However, there are also a number of reasons why it may not be the best idea for you to pay off your mortgage early. It’s important for each person or family to weigh the pros and cons for their unique situation.
How much could you save by paying off your mortgage early?
Now, let’s say you decide that you want to pay the mortgage off in 20 years instead by adding to your payment each month. If you do this, you’d end up only paying a total of $272,253.60. This would save you over $41,000 over the life of the loan! Even paying off this mortgage just one year early would save you over $4,000.
If you want to see what it would take to pay off your mortgage early, check out this mortgage payoff calculator from NerdWallet.
How to pay off your mortgage early
If you decide that you want to pay off your mortgage early, there are a few different options for doing this. One option is to increase your monthly payments. Another option is to make biweekly payments instead of monthly payments. This means you would pay half of your payment every two weeks. By making 26 half-payments per year, you’ll be paying the equivalent of 13 regular payments—adding an entire extra payment per year.
If you do decide to pay extra, be sure to specify that you want that amount to go toward the principal rather than it paying down interest for the next payment. Paying down the principal is what allows you to save in the long run!
What to consider before paying extra on your mortgage
- Prepayment penalties. Be sure to find out whether your lender charges a penalty for early payoffs. Mortgage lenders make money by charging you interest, so penalties make up for the money they lose if you pay off your principal more quickly.
- Lack of a solid emergency fund. Don’t throw money at your mortgage unless you first have a significant emergency fund set aside. An effective emergency fund should be enough to cover your expenses for 3-6 months. In the event that you lose your job or suffer an injury, your emergency fund will prevent you from having to take on debt for your everyday expenses.
- Better investment opportunities. Figure out whether paying your mortgage off early will give you more in the long run than investing that amount of money. If you have a low interest rate on your mortgage, there might be better investment options that will actually benefit you more in time. Keep in mind, though, that this is a personal decision. If having a mortgage payment causes you to lose sleep at night, consider paying it off quickly, even if there are better investment options out there.
What to consider before you get a mortgage
When considering your budget, do not make a decision based on expected future earnings potential. Instead, buy something you can afford right now, even if your income declined slightly. It’s no fun losing a job, but losing your house as well as a result is a much bigger problem. Make every effort to avoid this outcome by being conservative when deciding what you can afford in a home.
Is it a good idea to pay off your mortgage early?
Remember, two of the main ways to pay off your mortgage early are:
- Adding extra to the principal payment each month
- Making one or more extra payments per year
Reasons why you might not want to pay off your mortgage early:
- Prepayment penalties
- Lack of a solid emergency fund
- Better investment opportunities
This material is not intended to replace the advice of a qualified tax advisor, attorney, or accountant. Consultation with the appropriate professional should be done before any financial commitments regarding the issues related to the situations above are made.