The 30-year, fixed-rate mortgage is the standard of real estate finance, and for good reason. It provides homeowners with easy-to-plan monthly payments, with the added bonus of a locked-in interest rate. Once you start making those payments, though, the reality of that 30 year term may set in. Fortunately, not everyone with a 30-year fixed loan actually makes the same payment every month for three decades. Paying off your mortgage early is often possible and even preferable in some cases – just make sure you have all the information before committing to an accelerated repayment schedule.
Why you might pay off your mortgage early
Like any form of debt, a mortgage is a financial tool that helps make homeownership affordable. Of course, we do pay for this service in the form of interest. The interest paid on a mortgage is a function of the remaining principal, the loan’s interest rate, and time. Therefore, if we reduce the time portion of this equation by making more than the minimum monthly payment, the total cost of interest paid over the life of the loan will be lower.
Simply put, the less time you leave mortgage debt outstanding, the less you will pay in total interest. And once your mortgage is paid off, that’s one big expense you won’t have to worry about anymore. But since most homeowners have other bills and financial priorities to consider besides their mortgage, the decision to commit to early payment is usually a little more complex.
Why you should thoughtfully consider early mortgage payment
Before making a plan to pay off your mortgage early, consider other financial obligations, including:
Paying down debt faster is an attractive option when you have additional room in your budget. If you end up with a positive number after subtracting all monthly expenses from monthly income, that could mean you have room to pay down your home loan faster. But take another look at your savings accounts first: Are you contributing to your emergency fund and retirement accounts? What about savings and investment accounts for health expenses or college tuition for your children? Not only can some of these return more in interest than you may save through debt reduction, they may also be tax-deductible and help protect against an uncertain future.
We don’t often give home loans enough credit for the fact that they tend to be very affordable compared to other forms of debt. Mortgages originated in the last year have come with interest rates as low as 4 percent, while the average credit card account charged an interest rate above 14 percent, according to data from the Federal Reserve. Auto loans and student loans also tend to charge higher interest rates than mortgages. That’s why many financial experts who spoke with U.S. News & World Report advised homeowners to prioritize other debt before putting additional income toward home payments.
Your mortgage itself
The terms of your mortgage might help you make a decision in this case, too. Check to ensure your home loan allows additional payments to be made toward the principal, rather than the interest charged to the loan. This may require you to specify this when you submit your extra payments. Also, take note if your mortgage charges a prepayment penalty, which could actually increase the cost of early payment once the loan is paid in full.
Understanding the benefits and drawbacks of early mortgage payment can be complicated, but the result is well worth your time.