Does it make sense to pay off your mortgage early?

Couple before house

If you own a home, the thought of a mortgage hanging over your head for decades can be daunting for many people – and it's natural to want to pay off your mortgage as quickly as possible.

But before you decide to use an inheritance, a raise, or your savings to pay off your mortgage (or even before you decide to make additional payments), it's important to take a step back and determine if it really makes financial sense for you to do so.

In some cases, the amount you save in interest by paying off your mortgage early doesn't exceed what you would earn if you put the money elsewhere. On the other hand, sometimes it's not about the return on other investments, but rather peace of mind or freeing up cash flow for other opportunities.

Here's what you need to know when deciding whether to pay off your mortgage early.

Can you pay off your mortgage early?

If you are considering paying off your mortgage early, contact your mortgage lender or servicer first. Based on the terms of your loan, you might find out that you're subject to a prepayment penalty if you pay off your mortgage earlier than your payment plan allows, or that you can only make payments within certain parameters. Knowing this information in advance can help you create a repayment plan that works for you and your lender or servicer.

Pay off your mortgage early: What you should bear in mind

Will other investments beat paying off a mortgage early?

The biggest consideration could be whether to pay off your mortgage or invest it. What if, instead of putting the money into paying off your mortgage early, you invested it elsewhere?

"Unfortunately, the math tells us that it's almost always better to invest elsewhere than in your mortgage," says Richard Bowen, CPA and owner of Bowen Accounting in Bakersfield, Calif.

Mortgage rates are at an all-time low. So if paying off the mortgage early results in a return equal to the interest rate, that return would likely be lackluster compared to the annualized return for the S&P 500 – about 10 percent over the last 90 years.

A potentially better use of the funds could be to invest the money you would use to pay off your mortgage in buying a cash-flow-positive property such as multifamily or single-family homes, which have the potential to offer higher returns over the long term, Bowen says.

However, every choice is a risk. Even if you pay off your mortgage early, home prices can plummet, leaving you with a potential loss. Carefully consider the risks you are willing to take. Ultimately, you may be better off not paying off your mortgage early.

"The thing is, no one can give you a guarantee on an investment," cautions Bowen. "You can put your money in the stock market and lose it. You can put your money into real estate and it doesn't perform as well as you anticipated."

Will all your money be tied up in the mortgage?

Before you take a large chunk of your assets and use them to pay off your mortgage early, don't forget to look at liquidity. Your home is considered a non-liquid asset because it can take months – or longer – to sell the property and access the principal.

"If you start paying off your mortgage too quickly, you risk depleting your liquidity," says Amanda Thomas, client advisor at Mission Wealth in Santa Barbara, Calif. "The type of liquidity you have is also important. You should not invest too much money in pension funds, because fees may be incurred in the event of early withdrawal."

One approach is to keep an emergency fund and assets such as stocks, mutual funds, U.S. government bonds, notes and marketable securities ready in a taxable investment account. This way, in addition to the money tied up in tax-deferred retirement accounts and your home, you still have some liquid cash or other investments that can easily be converted to cash in an emergency.

Bowen suggests maintaining a cushion that protects you for at least six months before considering using a large portion of your cash to pay off your mortgage early.

What will you do with the money if you don't pay off your mortgage early?

Be realistic about what you'll do with your money if you don't use it to pay off your mortgage early. Will you actually use it to get ahead?

For example, it may make sense to put the money into paying off your mortgage early if you are having trouble keeping money in the bank. Your home can be a forced savings tool, and if you make additional mortgage payments, you can save thousands of dollars in interest over time and also build equity in your home faster.

"Doing the right thing is what you're going to do," says Bowen. "All of this has to do with personal habits. If you're going to blow the extra money anyway, it's better to put it into your home than spend it."

How much value do you place on peace of mind?

Sometimes it is less about the bottom line and more about peace of mind. Owning your home free and clear can bring benefits that can't be measured in purely financial terms. For many, eliminating a monthly mortgage payment before retirement can be a mental relief when thinking about living on a fixed income.

"I personally pay off my mortgage," says Thomas of Mission Wealth. 'It feels good to have it paid off before retirement'. It may not always make financial sense, but it offers peace of mind and allows for better budgeting."

Another potential benefit is the ability to borrow against the equity in your home. A substantial amount of equity can allow you to establish a home equity line of credit (HELOC), which is a source of emergency funds and allows you to make home improvements or meet other financial goals.

Advantages and disadvantages of paying off your mortgage early


  • Eliminates your monthly mortgage payment and frees up cash flow that can be especially useful in retirement
  • Saves you money on interest, potentially thousands of dollars
  • Can receive a predictable rate of return equal to the interest rate on the amount paid off
  • Gives you the certainty that your house belongs to you
  • Can tap into your home's equity if you need money later on


  • Tie up a good portion of your liquidity and net worth in your home, which could make it harder to access later
  • No longer eligible for mortgage interest deduction
  • Could forgo potentially higher returns from other investments
  • You may not realize as much from your home as you had hoped if the market drops and you need to sell quickly

Pros and cons of paying off your mortgage video guide

Tips for paying off your mortgage early

If you decide it makes sense to pay off your mortgage early, be careful not to jeopardize your other financial goals. Here are some tips.

  • Pay off high-interest debt before making additional mortgage payments – Other debt, such as z.B. Credit card balances, can have much higher interest rates than your mortgage, so if you pay off your mortgage early instead of tackling this one, you could fall behind. Credit card debt, personal loans and even car loans typically cost you more, and the interest is not tax deductible. It might be smarter to get rid of other debt first.
  • Make sure you're investing for retirement – When deciding whether to pay off your mortgage or invest, don't forget to think about retirement. Make sure you put money into a tax-advantaged retirement account, like a 401(k) or IRA, first. If your company offers a subsidy, take advantage of it and build your nest egg. A good retirement account and a paid-off house can be a good combination.
  • Build an emergency fund – As Bowen points out, it's a good idea to build an emergency fund before you make additional mortgage payments. This way, you still maintain some liquidity and can access the money in case of an emergency.
  • Work on other goals – You may have other financial goals, such as buying a car or saving for a child's education. Make sure you achieve these goals first.
  • Refinance – Think about refinancing your mortgage to a shorter term, z.B. Switching from a 30-year mortgage to a 15-year loan. You'll be making higher payments each month, but it's a way to save on interest and still be debt-free sooner.
  • Consider bi-weekly payments – One way to start making extra mortgage payments is to set up a bi-weekly schedule. This equates to one full additional monthly payment per year and can reduce the amount of time you spend on a mortgage. Starting with biweekly payments can help you get ahead on your mortgage while you can continue to work toward other financial goals.
  • Check for a prepayment penalty – Don't forget to check your mortgage for a prepayment penalty. If you pay off your mortgage early, you may be charged an additional fee. Do the math to see if you still have an advantage after paying a penalty.

Bottom line

When considering whether to pay off your mortgage early, it's important to figure out what works best for your situation and is most likely to help you meet your short- and long-term financial goals. Sometimes financial planning isn't just about making the most of the numbers. People want to feel good about where their money is going – no matter what the spreadsheet says.

For some people, debt causes stress, and paying off a mortgage early can bring peace of mind. For people nearing retirement, a paid-off mortgage means they have much more free cash flow from their fixed income when they stop working.

"My wife likes to have money in the bank, whereas I'd rather invest it," Bowen says. "But if money is a tool, then this money buys their happiness, so it works."

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