5 Mistakes to Avoid When Paying Off Your Mortgage Early

If you can afford to pay off your mortgage ahead of schedule, you’ll save money on your loan’s interest. Getting rid of your home loan just one or two years early could save you hundreds or thousands of dollars. But if you’re planning to take that approach, you’ll need to consider if there’s a prepayment penalty, among other possible issues. Below are five mistakes you should avoid when paying your mortgage early. A financial advisor can help you figure out your mortgage needs and goals.

Key Takeaways

• Paying off a mortgage early doesn’t have to be in one fell swoop. You can do it slowly over time by following certain payment strategies.
• Making extra payments specifically towards your loan’s principal is optimal.
• Thinking through your entire financial situation before making a decision is imperative.

How to Pay Off Your Mortgage Early

If you’d like to pay off your mortgage early, there are several ways to do it. The early payoff strategy that’s optimal for you will depend on your budget and what you can afford to pay, as well as when you’d like to become mortgage debt-free.  

Here’s a closer look at the different options for paying a mortgage off early:

• Make one extra payment per year: Making 13 payments per year instead of 12 is a simple way to accelerate your mortgage payoff.You can choose when to make the extra payment each year, which may coincide with receiving your tax refund or a year-end bonus at work.
• Pay biweekly instead of monthly: Moving from monthly to biweekly mortgage payments allow you to make one full extra payment each year. If you already get paid biweekly, it may be fairly easy to reconfigure your budget to accommodate this payoff strategy. 
• Refinance to a shorter loan term: It could make sense to refinance your mortgage into a shorter loan term if doing so would allow you to pay off the balance sooner. For example, if you have a 30-year fixed with 22 years left on the loan then you could refinance into a 15-year loan and pay off the balance seven years earlier The potential downside is that a shorter mortgage term often means a higher monthly payment.
• Pay off your balance in cash: If you’re able to save enough money to pay off the balance of your loan in its entirety, then this could be an option for you.Keep in mind that if you’re using your cash to clear your mortgage balance, you’d want to ensure that you have additional savings in reserves in case a financial emergency comes along.

A mortgage calculator can help you estimate your monthly payments and monthly savings from different early payoff methods. If you’re learning toward replacing your existing mortgage with a new one, researching refinance lenders can help you find a loan that fits your situation and needs.

Should I Pay Off My Mortgage Early?

It may seem like a good idea to pay off your mortgage early if you’re able to do so, but it doesn’t always make sense.  Looking at your financial situation and goals can help you decide if you should move ahead with your payoff plans. Here are some of the pros and cons to keep in mind. 

Ultimately, the right time to pay off your mortgage early really comes down to your personal financial situation. It needs to be a time that won’t hurt you financially and that benefits you over the long haul. Working with your financial advisor can help you determine when that time is for your situation.

Mistakes to Avoid When Paying Off Your Mortgage Early

If you’re learning toward an early mortgage payoff, it’s important to protect yourself financially. Making a mistake could cost you in more ways than one, so it’s helpful to know what to avoid so that you’re set up for success.

1. Not Considering All of Your Options

You may be so focused on paying your mortgage off early that you don’t consider how you might be able to make better use of your money. Here’s an example of when an early mortgage payoff may not yield the highest return.

Let’s say you’re considering making a one-time payment of $20,000 toward your mortgage principal. Your original loan amount was $200,000, you’re 20 years into a 30-year term, and your interest rate is 4%. Paying down $20,000 of the principal in one go could save you roughly $8,300 in interest and allow you to pay it off completely 2.5 years sooner.

That sounds great but consider an alternative. If you invested that money in an index fund that represents the S&P 500, which averages a rate of return of 9.8%, you could earn $30,900 in interest over those same 10 years. Even a more conservative projection of your rate of return, say 4%, would net you $12,500 in interest.

Everyone’s financial situation is unique, and the notion of being out of debt may be so important to you that it’s worth a less-than-optimal use of your money. The important thing is to consider all of your options before concluding that paying off your mortgage earlier is the best path for you.

2. Not Putting Extra Payments Toward the Loan Principal

Whether you make biweekly payments or one-time lump sum payments toward your mortgage, you’ll need to make sure those amounts go to the principal. Otherwise, you may not see much progress in your early mortgage payoff efforts if extra payments are absorbed by the interest. 

Here’s how to handle extra payments so you gain traction with your payoff plans.

• If you’re writing separate checks for extra principal payments, note that on the memo line. 
• If you pay your mortgage bill online, you might want to find out whether the lender will let you include a note specifying how additional payments should be used.
• Contact your lender before and after making extra payments to verify that they will be or have been applied to the principal.

