Can You Pay Off Mortgage Early?

Can you pay off your mortgage early? In most cases, the answer is yes. The obvious advantage is no longer having debt on your home or a monthly mortgage payment. But for some, it makes more sense to keep paying. Consider the following information as you evaluate whether it makes sense to pay off your mortgage early.

Is It Allowed?

In almost every conventional mortgage, you can pay off a loan early if you chose. Some loans come with prepayment penalties, which might offset any financial value to you, but this is rare, again, for conventional first mortgages.

Is It Possible?

For most, a home mortgage loan is for a hundred thousand dollars or more, often hundreds of thousands of dollars. So is paying it off possible? Of course. It is assumed you will not have the cash on hand to simple pay the mortgage off early. Instead, most conventional mortgage loans allow you to increase your monthly payments and begin paying down the principal amount of your loan.

Your monthly mortgage payment is comprised of interest and principal (setting aside taxes and insurance for this discussion). In the early years, only about 10 percent of your payment is going to reduce the balance. The rest is prepaying the interest on the loan amount, the principal.

By making additional principal payments, you reduce the total interest you’ll pay over the life of the loan and pay the mortgage loan off early.

Is It the Best Thing for You?

A large part of the answer to this question is, “It depends on you.” Many people do not like debt. If this is important to you then it makes sense to pay off your mortgage early. The peace of mind is added to real dollar savings.

However, keep in mind that mortgage interest is a tax deduction. That is one of the two great benefits of home ownership. (The second is the tax-deferred growth on the value of your house.) Additionally, if you prepay mortgage principal that is money you can’t use for lifestyle or other investments. While a home typically is a safe, long-term investment, there are many other places to invest, such as mutual funds, where the annual rate of return can be better.

Payoff Strategies

You don’t have to double your monthly principal payments as in the example above. In fact, most people don’t have the room in their budget for that. But you still can reduce pay your mortgage off early in other ways.

Bi-monthly Payments. If you pay monthly on your mortgage, you pay 12 times a year. If you switch that to bi-monthly, that is 26 half payments or 13 full payments a year. An additional payment a year. 

Annual Lump Sums. Some people put their IRS refund into their mortgage. If you receive an annual bonus, you can dedicate part of it to pay off your mortgage early.

Whenever You Can. A legitimate strategy for those with discipline is to commit to irregularly saving extra money and paying down as you can.

Be Aware

If you have refinanced your mortgage with a new mortgage loan, there often are prescribed waiting periods before you can refinance again. There also are commonsense waiting periods where the cost of closing a new loan offsets the savings you generate.