Should I Pay Off My Mortgage Early?

Pros and Cons of Paying Off Your Mortgage Early

A mortgage-free life can bring peace of mind and long-term savings, but there are trade-offs you must consider first.

Should I Pay Off My Mortgage Early?

Paying off your mortgage and owning your home outright is a major achievement that delivers a broad variety of benefits, but it's not for everyone. Let's look at some scenarios when you should and shouldn't pay off your mortgage early.

When It May Make Sense to Pay Off Your Mortgage Early

Consider paying off your mortgage early in these situations:

• You're close to retirement. If you'll be retiring soon, erasing your mortgage could be wise—especially if you'll be living on a fixed income. Without a mortgage payment, you'll have more money to cover essential expenses and enjoy retirement.
• You have a solid emergency savings fund. If you already have an emergency fund that could cover three to six months' worth of living expenses, you may be in a good position to focus on directing more money toward your mortgage. Having a savings buffer in place helps you manage unexpected expenses without having to turn to credit.
• You don't have high-interest debt. It may make financial sense to pay off high-interest debt like credit cards and personal loans before your mortgage, which likely has a lower rate. Once those are gone, putting extra money toward your mortgage can reduce the total interest you'll pay and help you own your home sooner.
• You want peace of mind. If you believe paying off your mortgage can give you a sense of relief and more control over your finances, it may be your best option. It can lower stress, simplify your budget and free up cash for other priorities. You'll be able to focus on your next goals while enjoying the peace and security of knowing your housing is covered.

When It May Not Make Sense to Pay Off Your Mortgage Early

Skip paying off your mortgage early in these situations:

• You could earn higher returns elsewhere. If you have a low-interest mortgage, you may be able to earn the same return—or even more—through a low-risk investment. As mentioned, stock market returns have generally been greater than average mortgage rates over the long term. Of course, the stock market can be volatile, and your returns will fluctuate higher and lower.
• You want to lower your taxable income. If one of your financial goals is to lower your tax bill, you may want to avoid paying off your mortgage early. The IRS allows you to deduct the mortgage interest you pay from your taxable income when you itemize your taxes, lowering your tax bill. You can take advantage of that deduction for the life of the loan if you itemize every year.
• You value liquidity. You might think twice about applying additional funds to pay off your home early since doing so could deplete your liquidity. The extra money you dedicate to your house is locked in a non-liquid asset. If you need funds quickly, selling your property and accessing your money could take a long time.
• You're behind on retirement savings. If you're not maxing out your retirement contributions or you need to make larger catch-up contributions, you may want to apply your extra cash toward your retirement savings. In most cases, your 401(k), individual retirement account (IRA) or other retirement accounts grow tax-deferred until you withdraw funds. Directing your extra funds toward paying down your mortgage may come with an opportunity cost—especially if your employer offers a contribution match that can compound over time.

Learn more: Should I Pay Off My Mortgage Early or Invest?

How to Pay Off a Mortgage Early

Getting rid of your mortgage is a worthwhile endeavor that could save you a considerable amount of interest over the life of the loan. If you have enough cash on hand to pay it off, you could pay the full balance to eliminate this major monthly expense. Otherwise, the following options could help you pay off your mortgage ahead of schedule.

• Refinance your mortgage. If interest rates are lower than when you first took out your loan, refinancing can lower your interest charges so more of your payment goes toward the principal. Refinancing can also shorten your loan term. Your monthly payment would increase, but it could cut years off your mortgage and save you a substantial amount of interest over time.
• Make extra loan payments. Making even one extra mortgage payment a year can trim years off your repayment term. Setting up biweekly payments is one easy way to make this happen, since it results in 13 payments a year instead of 12. Before you start, check with your lender to make sure any extra funds are applied to your loan principal, not the interest.
• Add extra money to your mortgage payment. Rounding up your mortgage payment can help reduce your principal faster without much impact on your budget. Similarly, adding a modest extra payment each month—even just $100—can shorten your loan term by several years and save you tens of thousands in interest, especially if you start early in the loan.
• Create room in your budget for larger payments. Finding extra cash might be easier than you think. Cutting back on things like unused subscriptions and memberships can free up money for your mortgage. You could also bring in more income with a side hustle or part-time job and use that extra money to make larger payments and pay off your loan balance faster.
• Apply unexpected money toward your mortgage. You can put windfalls like an inheritance, tax refund or work bonus toward your mortgage balance to make a dent in your principal balance. Applying a large windfall toward your mortgage early in the loan could save you thousands—or even tens of thousands—in interest over time, depending on your balance and interest rate.

Learn more: What Happens When You Pay Off Your Mortgage?

Alternatives to Paying Off Your Mortgage Early

If you're not keen on paying off your mortgage early, you can always direct extra funds toward other goals. For example, you could:

• Invest more for retirement. If your retirement account is underfunded, you might move extra funds to your retirement accounts. Contributing to your 401(k), IRA or pension not only helps you build wealth for the future but also comes with tax advantages.
• Save for your child's education. If your retirement savings are in good shape, another option might be opening a savings account or 529 plan for your child's education.
• Pay off debt. Tackling high-interest debt could provide a better return on your money than paying down a low-rate mortgage.
• Invest toward other goals. You could explore investing in other vehicles, such as a brokerage account, certificates of deposit (CDs) or bonds. That way, if a large unexpected expense arises, you could withdraw money from your investments as needed without having to sell your home or refinance it.

Ultimately, where to put extra funds comes down to your current financial situation and long-term priorities. Whether it's retirement, a child's education or a future business idea, putting money toward your goals may offer more flexibility than dedicating it to your home. You may want to hold off on paying off your mortgage if it means you'll have more options later.

Learn more: How to Set Financial Goals

The Bottom Line

Whether or not you should pay off your mortgage early depends on what you want your money to do for you. Owning your home free and clear offers great peace of mind, but so can knowing you're building wealth while staying flexible.

While you're strengthening your financial well-being, don't forget about improving your credit health. Start by periodically reviewing your Experian credit report and FICO^® Score^☉ for free. Whether you pay off your home or stay the course with your mortgage, a high credit score can help you qualify for better loan options if you ever need one.