Is Early Mortgage Payoff a Good Idea?


An early mortgage payoff can certainly be a tempting idea. It means money saved in interest and one less payment to factor into your monthly budget. But is an early mortgage payoff really a good idea?

In this article, we’ll go through the ins and outs so you can decide whether an early mortgage payoff is the right move for you.

How Do You Pay Your Mortgage Off Early?

There are a couple of paths to early mortgage payoff. Maybe you’ve come into a large sum of money recently. You can get a payoff amount from your lender and use that sum of money to pay the remaining balance of your loan.

More commonly, borrowers opt to pay a little extra against their loans each year, either through increased monthly payments or by making extra payments when the money is available.

Pros of an Early Mortgage Payoff

Save on Interest

One of the primary benefits of an early mortgage payoff is that you’re saving money on the amount of interest you pay over the life of your loan. Interest on home loans is always compounding. That means your loan is growing too. For instance, if you have a 30-year mortgage on a $300,000 loan at a 5 percent interest rate, you’ll wind up paying around $279,770 in interest over the full loan term. That’s almost the amount of the original loan itself, so that $300,000 loan is really costing you close to $580,000.

If you make a lump sum payment or put extra money toward your mortgage payment each month, even a couple hundred dollars, you can pay off your mortgage early, shaving months of compound interest off your loan. That could save you thousands or even tens of thousands of dollars in interest. That money can go toward home renovations, a new car, or putting the kids through college.

If you want to crunch the numbers yourself, you can plug some numbers into the AARP mortgage payoff calculator to see much money you could save in a variety of scenarios.

Own Your Home Outright

Paying off your mortgage early also enables you to own your home free and clear. The housing market fluctuates, and your home’s value moves with it. If you have a mortgage and housing values drop, you risk owing more on your home than it’s actually worth. If you decide to sell your home while housing values are down, you may wind up taking a financial hit.

You also run the risk of falling behind on payments. The Great Recession and the pandemic are two recent events that put a financial strain on many homeowners. When faced with financial hardship, it may be difficult to make monthly mortgage payments, and you could go into foreclosure. On the other hand, owning your home outright means you have an asset you can borrow against if you should ever need a safety net.

Cons of an Early Mortgage Payoff

While an early mortgage payoff certainly has its advantages, it may not always be in your best financial interest to pay off your home loan early. For instance, mortgage interest rates are typically low when compared to other types of debt. If you have auto loans, personal loans, or credit card balances, you may want to focus on paying those debts off first, especially if they have higher interest rates. This is known as the debt avalanche method of repayment and may save you more money in the long run than an early mortgage payoff.

If you don’t have other debts, you should still make sure the timing of your early mortgage payoff makes sound financial sense. For instance, if you know you have a large expense coming up, it may be best to save for that expense so that you can afford it, instead of running the risk of accruing additional debt. Likewise, make sure throwing extra money toward your monthly mortgage payment still enables you to have some breathing room in your monthly budget.

If you decide that you do want to proceed with an early mortgage payoff, you should contact your lender or mortgage service before doing so. You may incur a prepayment penalty for paying off your loan early, so you’ll want to factor that cost into the payoff to assess whether it really is your financial benefit to move forward with an early payoff.

Refinancing: An Alternative to Early Mortgage Payoff

If you want to pay off your mortgage early but are uncertain if the timing is right, there are alternative options for you to explore. For instance, you may be able to refinance your mortgage for a shorter loan term. If you qualify for a lower interest rate on your new mortgage, you can save money while also paying off your mortgage early.

In some instances, refinances come with their own set of expenses. So it’s important to find the right one to suit your financial needs. If you feel refinancing is the right option for you and you’re based in Washington State, Solarity Credit Union’s refinance options can help you save money, pay off your home faster, and even help you consolidate your debt.

A cash-out refinance allows you to refinance for a higher amount than your current mortgage balance. You can then use the extra cash to pay down other debt that may have higher interest rates, such as credit cards or auto loans, while still changing the term of your home loan.

Interested in speaking with an expert about early mortgage payoff or refinancing? From application to closing, Solarity’s mortgage process is quick, convenient, and simple. Contact one of our helpful Home Loan Guides to find out exactly how much time and money you could save on your path toward full home ownership.

Working with a lender like Solarity can make the future a little easier. Give them a try, and you’ll find out for yourself just how easy the mortgage process, whether a first mortgage or a refinance, can be.

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