Few financial decisions are as complicated as whether to pay off a mortgage early. Some homeowners value the financial freedom, while others prefer to maintain their payments and put any extra money in investments that earn a high rate of return.
Is it smart to pay off your mortgage early? That depends on your priorities, your investment strategy, economic factors, and what brings you the most peace of mind. It’s not an easy decision, but there are plenty of tools and readily available advice that you can draw from.
Benefits of Paying Your Mortgage Off Early
There are excellent arguments supporting the strategy to pay off your mortgage early.
Significant Interest Savings
Over the course of a mortgage term, you pay an enormous amount of interest. For example, if you have a $300,000 mortgage at 6% interest, you pay approximately $347,000 of interest over the course of 30 years, more than the original loan amount!
If you can put more toward your payment each month, you pay your principal down faster and pay less interest over the course of the loan. With this strategy, you can save tens of thousands of dollars just in interest.
More Cash Flow in Retirement
When you retire, your income will likely decrease, but your expenses won’t. If you can pay your mortgage off early (before retirement), you’ll have the funds you need to be comfortable and do the things you want to do.
An early mortgage payoff could also mean that you can retire sooner since you won’t need to save as much for retirement before you stop working. For example, if your mortgage payments are $2000 per month, you’ll need $24,000 less every year in retirement savings.
Peace of Mind
There is psychological freedom in owning your home outright. Knowing that you have no mortgage payments means reduced financial stress and enhanced quality of life.
Being mortgage-free also gives you more flexibility to live life the way you want to. Thinking about starting a business, taking a lower-paying job that’s more rewarding, or reducing your work hours to spend more time on hobbies? If you pay off your mortgage early, you’ll have that freedom.
Buffer Against Economic Uncertainty
When you own your home outright, you have a safety net during economic downturns, job losses, health setbacks, and other financial emergencies. Your housing is secure as long as you can pay your property taxes and insurance.
Disadvantages of Paying Your Mortgage Off Early
Despite the advantages, there are several downsides if you pay off your mortgage early.
Investment Opportunity Cost
If your mortgage is at 5% but you can reliably earn 8% by investing your money in another instrument, such as a diversified stock portfolio, you’re missing out on significant investment income.
For example, if you have an extra $500 monthly, you could use it to pay down your mortgage, which would save you approximately $50,000 in mortgage interest over a 20-year loan period. On the other hand, you could invest it in a retirement fund, which would grow to $275,000 over the same period.
Lower Liquidity
Although a home is a valuable asset, it’s not very liquid. If you pay off your mortgage early, you own that asset outright, but you’d have to sell it, refinance, or get a home equity loan if you needed to access the equity.
By keeping your extra funds in a more liquid asset like savings or investments, you have more financial flexibility. In an emergency, access to quick funds means you can still pay your mortgage and take care of urgent needs.
Keeping money in different investments (not just your house) also makes sense from a diversification perspective. Investment advisors caution us to spread our risk and avoid putting all our eggs in one basket. Applying this advice, it’s good practice to have investments that aren’t tied up in real estate.
Inflation-related Benefits
The dollar amount of mortgage payments doesn’t change, but due to inflation, the real cost of the payment becomes cheaper as time goes by. It’s also likely that your income will increase with inflation while your payment stays the same. If you pay off your mortgage early, you’re foregoing this benefit.
Can You Pay Off a Lifetime Mortgage Early?
A lifetime mortgage, also called a reverse mortgage, allows homeowners to borrow against their home equity without paying it back in monthly installments. The loan is repaid when the homeowner or their estate sells the property.
You can pay off a lifetime mortgage early, but there are a few disadvantages to this strategy:
- You might incur early repayment penalties, which can be quite high.
- You’ll be locking up equity in your home, so you’ll have lower liquidity and less cash. In the future, you might want access to cash for things like health care, home modifications for aging in place, and general living expenses.
- You have to repay the entire loan balance at once (you can’t make payments toward it). You could do this by refinancing your home to pay off the reverse mortgage, but you’d be applying for a new mortgage with the closing costs that attach.
Paying your reverse mortgage off early also has some pros:
- Interest on lifetime mortgages accrues rapidly; paying it off stops the balance from growing.
- Liquidating your estate after you pass away will be easier, and your heirs get to keep more of the home’s value.
- You can sell the home more easily because it doesn’t have liens against it.
- You get more financial flexibility because you can borrow against the equity in your home later if you want or need to.
So, can you pay a lifetime mortgage off early? Absolutely, but it takes careful planning and consideration of a wide range of implications.
How to Use a Mortgage Calculator to Pay Off Early
Before you decide to pay off your mortgage early, do a detailed calculation to evaluate the financial impact. An online mortgage calculator allows you to look at your revised financial picture from several angles. Here’s what to calculate:
- Total interest you’ll pay over the course of your loan. You can compare that with the total interest for shorter terms to see how much you’d save.
- Impact of increasing your monthly payments. Plug in an extra $100 or $200 to see how much faster you could pay your mortgage off and how much it would reduce the total interest you’ll pay over the life of your mortgage.
- Impact of lump sum payments. Most lenders will allow you to make principal-only payments periodically, which can significantly reduce the total interest on your loan.
- Investment opportunity cost. An advanced online investment calculator will allow you to compare the returns on other types of investments to the advantages of paying off your mortgage early.
Financial decisions are complex, and the ones involving your mortgage can be particularly challenging. But there are many online tools you can use to help you make the right decision for you and your future. Spend some time doing the analysis, and don’t be afraid to reach out for financial advice from experts in the field.
