Should You Pay Off Your Mortgage Early: Pros, Cons & Early Pay-Off Tips

Paying off a home is a large part of the American dream — if any of us ever actually get there — so let’s imagine the scene.

The last payment has been made. The backyard grill has been activated. The paperwork catches fire, and there are cheers all around.

Who doesn’t love a good mortgage-burning party?

It means the end of that monthly payment. It means the end of the largest debt most families will ever take on. It means saving a fat emergency fund, more money for investing, vacations — and financial freedom.

If you have the means to pay down your mortgage early — to avoid the full life of a 30-year debt — wouldn’t you go for it?

The answer, far too often, is “no.”

Better Uses for Your Money

With recent mortgage interest rates in the range of 4% or lower, many financial experts say your money could be better used in other areas. After all, as financial advisor Ric Edelman points out about assuming a mortgage, “It’s the cheapest money you’ll ever be able to borrow.”

But the decision to pay off a mortgage early often has more to do with the heart than the head. For the risk-averse segment of our population — the people who truly consider “debt” as the ultimate four-letter word — it’s simply the right thing to do. These are the people who will be unaffected by losing out on some tax deductions that could come with carrying a mortgage.

Financial freedom and being debt-free has much more meaning. Plus, in a risk-averse perspective, prepaying a mortgage is a “sure thing,” while any other type of investments — even in a safe, growing environment — carry no guarantees.

“Not having debt is a huge advantage,” says Allen Wohlwend, a financial advisor in St. Petersburg, Florida. “You can save at an accelerated rate. You have the flexibility to react to the unexpected. It’s a very smart and astute way to conduct your business. It uncomplicates things.”

Depending on your interest rate and how much time is remaining on the loan, paying it off early can add up to significant savings and make your monthly budgeting a breeze.

How to Pay off a Mortgage Early: 7 Tips

Here are some tips to follow when paying off a mortgage.

1. Make an Extra Payment. This doesn’t have to be as harsh as it sounds. First, divide your monthly principal and interest by 12, then add that amount to your monthly payment. Essentially, you have increased to 13 payments a year. If you employ this “extra payment’’ strategy, how much can things change? Considerably. Let’s say, for example, after the fifth year of a 30-year mortgage for $200,000 at 4.5% interest, you start making an extra payment every year. You will pay off the mortgage 39 months earlier, saving you more than $18,000 in interest. Another tip: Make certain your payment is applied to the loan principal, not just the next month’s payment.
2. Do Something (Even a Little Something). There could be some disagreement among couples. One spouse might value security and the feeling of no debt. The other might want to take more risk — even subtle risk — for the opportunity of a greater reward. A compromise could be cutting your extra money in half: One-half goes to an extra mortgage payment, while the other could go towards other investments.
3. Refinance from a 30-Year to a 15-Year Fixed Rate Mortgage. Choose between different kinds of mortgages for what fits your context. Using the example of a $200,000 mortgage at 4.5% interest, let’s say after five years you can refinance to a 15-year loan at 4%. With that act alone, you will pay off the mortgage a full 10 years earlier and save more than $60,000! The downside is that it’s not flexible. You are locked into the new higher monthly payment. Additionally, you must qualify for the new mortgage. That means paperwork, a credit check, a probable home appraisal and closing costs. A significantly lower interest rate will be the primary impetus for this strategy, which will pay off if you have discipline and motivation.
4. Apply Found Money to Your Mortgage. If you get a tax return, promotion, bonus, or unexpected windfall, the additional income goes to pay down the mortgage. Period.
5. Downsize to a More Affordable Mortgage. Evaluate your mortgage and figure out how much home you can afford. Maybe you can get by with a smaller house and smaller payment. If so, perhaps the profits from selling your house will allow you to pay cash for the smaller home and the whole idea of a mortgage will be moot.
6. Fun with Math. The Bi-Weekly Payment Strategy: If you make bi-weekly payments instead of monthly payments, you will come out way ahead. How? The numbers work for you because there are 13 weeks in each quarter (not 12) and 52 weeks in each year (not 48). With bi-weekly payments, you can retire a 30-year mortgage in 27 years. Check with your lender (many have caught on and prohibit bi-weekly payments because they don’t want to surrender that extra interest money — darn it!). Another option is to round up your monthly payment. If you owe $970 per month, why not make it $1,000. Make sure the extra cash goes to the principal. You’ll save time and money with that simple gesture.
7. Get Motivated: Set A Financial Goal. Determine a milestone: your 50th birthday, when the kids go to college or maybe retirement and calculate how you will get to mortgage payoff by that time. Setting financial goals and celebrating milestones will make the mortgage-burning party extra sweet.