In this article:
If you have the means, paying off your mortgage ahead of schedule could bring big savings and create some welcome options for your household budget. But there are potential consequences you should consider before you make that move.
Pros and Cons of Paying Off Your Mortgage Early
Here's a look at the advantages and potential drawbacks of paying off your mortgage ahead of schedule:
Pros of Paying Off Your Mortgage Early
- Elimination of a big monthly payment: This is the obvious win. Your mortgage payment is likely your biggest monthly expense, and without it there'll be more funds to use for other things. Savings? Investment? Travel? Action figures? It's up to you.
- Interest savings: Paying off your mortgage early could bring significant savings by eliminating interest charges that would have been applied over the remaining months or years of your payment term. How much you'll save depends on your interest rate and the number of scheduled payments left on the loan. Talk with your mortgage servicer to determine just how much you'd save.
- Predictable rate of return: Investing in the stock market, mutual funds or other options can pay off big in annual return rates. However, because your returns will fluctuate with the market, what's a big payoff one year could be much lower the next. You may even lose money. Paying off your mortgage, on the other hand, means you will gain a predictable amount in savings each year—an amount equal to your mortgage interest rate.
- Owning your home outright: The peace of mind that comes with owning your home and eliminating a sizable debt can be reason enough if you have the means to pay off your mortgage. Even if you get into a bind down the road and need to borrow money, paying off your mortgage in full gives you 100% equity in your home, allowing you to borrow a large sum using a home equity loan or home equity line of credit (HELOC) if you need it.
Cons of Paying Off Your Mortgage Early
- Loss of mortgage interest tax deduction: If you itemize tax deductions, some or all of your mortgage interest payments likely have been offsetting your federal income taxes. Paying the mortgage off early would eliminate that offset, so check with your tax advisor to understand the consequences of eliminating your mortgage payments.
- Prepayment penalty: It's not a common practice today, but some older mortgage contracts charge a prepayment penalty if you pay your mortgage off early. If this applies to you, be sure you'll save more in avoided interest charges than you must pay as a penalty.
- Neglecting savings: Having extra money to put toward your mortgage payments is great, but not if you aren't adequately funding your savings. Before focusing on paying off your mortgage, set aside an adequate household emergency fund—ideally one that covers at least six months of basic household expenses. Also make sure you've taken full advantage of any retirement savings plans you may have—401(k), or individual retirement account (IRA), for example. Consult a financial professional for advice on whether it makes more sense for you to channel your windfall into retirement savings or mortgage payoff.
- Opportunity for greater return: From 1992 to 2021, the average rate of return on investing in the stock market was 10.66% (or 8.10% when adjusted for inflation). In contrast, a current 30-year, fixed-rate mortgage comes with an interest rate of 6.5%. If returns are what you're after and you understand the risks, you may be better off funneling extra funds into investments and potentially enjoying a higher return rate.
Will Paying Off Your Mortgage Affect Your Credit Score?
No, paying off your mortgage early won't have a significant effect on your credit scores.
A mortgage paid in full will remain on your credit reports at the three national credit bureaus (Experian, TransUnion and Equifax) for 10 years as a "closed account in good standing." At the end of that time, if you haven't taken out a new mortgage, your credit scores may drop slightly because of a reduced credit mix and lower average age of your accounts.
If you've kept your debt payments up to date, your credit scores will likely have risen over those 10 years and balance any score loss related to your paid-off mortgage.
Should I Pay My Mortgage Off Early?
Using an inheritance or other cash windfall to pay off your mortgage early could simplify household bookkeeping and save you money, but that doesn't necessarily mean it's the best use you can make for the cash. Here are a few guidelines to consider before you finalize your decision.
- Pay yourself first. Before you close out your mortgage, make sure you've set aside sufficient funds for household emergencies, retirement savings and other financial goals.
- Optimize your savings. Be clear about what prepaying your mortgage will save you in interest charges, whether you'll face additional income taxes from the loss of mortgage interest deductions and the amount of any prepayment penalty you may have to make. If appropriate, talk to a financial advisor or tax expert for advice on maximizing the benefit of prepaying your mortgage.
- Consider other uses for the money. Ask yourself (and perhaps a trusted financial advisor) whether you can put the money to work in a way that generates more return than what you'll save by paying off your mortgage.
- It doesn't have to be all or nothing. You don't have to pay off your mortgage altogether to reap significant savings on interest charges. Any lump-sum payment applied against outstanding mortgage principal will lower your interest costs and the number of payments remaining on your loan. So even if you put some of your windfall toward other goals, using the remainder to prepay your mortgage could still save you money.
- If it makes sense for you, go for it! If all your other financial priorities are on track and you're comfortable with any tax consequences, get that mortgage payment off your plate and enjoy the extra flex in your monthly budget.
The Bottom Line
Paying off a mortgage will always be cause for celebration, and you're fortunate if you're able to do so ahead of schedule. The consequences of paying off a mortgage early aren't always obvious, however, so consider all the implications carefully before making that move. If it makes sense to move ahead, enjoy the fruits of owning your home outright.