When to Consider Paying off Your Mortgage Early

Maybe you saved up money over the past few years, got a hefty raise, or received an inheritance. Whatever the reason, you now have the means to pay off your mortgage early. Isn’t that the best move? It just depends.

It can be tempting to rush to pay off your home loan when you have the ability to, especially if you’ve struggled with debt management. And why wouldn’t you want to pay off your mortgage? Getting rid of debt could potentially increase cash flow.

When it comes to your mortgage loan, it all depends on your unique financial situation—there is no one right answer.

Why You May Not Want to Pay Your Mortgage Off Early

Here are a few reasons why many consider not paying their mortgage off early:

You have a reasonable interest rate on your mortgage loan. Unless you’ve reached all of your financial goals, it may not make the most sense to pay off your mortgage early when you have a competitive interest rate.

For example, if you are saving to send your child to college or you’re trying to rebuild your emergency fund after a home repair, those might take priority.

Paying off your mortgage loan early would deplete liquid savings. This could make it more challenging to handle financial emergencies.

You might face a prepayment penalty. Make sure to review your mortgage terms closely. Some lenders charge an early payoff penalty, usually a percentage of the principal balance at the time of payoff.

You might miss out on the mortgage tax deduction. For many people who itemize, having a mortgage helps push their itemized deductions higher than the standard deduction. It’s worth discussing the mortgage tax deduction with your accountant or other tax professional before you resolve to pay your mortgage off early.

When an Early Payoff May Make Sense

There are some situations when paying off a mortgage early might make more sense than waiting.

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You’ve Met All of Your Financial Goals

If your emergency savings account is right where you feel it needs to be and you’re diligently contributing to your retirement accounts, you may feel like all of your financial boxes are checked right now.

If you’ve met all your other financial goals, then you may be in the clear to prepay your mortgage.

You’re Interested in Being 100% Debt-Free

Sometimes just the idea of having loan payments can be mentally taxing, even if you’re in a good place financially. Money is not just about numbers for many; it’s also about emotions.

So if paying off your mortgage loan early relieves anxiety because it’s helping you become debt-free, then that might be something to consider.

Of course, reflecting on why you want to become debt-free is important when thinking about paying your mortgage off. If, for example, it’s because you’re approaching retirement and will no longer be getting a steady paycheck, it might make sense to pay off your mortgage.

Ways to Pay Off a Mortgage Early or Faster

Let’s say that you’ve decided to prepay your mortgage because it’s the right financial move for you. How do you do it?

Lump sum. You could pay it off in a lump sum if you have that kind of cash lying around.

Extra payments. You could potentially pay more toward your mortgage each month, whether because you got a raise at work or because you’ve trimmed some fat in your budget that allows you to pay more toward the mortgage.

If you make higher payments or extra payments toward your mortgage, it could lead to paying off the loan faster than if you were just to make the set payment each month.

Refinancing. There is one more way you may be able to pay off your mortgage faster: refinancing.

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Refinancing your mortgage means replacing your current mortgage with a new one, with terms that better suit your current needs.

It may make sense to refinance if you are going to get a significantly lower interest rate and/or change your loan term.

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If you shorten your loan term from, say, 30 to 15 years, it may increase your monthly payments but in turn allow you to pay your mortgage off faster. Home loans with shorter terms often come with lower interest rates, too, so more of your monthly payments will be applied to the loan’s principal balance.

The Takeaway

Should you pay off your mortgage early? Maybe. What’s right for your neighbors or friends may not be right for you. If you’re trying to decide whether to refinance, consider your current lender’s terms and the new terms you could get. Then you can make an educated decision based on your financial picture.

Mortgage refinancing with SoFi means getting a competitive rate.

And finding your rate takes just two minutes.

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.