Amy Fontinelle is a freelance writer, researcher and editor who brings a journalistic approach to personal finance content. Since 2004, she has worked with lenders, real estate agents, consultants, financial advisors, family offices, wealth managers.
Amy Fontinelle Personal Finance ExpertAmy Fontinelle is a freelance writer, researcher and editor who brings a journalistic approach to personal finance content. Since 2004, she has worked with lenders, real estate agents, consultants, financial advisors, family offices, wealth managers.
Written By Amy Fontinelle Personal Finance ExpertAmy Fontinelle is a freelance writer, researcher and editor who brings a journalistic approach to personal finance content. Since 2004, she has worked with lenders, real estate agents, consultants, financial advisors, family offices, wealth managers.
Amy Fontinelle Personal Finance ExpertAmy Fontinelle is a freelance writer, researcher and editor who brings a journalistic approach to personal finance content. Since 2004, she has worked with lenders, real estate agents, consultants, financial advisors, family offices, wealth managers.
Personal Finance Expert Chris Jennings Loans & Mortgages EditorChris Jennings is a writer and editor with more than seven years of experience in the personal finance and mortgage space. He enjoys simplifying complex mortgage topics for first-time homebuyers and homeowners alike. His work has been featured in a n.
Chris Jennings Loans & Mortgages EditorChris Jennings is a writer and editor with more than seven years of experience in the personal finance and mortgage space. He enjoys simplifying complex mortgage topics for first-time homebuyers and homeowners alike. His work has been featured in a n.
Chris Jennings Loans & Mortgages EditorChris Jennings is a writer and editor with more than seven years of experience in the personal finance and mortgage space. He enjoys simplifying complex mortgage topics for first-time homebuyers and homeowners alike. His work has been featured in a n.
Chris Jennings Loans & Mortgages EditorChris Jennings is a writer and editor with more than seven years of experience in the personal finance and mortgage space. He enjoys simplifying complex mortgage topics for first-time homebuyers and homeowners alike. His work has been featured in a n.
| Loans & Mortgages Editor
Updated: Sep 28, 2023, 11:42am
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Your house is probably the most expensive purchase you’ll make in your lifetime. So it’s no wonder if you dream of the day that monthly mortgage payment is gone for good.
If you have the extra cash, should you go ahead and pay off the loan ahead of time? Maybe. Here’s what to consider before paying off your mortgage early.
Because mortgages tend to be large loans that last for a couple of decades or longer, paying off the loan early can save you tens of thousands of dollars in interest. Not to mention, it feels good not having a monthly mortgage payment to worry about.
When you send in your monthly check to your mortgage lender, the payment is split between principal and interest. Early on in the loan, a large portion of that payment is applied to interest. As time goes on, more of the payment goes toward paying down the principal. This is known as amortization, and it allows the lender to make back a larger portion of their money within the first several years of repayment.
The key to paying off your mortgage early is by applying extra payments to the principal.
Just because you can pay off your mortgage early doesn’t necessarily mean that you should. Of course, it would feel great to rid yourself of a huge financial burden like a mortgage. But if you really want to know if it’s a good decision, you have to look at the math.
There are pros and cons to paying off your mortgage early. Whether the pros outweigh the cons will depend on your overall financial situation.
If you pay off your mortgage early, you’ll no longer have any mortgage interest to deduct on your tax return if you itemize your deductions. This change is most likely to affect you if you have a large mortgage, a high interest rate—or both—-and your annual interest payments are substantial.
Since the Tax Cuts and Jobs Act of 2017 doubled the standard deduction, most people don’t itemize their deductions. This provision sunsets in 2025, which means the standard deduction will halve in 2026 unless Congress passes a new law.
If you do itemize your deductions, losing the mortgage interest tax deduction could make it harder to get over the standard deduction threshold that makes itemizing your deductions worthwhile. However, your taxes will be simpler and you’ll no longer be paying mortgage interest.
If you’re thinking about paying off your mortgage early, ask yourself these three questions first:
Keep in mind that some lenders charge a prepayment penalty; if yours does, be sure to factor in that cost, too.
Here are the five best ways to pay off your mortgage faster, with the numbers to prove it.
One of the most effective ways to pay off your mortgage faster is to pay more than the monthly amount due. That might seem obvious, but you might not realize just how far a little extra money can go.
For example, say you took out a 30-year fixed-rate mortgage of $250,000 at 5% annual percentage rate (APR) and have 25 years left on the loan. That would mean you owe $1,342.05 per month. Now imagine that you tack on just $20 extra to each payment. You’d shorten the repayment period by eight months and save $5,722 in interest. Use a mortgage calculator to help you do the math.
For an extra $20 per month, you’d simply need to cut out one fancy coffee a week or a couple of takeout lunches. Obviously, putting even more money toward extra payments will result in even more savings.
Just keep in mind that you don’t want to go overboard here and sacrifice other financial goals to pay down your mortgage faster. Mortgages are some of the cheapest loans out there, so be sure you’re paying off other higher-interest debt and investing before you start cutting back in other areas of your budget.
Maybe you aren’t able to come up with the extra cash to make additional payments each month (or don’t want to). That’s OK—a couple of well-timed extra payments throughout the year can be even more effective.
Perhaps you receive an annual bonus from work or tax return each April. If you were to take $1,200 per year and apply it to that same mortgage example above, you’d cut your loan down by over three years and save over $25,000 in interest.
If you do decide to make extra payments toward your mortgage, be sure to check with your lender that the extra funds will be credited toward the loan principal. If you don’t specify how you want these payments applied, the lender will likely use them to prepay interest owed on your mortgage instead.
It’s common for mortgage borrowers to opt for a longer repayment term in order to keep monthly payments low—typically 30 years. However, as time goes on, your income may increase or your lifestyle may change to free up more cash flow.
If that’s the case, you may be able to refinance your loan to a shorter term. Since the repayment period gets crunched into a shorter time period, the monthly payments will likely increase. However, this is an effective way to pay off your mortgage much earlier and save a ton of money on interest, especially if you also qualify for a lower interest rate.
Take a look at this comparison of a $250,000 loan with a 30-year, fixed-rate term versus a 15-year, fixed-rate term:
