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Paying Off Your Mortgage Early: Pros, Cons, and How to Do It

Paying off your mortgage early can be an enticing goal. As you make extra payments each month and see your loan balance creep lower and lower, the promise of debt freedom and outright home ownership can seem very appealing.

Can you pay money off your mortgage? Yes, you can pay money off your mortgage early by making extra principal payments, refinancing to a shorter term loan, applying windfalls toward the principal, using bi-weekly payments, or downsizing your home. However, it’s important to consider potential prepayment penalties and ensure you have adequate emergency savings before making extra mortgage payments.

But deciding to pay off your mortgage ahead of schedule is a big financial decision that shouldn’t be taken lightly. While paying off your home loan early can make sense in some situations, it’s not the right move for everyone.

In this article, we’ll explore the pros and cons of paying off your mortgage early, as well as tips for making extra payments and deciding if early payoff aligns with your financial goals.

 A calculator and a notepad on a pile of cash

Why Would You Want to Pay Off Your Mortgage Early?

There are a few key reasons why homeowners choose to make extra payments and pay down their mortgage principal faster:

  • To gain financial freedom and build equity in their home more quickly
  • To save money on interest payments over the life of the loan 
  • For the peace of mind of owning their home free and clear
  • To simplify their finances for retirement
  • Because they received a financial windfall and want to use it responsibly

For many people, the emotional benefits of being mortgage free and reaching financial independence more rapidly are just as important as the financial factors. Paying off the mortgage early can provide a tremendous psychological boost and sense of pride for homeowners.

What Are the Benefits of Paying Off Your Mortgage Early?

Let’s explore some of the advantages of putting extra money toward your mortgage principal and paying off your home loan ahead of schedule:

1. Financial Freedom

One of the biggest appeals of early mortgage payoff is gaining financial freedom

When your mortgage is paid off, you remove a large recurring monthly expense from your budget. You’ll still need to pay property taxes and homeowners insurance, but being mortgage free provides significant cash flow relief on a monthly basis.

This flexibility empowers you to put those hundreds of dollars freed up toward other financial goals, such as increasing retirement or education savings. It also helps protect you in case of job loss or another financial emergency.

2. Lower Interest Payments

Since mortgage rates are much higher than current deposit accounts, paying off your mortgage early can save you thousands in interest payments over the loan term.

The faster you can direct extra payments toward your principal, the less overall interest you pay across the duration of the loan. This helps you build home equity faster.

3. Increased Home Equity

Equity represents the current value of your stake in your home. You build home equity over time as you pay down your mortgage principal and as your home hopefully appreciates in market value. 

Paying off your mortgage early helps you unlock home equity faster, which provides flexibility later in life. You can tap equity through a cash-out refinance, home equity loan or home equity line of credit. Unlocking home equity can help fund home improvements, education expenses, starting a business or retirement.

4. Peace of Mind

For many people, the peace of mind and sense of pride that comes from owning their home free and clear is a major benefit of paying off the mortgage early. 

Knowing you’ll never have to make another monthly mortgage payment can provide great comfort and stress relief, especially later heading into retirement. Just be sure your decision aligns with the rest of your long-term financial plan.

What Are the Downsides of Paying Off Your Mortgage Early?

While reaching a zero mortgage balance more quickly can be rewarding, it’s not the ideal strategy for everyone. Here are a few potential cons to consider:

1. Limited Liquidity

Putting large lump sums of cash toward your mortgage ties up that money in your home. This decreases your liquidity and cash on hand for emergencies and other needs.

For example, fully draining your rainy day funds to pay off your mortgage may leave you financially vulnerable. Make sure you have adequate emergency savings and cash flow before making extra mortgage payments.

2. Missed Investment Opportunities

Money put toward paying off your low-interest mortgage could potentially get better returns if invested elsewhere. Maxing out retirement accounts, investing in a brokerage account or even paying down higher-interest debt can sometimes yield higher long-term returns.

