Prepaying Your Mortgage

Paying off My Mortgage Faster – Pros, Cons & Hows

Deciding whether to pay off your mortgage faster depends on your financial goals, personal situation, and priorities. While paying off a mortgage early can provide peace of mind and reduce monthly expenses, for some people, the greater financial growth from other investments or savings can outweigh the satisfaction of being mortgage-free. Balancing emotional and financial benefits is part of the decision. Below are some factors to consider when deciding if early mortgage payoff is the right choice.

Why Should I Pay Off My Mortgage Early?

  1. Interest Savings
    Paying off your mortgage early can save you a lot in interest over time, especially with a high-interest loan. The faster you reduce the principal balance, the less interest you will pay, potentially saving thousands or tens of thousands of dollars.

  2. Peace of Mind and Financial Security
    For many, eliminating debt provides peace of mind and financial security. With a paid-off home, you can reduce your monthly expenses, making retirement or life changes more affordable.

  3. Debt-Free Living
    If being debt-free is a personal goal, paying off the mortgage early can simplify your finances and provide a safety net, especially if you will be on a fixed income.

  4. Financial Discipline
    For some, prepaying the mortgage can be a form of “forced savings”, helping avoid spending on other things. If you are more likely to spend extra cash instead of saving or investing it, putting it toward your mortgage can be a disciplined way to build wealth.

payoff off mortgage early

Opportunity Costs of Paying Off Your Mortgage Early

The opportunity cost of prepaying your mortgage refers to the potential financial benefits you might forgo by using extra funds to pay down your mortgage rather than investing or using that money in other ways. Here are some key opportunity costs to consider:

  1. Higher Returns from Investments
    If the return on alternative investments (such as stocks, mutual funds, or bonds) is higher than your current mortgage interest rate, investing may yield greater financial growth. For example, if your mortgage rate is 4% but your investment portfolio averages 7% annually, investing could offer a better return.

  2. Tax Benefits and Deductions
    Mortgage interest is often tax-deductible if you itemize your deductions. Prepaying your mortgage may reduce this tax benefit, which effectively lowers the “real” cost of your mortgage interest.

  3. Reduced Liquidity
    Once funds are used for mortgage prepayment, they are locked into the home and less accessible. For short-term or emergency needs, it may be more advantageous to keep cash in a more liquid form, such as in a savings account, investment portfolio, or emergency fund.

  4. Impact on Retirement Savings
    If prepaying your mortgage diverts funds from retirement accounts, you may miss out on compounding growth in retirement savings or lose out on employer match contributions in 401(k) plans. This can lead to a significant opportunity cost over time.

  5. Flexibility for Other Financial Goals/Investments
    Prepaying limits funds available for other financial goals, like saving for college, starting a business, making home improvements, or investing in rental properties. Having cash on hand could give you more flexibility to allocate funds according to your current priorities and goals.

How to Expedite Mortgage Payoff

Here are some effective strategies to achieve early mortgage payoff:

  1. Make Biweekly Payments
    Instead of making one monthly payment, split it into two biweekly payments. This results in 26 half-payments or 13 full payments over the year, shaving years off a 30-year mortgage. For example, making biweekly payments on a $300,000 mortgage at a 5% interest rate can reduce the loan term by almost 5 years and save close to $52K in interest payments.

  2. Increase Monthly Payment Amounts
    Adding even a small extra amount each month directly to your principal can significantly reduce your mortgage term. For example, adding $100 each month to a $300,000 mortgage at a 5% interest rate can reduce the loan term by almost 4 years and save close to $40K in interest payments.

  3. Make One Extra Payment Per Year
    Making one full extra mortgage payment each year, specifically applied to the principal, will yield time and interest savings similar to making biweekly payments.

  4. Make Extra Lump Sum Payments
    Use any bonuses, tax refunds, or unexpected windfalls to make extra lump-sum payments toward your principal. Even one extra payment a year can make a big difference.

  5. Refinance to a Shorter-Term Loan
    Refinancing to a 15- or 20-year mortgage can increase your monthly payment but will reduce the interest you pay over the life of the loan and help you own your home sooner.

  6. Round Up Payments
    Rounding up your payments to the next hundred can lead to paying down your mortgage faster with minimal impact on your budget. For example, if your monthly payment is $975, pay $1,000 instead.

mortgage payoff

Does Every Lender Allow Prepaying Mortgage Loans?

Not every lender allows unrestricted mortgage prepayments. Mortgage terms vary by lender, so review your loan agreement to understand prepayment rules. Most lenders clearly outline the conditions for early payments, including any fees, allowable payment amounts, and penalties.

  • Prepayment Penalties: Some lenders charge a fee if you pay off your mortgage earlier than the agreed term. This penalty can apply if you make extra payments, pay off a large part of the balance, or fully repay the loan within a certain period (often the first 3-5 years of the loan).
  • Partial Prepayment Allowances: Some lenders allow partial prepayments up to a specific amount each year (e.g., 10-20% of the principal balance) without penalty. If your loan has this allowance, you can make extra payments within this limit to reduce your principal.
  • Refinancing for Flexibility: If your current lender restricts prepayments, refinancing to a new lender with more flexible terms could be an option if prepaying your mortgage is a priority.

Bottom Line

Paying off your mortgage loan early is an important decision that can affect your balance sheet. Consider your short- and long-term financial goals and the opportunity costs of adding extra cash to your regularly scheduled payments. If you have a low mortgage rate, other high-return investment opportunities, or liquidity needs, investing elsewhere might be a better choice. If you have higher-interest debt (like credit cards, personal loans, or auto loans), it is generally better to pay those off first before accelerating mortgage payments. However, if being mortgage-free aligns with your financial and personal goals or if you are nearing retirement, paying off your mortgage faster can provide significant benefits. You do not necessarily have to choose between fast payoff and regular payments. Making occasional extra payments, especially when you have surplus cash, can give you the benefits of mortgage reduction without tying up all your resources. Carefully review your loan agreement to see if there are any early payoff restrictions or penalties. If the lender allows partial prepayments or caps the penalty, these may still be cost-effective ways to pay down your loan faster.

Please reach out to me to discuss paying your mortgage off earlier or within a specific time frame at 312-296-4175 or email me at connect@borislending.com. I lend in all 50 states and I am never too busy for your referrals!