Should You Pay Off Your Mortgage Early?

Paying off your mortgage early can help save thousands of dollars in interest. But before you start throwing a lot of money in that direction, you’ll need to consider a few factors to determine whether it’s a smart option.

In this article, we’ll share some of the pros and cons of paying off your mortgage early and give you a few tips you can use to reduce the interest you’ll pay on your loan.

Every time you make a mortgage payment, it’s split between your principal and interest. Most of your payment goes toward interest during the first few years of your loan. You owe less in interest as you pay down your principal, which is the amount of money you originally borrowed. At the end of your loan, a much larger percentage of your payment goes toward principal.

You can apply extra payments directly to the principal balance of your mortgage. Making additional principal payments reduces the amount of money you’ll pay interest on – before it can accrue. This can knock years off your mortgage term and save you thousands of dollars.

Let’s say you borrow $150,000 to buy a home at 6% interest with a 30-year term. By the time you pay off your loan, you’ll have paid a whopping $173,757.28 in interest. This is in addition to the $150,000 you initially borrowed.

Now, let’s say that you pay an extra $100 every month toward a loan with the exact same term, principal and interest rate. At the end of the term, you’ll have paid $128,170.57 total in interest. That’s $45,586.71 less than you would have paid if you didn’t make any extra payments. You’ll also pay your loan off 81 months earlier than you would if you only paid your premium each month.

Paying down your mortgage early reduces the amount that you’ll pay over time, but many finance experts agree that you shouldn’t always focus on paying off your loan as soon as possible. Some believe that people should concentrate on investing rather than paying off their mortgage early, putting that money into a retirement account or an investment fund. Others believe it’s better to use the money that would have gone to extra payments to pay down other sources of debt.

The decision to pay off your mortgage early is a personal one that depends heavily upon your individual circumstances.

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.

Think that paying off your mortgage early is right for you? Use these tips to own your home sooner.

1. Switch To A Biweekly Payment Schedule

One easy way to pay off your mortgage sooner is to pay your loan on a biweekly basis instead of monthly. For example, if your monthly mortgage payment is $1,000, you’d pay $500 every 2 weeks instead of $1,000 at the end of the month.

Because there are 52 weeks in a year, following this schedule allows you to make 13 payments on your loan instead of the standard 12. This reduces your debt faster without making you feel strapped for cash.

2. Commit To Making One Extra Payment A Year

One option is to use your tax refund to make an extra mortgage payment each year if you’re financially able to. You could potentially end up paying off your mortgage several years earlier than your original payoff date, and you’d be saving yourself a lot of money in interest. If your tax refund is enough to make this extra payment once a year, it could help you financially in the long run.

3. Refinance To A Shorter Loan

Have you built up a significant amount of equity in your home? If so, you may want to consider refinancing to a shorter term. Refinancing your mortgage allows you to save money on interest without worrying about penalties or scheduling extra payments. It also allows you to fully own your home much faster.

Keep in mind that refinancing your mortgage to a shorter term will increase your monthly payments. Do the math and make sure you can cover the extra financial burden before you decide to refinance.

Let’s go over some of the most frequently asked questions regarding paying off a mortgage early.

Should I pay off my mortgage early?

Deciding if you should try to pay off your mortgage early is a personal decision that will heavily depend on your financial situation. Take time to assess your financial plans and decide whether making extra payments on your mortgage loan will still help you reach those financial goals.

How do I know if I’ll have to pay a prepayment penalty for paying off my principal early?

You can find out if your mortgage loan carries a prepayment penalty by looking at your mortgage note or asking your lender. However, it’s important to know that not every mortgage has this penalty. Rocket Mortgage doesn’t have any prepayment penalties.

What if I make two extra mortgage payments a year?

If making an additional payment on top of the extra payment you’d make through a biweekly schedule or by committing to one annual extra payment is a feasible financial option for you, doing so can be a great way to gain full ownership of your home even faster.

However, you should consider this option only if it won’t negatively affect your other financial responsibilities.

Is paying off my mortgage early with lump-sum payments a good idea?

Deciding to reduce the amount you owe on your mortgage using a large lump-sum payment will depend on your personal situation. While your loan term will technically remain the same and you won’t necessarily pay off your mortgage any earlier, your monthly payments will go down, and the overall financial burden of the loan will be diminished.

Paying off your mortgage early can save you a lot of money in the long run. Even a small extra monthly payment can allow you to own your home sooner. Make sure you have an emergency fund before you put your money toward your loan. Also, it’s good to save for retirement and pay down your other sources of debt before you add more to what you’re currently paying on your mortgage.

Making extra payments, refinancing or switching your repayment schedule are all strategies you can use to pay off your mortgage early. As always, consulting with a financial planner is recommended before making any big decisions.

If you’re ready to pay down your mortgage, get started on the refinance process today with Rocket Mortgage.