Crunching the numbers for your situation is key. If mortgage rates are low and you can earn higher returns through other investments, you may want to put extra funds there instead of shortening your mortgage term.

3. Potential Penalties for Early Repayment

Many mortgages, especially in the first few years, will charge prepayment penalties if you pay off the loan early. This could negate some of the potential interest savings from paying off your mortgage ahead of schedule.

Be sure to review your loan documents to understand any fees or penalties that could apply. A mortgage refinance may help you bypass prepayment penalties in some cases.

What Are the Different Ways to Pay Money Off Your Mortgage?

If you’ve decided that paying down your mortgage aggressively aligns with your financial goals, here are some proven strategies to consider:

1. Make Extra Payments

One of the simplest routes is to start making extra principal payments each month or year. Even an extra $100 above your required monthly payment can shave months or years off your loan. Consider automatic transfers to streamline extra payments.

2. Refinance to a Shorter Term Loan

You can refinance your mortgage to reduce the term length, say from a 30-year to 15-year loan. Just beware of refinance costs and ensure the monthly payments still fit your budget. 

3. Apply Windfalls Toward the Principal

Use tax refunds, work bonuses, inheritance money or other one-time funds to make a lump sum extra payment and chip away at your principal. This takes discipline but can put a major dent in your balance.

4. Use Bi-Weekly Payments

Making half payments every other week on your mortgage can help you chip away at principal faster. With this strategy, you end up making one extra mortgage payment a year since seven days on a calendar go unaccounted for.

5. Downsize Your Home

Some homeowners choose to downsize to a smaller living space with a lower mortgage balance. This allows them to pay off their mortgage quicker while also simplifying their lifestyle.

How Can I Use My Home Equity to Pay Off My Mortgage Early?

If you’ve built up significant home equity, you may be able to leverage it to accelerate your mortgage payoff timeline:

  • cash-out refinance converts home equity into cash you can use to pay down your principal. You take out a new, larger mortgage and use the funds to pay off your current balance.
  • A home equity loan or home equity line of credit also unlocks equity which can be used to pay off your existing mortgage early. These add another monthly bill, so run the numbers carefully.
  • A reverse mortgage converts home equity into income for homeowners aged 62 and up. Proceeds can be used to eliminate an existing mortgage.

How Much Money Can You Save by Paying Off Your Mortgage Early?

The interest savings from paying off your mortgage ahead of schedule can be substantial. For example:

  • Paying off a $250,000 mortgage 3 years early on a 4% 30-year loan would save around $26,000 in interest payments.
  • Paying off that same mortgage 10 years early would save about $62,000 in interest over the loan term.
  • On a 15-year $200,000 mortgage at 3%, paying it off 7 years early saves around $18,000 in interest.

Exact savings depend on your loan amount, interest rate and how many years early you’re able to pay it off. Use a mortgage payoff calculator to run the numbers for your situation.

How Can You Create a Plan to Pay Off Your Mortgage Early?

If paying off your home loan ahead of schedule is one of your financial goals, here are some tips to create an effective early mortgage payoff plan:

  • Review your budget and identify areas where you can trim expenses to direct more cash flow toward extra principal payments. 
  • Make sure you have adequate emergency savings on hand before aggressively paying down debt. Aim for 3-6 months of living expenses.
  • Understand any prepayment penalties so you can avoid them if trying to pay off your mortgage quickly.
  • Pick the payoff method that works for your situation – whether extra payments, bi-weekly installments, or lump sum windfalls.
  • Use a mortgage calculator or spreadsheet to determine your target payoff date and track your progress over time. 
  • Celebrate milestones along the way like reaching a 25%, 50% and 75% loan-to-value ratio. This can help keep you motivated as you get closer to the finish line.

What Are the Tax Implications of Paying Off My Mortgage Early?

When it comes to taxes, there typically aren’t any direct implications from paying your mortgage off faster. Your monthly mortgage interest is likely tax deductible, so paying it off early simply reduces the amount of mortgage interest you can deduct each year.

