Should You Pay Off Your Mortgage Early?
Paying extra on your mortgage is one of the few guaranteed returns available: every dollar you prepay saves interest at your loan’s rate. Whether it is the best use of your money depends on your rate and the rest of your finances.
How extra payments save money
Each month, interest is charged on your remaining balance. Any amount above your regular payment goes straight to principal, which lowers the interest on every future payment.
Example: $280,000 left at 6.5% with 27 years to go, a principal and interest payment of about $1,836.
| Extra per month | Paid off sooner by | Interest saved |
|---|---|---|
| $100 | about 3 years 4 months | about $46,300 |
| $200 | 5 years 10 months | about $79,680 |
| $500 | about 10 years 9 months | about $141,600 |
Strategies that work
- A fixed extra amount each month. Simple and effective; even $50 makes a difference over decades.
- Biweekly payments. Paying half your payment every two weeks results in 13 full payments a year instead of 12.
- Windfalls. Put part of a bonus or tax refund toward principal.
- Recasting. Some lenders will re-amortize the loan after a large lump-sum payment, lowering your monthly payment for a small fee.
Tell your lender to apply extra money to principal. Otherwise it may be held as an early payment toward next month.
When prepaying makes sense
- Your mortgage rate is relatively high.
- You have an emergency fund of three to six months of expenses.
- You already contribute enough to get any 401(k) employer match.
- You have no higher-interest debt.
- You value being debt-free before retirement.
When something else comes first
- Credit card or personal loan debt at higher rates should be paid off first.
- An employer 401(k) match is effectively an instant return that is hard to beat.
- A low mortgage rate. If your rate is around 3%, a high-yield savings account or a diversified long-term investment may reasonably be expected to earn more, though investments carry risk.
- Liquidity. Money paid into your home is hard to get back without selling or borrowing against it.
Prepayment penalties
Most conventional mortgages issued today have no prepayment penalty, and federal rules limit them on qualified mortgages. Check your loan documents or ask your servicer before making a large payment.
Tax considerations
If you itemize deductions, mortgage interest is deductible, which slightly lowers the effective benefit of prepaying. Most households take the standard deduction, so for them the full interest rate is the return on prepaying.
The right answer is often a mix: build your safety net and retirement savings first, then direct some extra cash toward the mortgage.
Results are estimates for informational purposes only and are not financial, tax, legal or medical advice.