A mortgage will likely be your biggest, lengthiest investment. And if you're like many homeowners, you have a 30-year mortgage and seemingly never-ending monthly payments.
Whether it's three decades or a 20-year or 15-year mortgage, this debt doesn't go away easily — and it constantly weighs on you when you plot out your financial goals. This has some borrowers dreaming about how to pay off their mortgage early to eliminate that bill. A mortgage payoff is not an insurmountable task. It can be done with proper planning.
The first thing you should do is explore your home loan options by visiting sites like Credible. Learn more about refinancing with different mortgage lenders and save money long-term.
If you're already ready to pay off your mortgage early and you don't need any help doing so, then you should read on to learn about the positives and negatives of this option.
Should you pay off your mortgage early?
"There is no clear-cut answer on whether to pay off your mortgage early. The best option really depends on your financial situation and your money goals," Sarah Pierce, head of operations at online mortgage lender Better.com, said.
You may be thinking: What is the downside to paying a loan off early? Well, you'd be surprised. While it's nice to no longer be burdened by monthly mortgage payments or lingering debt — there are actually some downsides to ending your home loan early.
“The decision is rarely a black-and-white one,” Pierce said.
If you're looking to expedite the process by changing your loan terms, monthly payments, or more, you should consider refinancing into a shorter-term loan to pay it off quicker.
Pros and cons
Before making the decision to pay your mortgage off early, understand all of the pros and cons. Here are some of the most popular lines of thought when it comes to a home loan payoff.
Pros of paying off your mortgage early
There are obvious pros to paying off mortgage loans early. For starters, you don't have to make any more monthly payments, and you'll have peace of mind knowing your home is your own. By eliminating that monthly payment you will have more disposable cash on hand each month. There would be no need to squirrel away mortgage money or worry whether you made the payment on time. The extra cash can more easily go toward other things like hobbies, traveling, investing, or saving. It also gives you the freedom to start investing, saving money for home improvements, boosting your savings accounts, or more. In short, you're no longer tied to your home loan.
Looking forward to finishing up monthly mortgage payments once and for all? Credible can also help you determine if you're ready to refinance your mortgage.
Aside from the obvious, there are some other pros of an early mortgage payoff, including:
- Improving your creditworthiness
- Saving money on interest
Improving creditworthiness: While experts agree that closing your mortgage has little effect on your actual credit score, a mortgage that is paid in full will be reflected on your credit report for 10 years. By eliminating your mortgage and having it show as a closed account in good standing, you will be more attractive to lenders and it also lowers your debt to income ratio. Ryan Dibble, COO of Flyhomes, told Fox an early mortgage payoff also lowers the risk of your home being foreclosed on.
If you have a strong credit history and credit score, then you'd qualify for lower refinance rates. See what kind of rates you prequalify for today through Credible.
Saving money on interest: By paying off your mortgage early you will save plenty of money on the interest that adds up over the years. When you make a mortgage payment, you are not just paying back your loan, you’re also paying interest on the remaining balance of your loan, said Pierce. “You’ll save thousands of dollars in interest payments,” she said.
However, if the current interest rate is a concern, don’t be shy about visiting Credible to compare the best interest rates and lenders.
Cons of paying off your mortgage early
Could leave you short for paying other debt: Although paying your mortgage off early eliminates one bill, using the bulk of your disposable cash on the mortgage could leave you short for paying off other debt or dealing with an unexpected crisis. Pierce said your extra cash will likely do more good if you are investing it or saving it than if you’re paying off a low-interest mortgage.
In other words, a mortgage likely costs you less to hang on to than other types of higher interest rate debt. Dibble added that spending a large sum of money on a mortgage payoff could also mean less money to put toward things like renovating your home or creating an emergency fund for yourself.
Could pay a prepayment penalty: It would be a shame to pay off your mortgage early just to face a hefty penalty for doing so. Experts advise you to be aware of this pitfall. Pierce said some borrowers are limited as to how much they can pay off and when. “Though this may seem unfair, it's not all bad news,” she added because the types of loans that carry prepayment penalties often have lower interest rates or other perks that save you money. But, she said future homeowners who plan to pay off their mortgage early will want to make sure to choose a home loan that allows for prepayment.
Eliminates tax deduction benefits: One of the greatest benefits of homeownership is the tax deduction that comes with it. Dibble said today’s mortgage rates today are at historic lows (around 3%), and mortgage interest can be deducted from your taxable income, further reducing the cost. He advises homeowners to consult their CPA before making a final decision.
There are other considerations for homeowners deciding to pay off their mortgage early. For instance, having a mortgage on your home de-risks your exposure to it, according to Dibble. For example, if you own 20% of your home and the bank owns 80% and the home value falls by 50% then your losses are capped at 20%. “If you've paid off your mortgage and you own 100% of the house, you would lose the full 50%,” he said.
Additionally, he said if you prioritize paying off your home in lieu of ensuring you have savings, you could end up taking on higher interest debt in the event of an emergency.
Whether you pay off your mortgage early, it is important to remember to pay your property taxes and homeowners insurance, said Dibble, costs that are typically handled through your escrow account on your mortgage.
Is it a good idea to pay off your mortgage early?
Again, deciding to pay off your home loan early is not a one-size-fits-all decision. It depends on things like your ability to pay, the type of loan, how mature your loan is, whether your extra cash would be more useful in other investments, and how close you are to retiring, said Pierce. “If paying off your mortgage means that you don’t have any cash saved up, you’ll likely have to take on high-interest debt to cover such emergency expenses,” she said, adding that it makes more sense to not pay off the mortgage and have some financial reserves.
If your primary goal is to reduce your monthly payments to free up extra cash, a mortgage payoff isn’t the only way. Refinancing your mortgage can also do the trick by giving you lower payments. Try visiting Credible.com to explore a variety of mortgage refinance options.