Should I pay off my mortgage early?

Paying off a mortgage is a major financial milestone—one that comes with incredible feelings of accomplishment and peace. For many, the thought of owning their home outright, eliminating monthly mortgage payments, and heading into their golden years debt-free is appealing enough to prioritize repayment. However, deciding whether to pay off a mortgage early requires careful consideration. 

If you've asked yourself, "should I pay down my mortgage early," read on. This comprehensive guide will explore the pros and cons of paying off your mortgage early, what to consider, and strategies that can help you accelerate your mortgage repayment.

Should I pay off my mortgage?

Before committing to an early mortgage payoff, ask yourself why you want to do so. Are you looking for financial security, wanting to reduce debt, or hoping to save on the interest you pay?

While eliminating mortgage debt can bring a new chapter of freedom, it can also put you in a financially vulnerable spot. Therefore, your goals, risk tolerance, and overall economic health should be considered when deciding whether early repayment is the right path forward. 

Understanding these factors can help tailor a mortgage payoff strategy that aligns with your needs—whether that be paying off your mortgage entirely or simply paying it down faster.  

Pros and cons of paying off your mortgage

Pros

• Interest savings: Reducing your principal balance lowers the total amount of interest paid over the life of the loan—potentially saving you thousands of dollars.
• Improved equity: The more of the loan you pay down, the more equity you own outright. This can be tapped into later for future flexibility through home equity loans or investments.
• Increased monthly cash flow: Paying off your mortgage can eliminate a pretty significant monthly obligation. This can free up cash for other priorities like retirement or travel.
• Lower debt: Reducing debt can improve your financial profile and credit score. You’ll be a more favorable borrower if you seek any future loans or financing. 
• Guaranteed returns: The money you save on interest provides a risk-free return equivalent to your mortgage rate, which may be better than some investments—especially if you have a high rate. 
• Peace of mind: Owning your home outright offers strong security, especially during retirement or periods of financial uncertainty.

Cons

• Reduced liquidity: Allocating extra payments or cash windfalls to mortgage debt will tie up your money in home equity. This can be harder to access compared to high-yield savings accounts or investments.
• Opportunity cost: If your mortgage rate is low, you might earn higher returns by investing any extra funds in the stock market or other opportunities. 
• Potential prepayment penalties: It’s possible your mortgage terms include penalties for early prepayment. Unfortunately, this could offset any potential savings. Before making extra payments, connect with your lender to gauge your terms. If prepayment penalties exist, be sure to calculate cost vs. savings before proceeding. 
• Loss of tax deductions: Paying off your loan early may impact interest deduction tax benefits. 
• Diversification risk: Overinvesting in your home could mean fewer diversified investments, exposing you more heavily to real estate market fluctuations. 

What to consider before paying down your mortgage

In addition to weighing the pros and cons, you'll want to consider: 

• How much you have in your emergency fund: Before allocating extra money towards your mortgage, make sure you have enough to cover the unexpected—like home repairs, medical bills, or job loss. A good buffer will protect you from debt or financial vulnerability. Experts recommend three to six months’ worth of living expenses in your savings. 
• Your current mortgage interest rate: Compare your current rate with potential investment returns. If your rate is low, investing in the market may yield better returns. 
• Any retirement accounts and investments: Take stock of your retirement savings and investment portfolio. If you're in danger of facing a retirement shortfall, it may be more impactful to wait to pay off your mortgage early.
• Upcoming expenses: Depending on where you are in life, you may have major financial obligations pending, like college tuition for children or grandchildren. Since mortgage rates are often lower than student loan rates, prioritizing educational costs could be more cost-effective than accelerating mortgage payments.
• Your plans for the home: If you plan to move soon or downsize, paying your mortgage off may not make sense. Instead, extra cash could be more impactful for renovations that could help you boost your return on investment.

What to pay off before paying down your mortgage

Before directing any cash toward your mortgage, you’ll want to secure your finances in the short term and handle more urgent—and costly—obligations. First, make sure you have a robust emergency fund in place. Without sufficient savings, you might be forced to rely on high-interest debt when the unexpected happens—negating the benefits of paying down your mortgage early.

Then, look to high-interest debt, like credit card balances or personal loans. These debts should be tackled first since the interest on these debts typically far exceeds mortgage rates. Next, check auto and school loans, which are likely to carry higher rates than your mortgage. 

Ways to pay down your mortgage early

There are many ways to go about paying down your mortgage. Depending on your situation and needs, you can leverage: 

• Extra payments: Making bi-weekly instead of monthly payments results in one extra payment per year. Although it's a small start to chipping away at the debt, it can significantly reduce the loan term and interest paid.
• Refinancing: Naturally, refinancing to a shorter-term mortgage, like a 15-year loan, will put you on a faster repayment schedule. This can also come with a lower interest rate, helping you save more on interest.
• A cash windfall: You can use bonuses, tax refunds, or inheritance money to make lump-sum payments toward your principal. 
• HELOC or home equity loan: If you've been paying down your mortgage for years, you've likely built up equity in the property. With a home equity line of credit (HELOC) or loan, you can tap into that equity to pay down your mortgage. However, this does involve taking on new debt and closing costs, so it's essential to weigh the risks and savings carefully.
• Home equity investment: You can also leverage your equity—without taking on debt or monthly payments—using a home equity investment (HEI). With an HEI, you'll get a lump sum upfront in exchange for a portion of the home's future appreciation. You'll have a flexible 30-year repayment term.
• 401(k) loan: Borrowing from your 401(k) to pay off your mortgage can be beneficial if the loan interest rate is lower than your mortgage rate. However, there are serious considerations to weigh. Mainly, a 401(k) loan has a short repayment period, failing to make catch-up contributions can result in a serious retirement shortfall, and there are potential tax implications. Be sure to consult a financial advisor before dipping into your nest egg. 

Frequently asked questions

Is paying down my mortgage a good idea?

Paying down your mortgage can be smart if your financial position supports it. If you have a strong emergency fund, low-interest debt, and are on track with retirement savings, it could lead to significant savings and earlier financial freedom.

Is there a downside to paying off your mortgage?

Yes, there are potential downsides to early mortgage payoff. You could face reduced liquidity, missed investment opportunities, loss of tax deductions, and prepayment penalties. If you’re unsure whether paying off your mortgage early is the right move, speak to a financial advisor. 

Is it better to pay off a mortgage or keep money in savings?

Whether it's better to prioritize debt repayment or saving depends on the market and your financial priorities. If your mortgage rate is low and you can earn higher returns from investments, keeping money in savings might be more worthwhile. Also, if you expect to have major obligations or periods of financial uncertainty, you may be more secure keeping your cash liquid. However, if peace of mind and debt reduction are top priorities, paying off the mortgage could be more beneficial. 

Final thoughts

If paying off your mortgage early is on your to-do list, be sure to take stock of your situation, goals, and risk tolerance. While it can empower you to save on interest, reduce debt, and even strengthen future financial security—early mortgage payoff is not without its liabilities. Consider the reduced liquidity and missed investment opportunities that can result from tying up your cash flow. 

Ultimately, before making extra payments, consider your short and long-term goals—and how an early mortgage payoff aligns with them. 

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