Can you pay off a mortgage early?

Household 3 min read

Yes, it is possible to pay off your mortgage early. There are pros and cons to almost every financial decision. It’s important to evaluate your unique financial situation to determine what’s best for you. Remember that even if you don’t pour every extra dollar into your mortgage, making additional payments can help you chip away at the principal amount.

What are the benefits of paying off your mortgage early?

If you’re like most Americans, your mortgage is one of your biggest monthly expenses. If you were to eliminate your mortgage payment, you could do more with your monthly income. Perhaps, you would have a surplus of cash you could invest or use to check items off your bucket list. However, while paying off their mortgage might seem like a dream for some, it’s not always the best solution for homeowners.

To identify if this is the right financial move for you, here are a few pros and cons of paying off mortgage early.

Advantages of paying off your mortgage early

Savings on Interest

Home loan interest can cost thousands or even tens of thousands of dollars over your loan term. Paying off your mortgage early frees this money up for investments instead of interest payments. Although paying off your home early would mean you lose the opportunity to take a mortgage interest tax deduction, you’ll save significant amounts on interest.

Additionally, as you inch closer to paying off your home loan, more of your payment goes toward your principal amount, decreasing the amount of interest you can deduct.

Retirement savings

While most Americans want to retire by age 67, they may not have the funds, according to a 2020 TD Ameritrade report. Regardless of how far you are from retirement age and how far along you are in the retirement planning process, you may want to pay close attention to this information. By paying off your mortgage early, you can eliminate a mortgage’s monthly expense in retirement. If you’re one of the many that don’t have large retirement savings, eliminating this expense can help you stretch your retirement income further.

Eliminating the monthly mortgage expense may give you and your family peace of mind and protect your retirement lifestyle.

Disadvantages of paying off your mortgage early

Deficient retirement savings

If you do not have large retirement savings and are considering paying off your mortgage early, you may want to reconsider. The reason you should stop and think about this decision is compound interest. In investing, your money earns compound interest on the principal and the interest in your account. For example, if you were to contribute $6,000 per year ($500 per month) into your retirement account and it was earning 5% interest, at the end of the first year, you’d have $6,300. The next year, that account would earn 5% interest on the $6,300, and continue for the life of the account. After 30 years, you’d have contributed $180,000, and the account would be worth $398,634.

If you used that $500 a month to pay down your mortgage faster, you might be able to shave 15 years off your 30-year mortgage. However, the value of your home is not likely to increase at the same rate as the compounding interest in your retirement fund. Therefore, you may want to use the money you’d use to pay off your mortgage early to invest instead.

Lack of an emergency fund

It’s important to have an emergency fund if something happens to your home. For example, if your HVAC unit breaks and you need to replace it, it’s important to have an emergency fund for unexpected expenses. If you’re using all your excess funds to pay down your mortgage, you may not have any money left over in the case of an emergency.

So, if you decide to make early payments on your mortgage, make sure to have an emergency fund set aside. An emergency fund will help you be more financially secure before accelerating your mortgage payments.

High-interest debt

If you have a credit card balance, you might focus on paying it off before you start paying off your mortgage early. Credit card issuers use compound interest formulas. Therefore, if you have high-interest debt, you might pay it off before making early mortgage interest payments. Learn more about personal loan options.

Absence of diversification

Having and maintaining a mortgage allows you to hold other assets. For example, as you pay off your debt and gain equity in your home, you can also build up your retirement fund or other investments. Although a home’s value may be relatively stable, building other assets for when you need them is a good idea.

Other considerations for paying off your mortgage early

If you decide to start overpaying on your mortgage, many lenders will allow you to make extra principal payments each month without penalty. By doing so, you can significantly lower your interest and even reduce the term of your loan. Be sure to ask your lender if any penalties or fees are involved with making extra mortgage payments.

Finally, you may put some extra money into your mortgage and continue building other assets simultaneously.

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