Should you pay off my mortgage early?

The short answer is yes: prepaying your mortgage can be a smart move to help you reduce debt and save on interest. But depending on your goals, paying off your mortgage early may not be the best use of your money. It might make better sense to put the cash toward other priorities like tackling high-interest debt or building your emergency fund.

Ways to prepay your mortgage

If you decide paying off your mortgage early is the right move, there are a few different ways to go about it. Making one large payment may work if you receive an inheritance or another lump sum. You may also be able to recast your mortgage, which lowers your monthly payment.

Making a large lump sum payment toward your mortgage may be difficult, however. Instead, most people will turn to making extra payments as their primary strategy: 

• If you have extra cash in a given month, you can put it toward your mortgage principal as you’re able. 
• If your extra income is predictable, you could commit to a regular schedule of additional payments. Biweekly payments, for example — meaning you pay half of your monthly payment every two weeks, instead of the full payment once a month — results in 13 full payments a year instead of just 12.

For example, let’s say you have a $400,000 mortgage balance with 10 years remaining at a 6.95% rate. Here’s how each payment option will work out using Bankrate’s biweekly mortgage payment calculator. 

The entire payment should be applied to the principal for the full benefit because every bit you put toward your principal will put you one step closer to being mortgage-free.

Pros and cons of early mortgage repayment

Questions to ask before you pay off your mortgage

If you have enough money coming in that you’re considering paying off your home earlier than scheduled, it’s worth considering what else that money might be able to do for you instead. Before you start making additional mortgage payments, ask yourself the following questions:

Will all your cash be tied up in the home?

Your home is considered a non-liquid asset. It can take months or longer — plus the cost of a real estate agent, repairs and other expenses — to sell the property and access the capital. It also takes time and money to get a second mortgage.

Before you pay off your mortgage, make sure you have a mix of more liquid assets in case you need them, like stocks, mutual funds, U.S. Treasuries, bonds and marketable securities available in a taxable investment account. These are easier to convert to cash in a pinch.

You’ll also want to maintain an emergency fund. A good rule of thumb is to keep at least a six-month cushion for the unexpected, like a job loss or a surprise medical bill. 

How else could you use the money?

Before you decide to put extra money toward paying off your mortgage, take a step back and think about what that money could do for you elsewhere. You could use those dollars to tackle:  

• Increasing your retirement savings. Extra contributions to your 401(k) or IRA can help you achieve your retirement goals faster.
• Building your emergency savings. If you don’t have enough money set aside for emergencies, consider strengthening your emergency fund. 
• Funding your child’s education. If saving for your children’s education is a priority, you might want to consider putting that money into an education savings account. 
• Paying down high-interest debt. Tackling personal loans, credit cards, or student loan debt can make sense, as rates are significantly higher than your mortgage rate. 

The right thing to do is the thing you will do. All of this has to do with personal habits. If you’re going to blow through the extra money, then it’s better that you put it into your house than spend it.

— Richard Bowen CPA and owner of Bowen Accounting

Be realistic about what you’ll likely do with your money if you don’t use it to retire your mortgage debt. It might make sense, for example, to pay off your mortgage early if you struggle with keeping money in the bank. Your home can be a forced-savings tool, and making extra payments can save you thousands of dollars in mortgage interest over time, plus you’ll build equity in your home more quickly.

Is refinancing your mortgage an option?

If your goal is paying off your mortgage faster, refinancing might make sense. Refinance from a 30-year loan to a 15-year loan will shorten the time you spend making payments. The catch is that your monthly mortgage payment will likely be higher. But if you can qualify for a lower rate, that could reduce the interest you pay over the life of the loan. 

Before going the refinancing route, make sure you understand the full costs, including closing costs and other fees. Take the time to explore current mortgage refinance rates to get an idea of what you could potentially save. And remember, the majority of homeowners overpay for refinancing — beat the odds by researching and finding a competitive offer.

How much do you value peace of mind?

Owning your home free-and-clear can have benefits that aren’t measurable in strictly financial terms. Sometimes, it’s less about the bottom line and more about peace of mind. For example, if you’re about to retire, eliminating your monthly mortgage payment can make it easier to live on a fixed income.

Paying off your home also increases your ability to borrow against the equity in your home. You could establish a home equity line of credit (HELOC) as a source of emergency income or to make progress toward other financial goals.

Will other investments pay greater dividends?

Investing has no guarantees, but according to some experts, it often makes more sense than funneling your money into your mortgage.

“Sadly, the math tells us it’s almost always better to invest in other places than in your mortgage,” says Richard Bowen, CPA and owner of Bowen Accounting in Bakersfield, California. “The thing is, no one can give you a guarantee on an investment. You can put your money in the stock market and lose it.”

Case in point: Current mortgage rates are lower than long-term stock market returns. On average, the S&P 500 has returned about 10% over the last 90 years. However, that S&P average ignores volatility in returns. While you might see a 10% appreciation over the long term, you could see a year, five years or more with much lower returns. For many people, that’s a compelling reason to pay off mortgage debt instead.

Frequently asked questions

• Will paying my house off early hurt my credit?

  Yes and no — but mostly no. When you pay off your mortgage early, you might notice a slight drop in your credit score, because the average age of your accounts will decrease, and you’ll have a less robust mix of types of credit. But this effect is temporary, and it doesn’t hurt your score in the long run.

• Is there a tax disadvantage to paying off a mortgage?

  Yes. If you itemize your taxes, you lose the mortgage interest deduction once the loan is paid off. However, many homeowners claim the standard deduction, and paying off the mortgage wouldn’t change their tax bill. If you’re concerned, ask your tax preparer to walk you through how paying off the mortgage will affect your tax picture.

• How do you calculate when your mortgage will be paid off?

  An easy way to calculate your mortgage payoff date is to enter your current loan balance, interest rate, and monthly payment into Bankrate’s mortgage calculator. The tool will also show you how different strategies can shorten your loan term and lower the amount of interest you have to pay over time.