Some key things to keep in mind:

  • You usually can’t deduct prepaid interest outside of your first calendar year with a mortgage. So large lump sum payments have limited deductibility.
  • Make sure your early payoff doesn’t trigger mortgage prepayment penalties, which aren’t tax deductible.
  • If you do a cash-out refinance, focus on using the funds for home improvements to get potential tax deductions there.

Consult a tax professional if you have specific questions about how accelerated mortgage paydown could impact your unique tax situation.

Should You Pay Off Your Mortgage or Invest Extra Cash?

One of the most common financial debates is whether it’s better to pay off your mortgage early or invest any extra funds instead. Here are a few things to help decide:

  • If your mortgage interest rate is low (under 4%), investing extra cash may yield better long-term returns.
  • If your mortgage rate is high, paying off the balance early guarantees those interest savings.
  • Look at your other interest rates – pay off or avoid higher-rate debts before the mortgage.
  • Assess your risk tolerance. Paying off a mortgage provides a low-risk, guaranteed return through interest savings.
  • Crunch the numbers. Calculate potential returns both ways over your investment time horizon.
  • Consider psychological factors. Are you more driven by investment returns or by reaching 100% home ownership?

There’s no one-size-fits-all answer. Look at the full picture of your financial goals and risk appetite when deciding between extra mortgage payments and other uses for excess cash.

What Happens After You Pay Off Your Mortgage?

Once you’ve reached your goal of a zero mortgage balance, it’s time to celebrate! Here are a few next steps to consider once you pay off your home loan:

  • Notify your lender and confirm procedures to receive your paid off mortgage paperwork. This documents you officially own the home.
  • Remove home insurance escrow payments from your monthly housing expenses, while maintaining adequate coverage.
  • Adjust housing expenses in your budget to account for increased cash flow going forward.
  • Max out any tax-advantaged retirement savings accounts with your new cash flow. 
  • Start or increase contributions to other investment accounts like a brokerage account.
  • Enjoy your financial freedom! With smart investing and planning, you can sustain mortgage freedom into retirement.


Deciding whether to pay off your mortgage early requires weighing many personal finance factors – from peace of mind and potential investment returns to your liquidity needs and risk tolerance. 

While right for some, extra mortgage payments don’t make sense for everyone. Crunch the numbers for your specific situation and mortgage details, assess your emotional drivers and align your decision with your overall financial plan.

Use the increased cash flow and financial freedom wisely once you reach mortgage payoff. With strategic investing and spending, the benefits of owning your home outright can last well into your retirement years.

Frequently Asked Questions(FAQ)

Is it worth paying off mortgage early?

Paying off a mortgage early can be a beneficial financial decision, as it eliminates the need to make monthly payments and can save a substantial amount of money in interest payments over the life of the loan. However, it is important to consider the potential opportunity cost of not investing the money that would have gone towards early repayment, as this could lead to greater returns than the amount saved on interest. Ultimately, the decision to pay off a mortgage early should be based on an individual’s financial situation and goals.

What happens when mortgage is paid off early?

When a mortgage is paid off early, the borrower no longer has to make monthly payments on the loan. This can result in significant savings in interest payments over the life of the loan. Additionally, the borrower will now have full ownership of the property, free of any obligations to the lender.

Are there disadvantages to paying off mortgage early?

Paying off a mortgage early can be a great way to save money on interest payments and build equity in a home. However, there are some potential drawbacks to consider, such as the loss of potential tax deductions, the loss of liquidity, and the potential for increased mortgage fees. Additionally, it may be difficult to refinance a mortgage if the loan balance is too low.

How to pay off 30 year mortgage in 10 years?

Paying off a 30 year mortgage in 10 years is possible with proper financial planning. One strategy to achieve this is to make extra payments towards the principal of the loan. This can be done through refinancing to a shorter term loan, or by making additional payments on the existing loan. Additionally, Nationwide offers resources to help homeowners pay off their mortgage faster.