Should You Pay Off Your Mortgage Early?
Paying extra on your mortgage saves interest and gets you debt-free sooner, but it isn't always the best use of spare money. Here's how much extra payments can save, what to do first, the ways to pay down a mortgage faster and how to make sure extra money goes where you want it.
By Pond.com editors Updated 3 min read
Quick answer
- Extra payments go straight to principal, cutting the interest you pay and the time it takes to pay off the loan.
- Paying $200 a month extra on a $360,000 loan at 7.32% saves about $133,000 in interest and about six years.
- First build an emergency fund, take any employer retirement match and pay off higher-interest debt.
- The higher your mortgage rate, the more paying it down early makes sense.
- Tell your servicer the extra money is for principal, and check for any prepayment penalty.
Owning your home outright is a big goal for many people. Extra mortgage payments can get you there years sooner and save a lot of interest. But money you put into your home is hard to get back out, so it's worth getting the order right.
This article is general information, not financial advice.
How much extra payments can save
Extra payments reduce your principal straight away, so less interest is charged every month after that.
Example: a $360,000, 30-year loan at 7.32% costs about $2,473 a month in principal and interest, and about $530,000 in interest over 30 years. Paying $200 a month extra from the start:
- Pays off the loan in about 24 years instead of 30.
- Saves about $133,000 in interest.
The earlier you start, the bigger the saving. Try your own numbers:
What will your monthly payment be? Include tax, insurance and PMI to see the full amount. Open calculatorWhat to do first
Paying down a mortgage early usually makes sense only after you've:
- Built an emergency fund of three to six months of expenses. Money in your home can't pay an unexpected bill. See how to build an emergency fund.
- Taken your full employer retirement match, which is an instant return. See retirement accounts explained.
- Paid off higher-interest debt, like credit cards and personal loans. See debt snowball vs avalanche.
Pros and cons
| Pros | Cons |
|---|---|
| A guaranteed return equal to your mortgage rate | Money is locked in your home and hard to reach |
| Lower total interest and debt-free sooner | You may earn more by investing over the long term |
| Lower costs in retirement | Your required monthly payment doesn't drop, unless you recast |
| Peace of mind | Less mortgage interest to deduct, if you itemize |
The higher your rate, the stronger the case. Paying extra on a 7% loan is very different from paying extra on a 3% loan.
Ways to pay it off faster
- Add a fixed amount to each monthly payment.
- Make one extra payment a year, for example from a tax refund or bonus.
- Pay half your payment every two weeks, which adds up to one extra payment a year.
- Recast after a large lump sum to lower your monthly payment.
- Refinance to a shorter term if rates allow. See refinancing a mortgage.
Make sure it counts
- Mark extra payments as principal only, in your servicer's app or with a note, and check your next statement.
- Check for a prepayment penalty. They're rare today and limited by law on most loans, but older or non-standard loans may have them.
- Keep your escrow in mind: paying off the loan ends escrow, so you'll pay property tax and insurance yourself.
Common questions
It depends on your rate and how you feel about risk. Paying down a 7% mortgage gives a guaranteed 7% return. Investing may earn more over the long run but isn't guaranteed. Many people do some of both, especially once they've maxed out any employer match.
Yes, because paying half your payment every two weeks adds up to 13 full payments a year instead of 12. You can get the same result by adding one-twelfth of a payment to each monthly payment. Avoid services that charge a fee to set up biweekly payments.
After you make a large lump-sum payment, some lenders will recalculate your monthly payment over your remaining term for a small fee. Your rate and end date stay the same, but your monthly payment drops. Not all loans allow it, and FHA and VA loans usually don't.