3. Not Asking If There’s a Prepayment Penalty

Mortgage lenders are in business to make money and one of the ways they do that is by charging you interest on your loan. When you prepay your mortgage, you’re essentially costing the lender money. That’s why some lenders try to make up for lost profits by charging a prepayment penalty.

Prepayment penalties can equal a percentage of a mortgage loan amount or the equivalent of a certain number of monthly interest payments. If you’re paying off your home loan well in advance, those fees can add up quickly. 

For example, a 3% prepayment penalty on a $250,000 mortgage would cost you $7,500. If you’re subject to a prepayment penalty, you’d have to weigh the cost of the fee against your potential savings. Your mortgage agreement should specify if a prepayment penalty applies and how it’s calculated, but you may want to call your lender to verify the details.

4. Leaving Yourself Cash-Poor

Throwing every extra penny you’ve got at your mortgage is an aggressive way to get out of debt. It could also backfire if you run into an unexpected financial situation. For example, a job loss or illness that keeps you out of work for several months could derail you financially if you don’t have a solid emergency fund. 

 In that case, you may have to use your credit card to cover your bills or try to take out an additional loan to manage your expenses. 

If you don’t have an emergency fund yet, you may want to spend some time building one before focusing on your early mortgage payoff. Take the amount that you planned to send to the mortgage and park it in a high-yield savings account instead. Once you have three to six months’ worth of expenses saved, you may be able to focus on paying down your mortgage debt.

5. Choosing the Wrong Refinance Term

Refinancing can save you money in multiple ways, as it allows you to convert to either a shorter or longer loan term, depending on what’s best for you. So if you’re 10 years into a 30-year mortgage term, you could potentially refinance to a 10-year term and shave off 10 years. On the flip side, you could go for another 30-year term to lower your monthly payments.

:Loans with shorter terms tend to have lower interest rates, allowing you to both save on interest and reach full ownership much sooner. The drawback is that shrinking your loan term could significantly increase your monthly payment, so you’ll need to be sure that works for your budget. Should you go with a longer term, you could pay less each month but you may not save much or anything on interest.

Don’t forget about closing costs either, since refinance loans typically require them If your lender agrees to let you roll those costs into your loan, you could pay more. You’ll now be on the hook for interest on a larger loan amount.

How Paying Off Your Mortgage Early Affects Long-Term Finances

Before accelerating mortgage payments, it’s important to understand how this choice fits into your broader financial picture. Eliminating debt can feel like a win, but it may have trade-offs depending on your overall goals, asset allocation, and tax situation.

Reduced Investment Flexibility

Extra mortgage payments tie up cash that could be invested elsewhere. If your mortgage rate is lower than the average return from long-term investments, you might see greater growth by investing instead of accelerating debt payments. This is especially relevant if you’re behind on retirement savings or have limited funds in tax-advantaged accounts.

Impact on Tax Deductions

Mortgage interest is tax-deductible, yielding a valuable tax break for homeowners.Once the mortgage is paid off, those deductions disappear. This change could increase your taxable income depending on your filing status, income level and other deductions. If you’re close to the standard deduction threshold, the impact may be minimal—but it’s worth considering.

Liquidity and Opportunity Cost

Cash used to pay off your home cannot be easily accessed in an emergency. While you could increase your home equity with an early payoff your home’s value isn’t liquid unless you sell, refinance, or open a line of credit. Before committing large sums to early payoff, you’ll want to feel secure with the amount of cash you have on hand especially if your income is unstable or you’re approaching retirement.

Retirement Timing and Lifestyle Goals

Paying off a mortgage early can lower your fixed monthly expenses, which may support an early retirement or reduce your estimated retirement budget. On the other hand, if your mortgage payment is manageable and your savings rate is low, investing extra funds may be better used to invest for long-term security.

Comparing investment returns to potential interest savings over the same time period can put an early payoff in perspective. If you plan to invest extra funds instead, an IRA or 401(k) are two ways to do so tax-efficiently.

Bottom Line

Whether you should pay off your mortgage early ultimately depends on how much money you have to spare, what your alternatives are and other factors that are unique to you. But if it’s something that’s legitimately on your radar, make sure to seriously consider all of your options.And don’t be afraid to consult a professional. Although often known for their expertise in investing and financial planning, many financial advisors are knowledgeable about mortgages and home purchases.

Tips for Buying a Home

• A financial advisor can guide you through major financial decisions, like the purchase of a home. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• Securing a mortgage can be a stressful and confusing process. For starters, you need to figure out what term is best for you, whether you want a fixed or variable interest rate and where to get the best mortgage rates.

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