First Steps

Should I Pay Off My Mortgage Early?

Published on: March 8, 2022

should i pay off mortgage early

Are you wondering, should I pay off my mortgage early? Depending on the loan you choose, it can take decades to pay off a home mortgage debt. But if you later discover you have some extra wiggle room in your budget, paying off your mortgage early can save you both time and money.

It’s important to note that paying off a mortgage loan ahead of schedule is a complex decision. While it can amount to savings, it isn’t necessarily the best choice for every homebuyer. Here’s what you need to consider and the steps required to pay off your mortgage loan early.

Should I pay off my mortgage early? Things to consider

Your home mortgage loan will follow what’s called an amortization schedule. This schedule outlines each of your monthly payments for the duration of the loan, detailing what percentage of each payment goes toward the principal balance on your loan — or what you actually borrowed to buy the home — and how much is paid in interest to your lender.

With each principal and interest payment, your mortgage balance will decrease. When you reach the end of your amortization schedule (in most cases), your debt is satisfied and the home is paid off.

However, borrowers may decide to contribute more toward their mortgage loan than just those 12 scheduled payments each year. By making additional principal payments that aren’t part of the amortization schedule, borrowers can reduce the total interest charged on their home mortgage loan, satisfy the loan early, or both.

Let’s look at the benefits of paying off a mortgage early, in numbers.

Say you have a $300,000 conventional mortgage loan, repaid over 30 years at a 3.25% interest rate. As expected, this loan would take you 30 years to repay and cost you a total of $470,022 when all was said and done. That’s $170,022 in interest charges alone, according to our mortgage calculator.

Original principal balance Monthly payment Total interest charged Total loan cost Time to payoff
$300,000 $1,306 $170,160 $470,160  360 months (30 years)

 

Now, let’s say that five years later, you get a raise at work and are able to contribute an extra $100 per month toward your house payment for the remainder of your loan term:

  Original principal balance Monthly payment Total interest charged Total loan cost Time to payoff
Standard loan schedule $300,000 $1,306 $170,160 $470,160 360 months (30 years)
With $100 extra monthly payment beginning at month 61 $300,000 $1,306 from months 1-60

 

$1,406 from month 61 on

$155,709 $455,709

 

Savings: $14,451!

329 months (27 years, 5 months)

 

Savings: 2 years, 7 months

 

By making a $1,406 payment each month, you will save yourself nearly $14,500 in interest charges alone, as well as knock two years and seven months off the length of your loan term.

While this may sound like a fantastic idea, you’ll need to consider a few things first to determine if paying off your mortgage early is the right choice for you.

Do I have enough cash left for emergencies?

Having an adequate emergency fund is one of the most important things you can do to protect your family. This fund can be used whether you lose your job and need cash for things like groceries or a mortgage payment, if an unexpected car repair pops up, or even if someone is injured or falls ill.

If you don’t have well-funded emergency savings already, consider putting any extra cash you have each month into such a fund. While saving money on a mortgage loan is beneficial, it won’t help your family in an emergency situation.

Is there a prepayment penalty on this mortgage?

If your loan has an early payoff penalty, mortgage fees will be assessed by your lender if you pay down your mortgage ahead of the amortization schedule. This isn’t the case with all lenders, so you’ll want to check your contract first.

These prepayment penalties could negate (or even exceed) any savings you might have by paying off your mortgage early. If this is the case, you’ll want to put that extra cash somewhere else each month, rather than paying off your mortgage ahead of schedule.

Could this money be better invested elsewhere?

What interest rate are you paying on your mortgage? If you could get a higher rate of return from another investment — such as putting that money in a mutual fund or other long-term savings vehicle — that might be smarter than paying off your mortgage early.

For example, let’s say you have a mortgage at a 2.5% interest rate, but your investment portfolio is consistently seeing returns between 10-12% each year. In this case, those extra dollars would potentially make you a lot more money after being invested than they would save you by paying down your mortgage.

How to pay off your mortgage faster

Whether you plan on making an extra mortgage payment each year or just want to contribute extra cash when you can, here’s a look at how to pay off a mortgage early in the most efficient way possible.

Consider a bi-weekly repayment schedule

Making a bi-weekly mortgage payment can be an easy way to contribute more toward your mortgage loan without the huge pinch of a lump sum payment.

With this method, you take your monthly mortgage payment amount and split it in half. Then, make that half-payment amount every two weeks. Since each month is a bit more than four weeks long, you’ll actually be paying a bit more toward your loan every month, but it won’t feel like much.

At the end of the year, you will have made 26 total half-payments, which equates to 13 full payments. Yes, you’ll have made one entire extra payment on your mortgage loan but split it up over the course of the year!

Refinance to a shorter term

If you’re looking for the fastest way to pay off a mortgage loan, refinancing might be the answer. With a mortgage refi, you are essentially paying off your existing mortgage loan with a new loan, ideally with better terms.

Refinancing offers many benefits and may allow you to:

  • Reduce your loan’s interest rate.
  • Adjust your loan’s monthly payment.
  • Pay off your loan sooner.

Or all three! You can also use a refinance to remove a co-borrower, if needed, or switch from an adjusted-rate mortgage to a fixed loan.

Make extra payments to principal when you can afford it

Curious about how to pay off your mortgage faster but can’t commit to a refinance loan? You can also choose to just make extra payments toward your principal balance whenever you can.

Whether you get a raise at work, rework your monthly budget, or simply host a garage sale and have some extra cash, you can contribute to your mortgage loan anytime you can afford to do so.

If your mortgage lender doesn’t charge an early repayment penalty fee, there’s no reason you can’t pay down an extra $50 here or $200 there. As you saw in our example above, contributing just a bit extra to your monthly payment can mean serious savings over the course of the loan.

Considering mortgage payoff vs. investing

When faced with the choice of an early mortgage payoff vs. investing that money, the decision really hinges on opportunity cost. It’s important to critically assess this decision to ensure that you make the wisest and most lucrative choice for your extra funds.

So, pay your mortgage off or invest the money? First, do some math on factors such as:

  • The existing interest rate on your home mortgage.
  • The potential returns on an investment, such as stocks or a mutual fund.
  • Any guaranteed returns on savings, such as a certificate of deposit (CD) or high-yield savings account.

You should also consider the liquidity of both options. By putting that money in an investment or savings vehicle, you retain some liquidity if you need access to cash.

However, if you put all that money into your mortgage loan — whether it be a few hundred dollars or thousands — you won’t have access to that money in an emergency. Your only option for liquidity will be to take out a home equity loan, open a home equity line of credit (HELOC), or consider a cash-out refinance.

Paying off your mortgage early can be a great way to get out of debt sooner and save money on interest payments. However, an early mortgage payoff isn’t necessarily right for every borrower and situation. Be sure to spend some time analyzing your specific situation, cash flow, and goals to decide if this debt repayment option is right for you.

If you want to learn more about your mortgage and refinance options, talk to a local Finance of America Mortgage Advisor today.

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