your loan early.
So, start by doing the math: If your mortgage rate is low (around 3%–4%), you may earn more by investing or even keeping money in a high-yield savings account (HYSA). However, if your mortgage rate is on the higher side (5% or more), you may be better off eliminating those interest charges.
Mortgages either have fixed or adjustable interest rates. If you have a fixed-rate mortgage, your monthly payment generally won’t change over the loan term. But with an adjustable-rate mortgage, your interest rate — and monthly payment — may grow in the future. This might make you more motivated to pay off that loan ahead of schedule.
Mortgages can also vary by term, with 30-year and 15-year terms being two popular options. With a 15-year term, you’re already on the fast track to paying off your loan. But with a 30-year term, there’s a bigger potential for savings by making early payments.
Age, retirement timeline, and risk tolerance
If you’re approaching retirement and want to minimize financial risk, you may be more motivated to pay off your mortgage early. But if you’re young and have a long career of steady paychecks ahead of you, you might be comfortable shouldering that monthly payment for several more decades.
It’s probably not wise to pay off a home early if doing so means wiping out your liquid reserves. Make sure you have a healthy emergency fund to handle unexpected expenses before prepaying your mortgage.
How does a mortgage fit into your overall debt situation? If you have higher-interest debt like credit cards or personal loans, you likely want to focus on paying off those accounts first.
Read more: 7 ways to pay off your mortgage faster
