Should you pay off your mortgage early? 5 top factors to consider first

Around 38.5% of homeowners are mortgage-free, according to ResiClub — a record jump from 2010, when only 32% didn’t have a home loan.

Paying off your mortgage early can feel like a major win: no more monthly payments, no more debt and full ownership of your home. But before you cut that final check, it’s worth slowing down and looking at the full picture.

For some retirees, being mortgage-free brings peace of mind and financial freedom. For other folks, it could mean giving up liquidity, missing out on investment gains or triggering a surprise tax bill.

Here’s what to consider before you send in that last payment on your mortgage and pay it off for good.

Can you pay off your mortgage early?

Yes, you can absolutely pay off your mortgage early. Most lenders allow you to make extra payments toward your home loan’s principal. But just because you can doesn’t mean you should.

You might benefit from paying off your mortgage early if:

• You’re entering retirement debt-free, with a solid emergency fund and enough cash flow to cover future expenses.

• You value peace of mind and want the security of owning your home outright.

• Your mortgage interest rate is higher than what you could realistically earn by investing the money elsewhere.

However, you might want to hold off if:

• You’d have to pull from retirement accounts and trigger a big tax bill.

• You won’t have enough savings left over to cover emergencies.

• Your mortgage rate is low, and your money could be working harder in the market.

“This is where the heart and the calculator have to sit down and talk. What helps you sleep better at night — more cash in the bank or no mortgage bill in the mailbox?” says Marifer Avery, a mortgage loan originator at USA Mortgage Homes.

What to consider before paying off your mortgage

Paying off your mortgage early is a major financial decision that can affect everything from your taxes to your emergency fund. Before you move forward, here’s what to think through.

1. Mortgage rate vs. potential investment returns

Historically, average annual stock market returns have hovered around 7% to 10%, depending on the timeframe and mix of investments.

“If you’ve got a high-interest mortgage, knocking it out early can save you serious cash in interest. But if your rate is low (think: sub-4%), you might be better off keeping it and using that extra money to invest — especially if you can earn a higher return elsewhere,” says Hillary Seiler, founder of Financial Footwork and former mortgage lender.

Seiler goes on to give this cautionary tale:

“I had a client — a high-earning executive in her 40s — who got an inheritance and immediately paid off her $225,000 mortgage,” says Seiler. “Sounds great, right? Except her mortgage rate was 3.125%, and her investments had been earning over 7% annually. If she had run the numbers or talked to her advisor first, she could have leveraged that inheritance more effectively.”

2. How much time is left on your loan

If you’re near the finish line with mortgage payments (say, five years or less), it might not be worth making a big lump-sum payment. The interest portion of your mortgage is front-loaded, meaning you pay most of it early in the loan term. Later on, more of your payment goes toward the principal.

In other words, the interest savings might be smaller than you think.

3. Your overall debt picture

If you’re carrying high-interest credit card balances or personal loans, prioritize those first. It usually makes more sense to knock out 20% APR debt before tackling a mortgage with a 4% rate.

Not sure which debts to focus on? Check out debts to pay off before retirement to help you sort it out.

4. Prepayment penalties

“Double-check to make sure there are no prepayment penalties,” says Sarah DeFlorio, vice president of mortgage banking at William Raveis Mortgage. “While a mortgage on your personal residence should not have one, one on an investment property might, and those fees can be significant.”

If your mortgage includes a prepayment penalty, it could cost you thousands of extra dollars. Still, it could be worth it depending on how much interest you’ll save by paying it off early.

For instance, if you’d pay $10,000 in pre-payment penalties but save $50,000 in interest overall, it still might make financial sense to pay your mortgage off early.

5. Your savings and emergency fund

“Will you still feel financially secure after you pay it off? That’s the magic question,” says Avery. “If paying it off leaves them tight on cash, we explore alternatives. Because the goal isn’t just to be debt-free — it’s to feel free.”

If paying off your mortgage would leave you without a healthy cushion in your savings account, it may not be the right time.

Dig deeper: Saving vs. investing: How they differ for growing and protecting your wealth

Financial pros of paying off your mortgage early

There’s a reason many homeowners and retirees dream of ditching their mortgage: being debt-free can feel like lifting a weight off your shoulders. If you’re in a solid financial position, paying off your mortgage early could offer both emotional relief and practical benefits.

1. You’ll save money on interest

The biggest financial perk is cutting down the total interest you’ll pay over time, especially if you’re still early in your loan term.

For example, if you have a $250,000 mortgage at 5% interest over 30 years, you’ll pay around $233,000 in interest alone. Paying it off just 10 years early could save you over $87,000 in interest over the life of the loan.

2. No more monthly mortgage payments

Without a mortgage, you may suddenly find yourself with extra cash — even thousands of extra dollars — in your monthly budget. That can make it easier to plan for retirement because you’ll have fewer living expenses to make work on a fixed income.

It could also free you up to redirect that money toward other financial goals, like travel, healthcare costs or supporting loved ones.

3. You’ll reduce your debt-to-income ratio

If you’re planning to apply for new credit — say, to buy a car or help fund a major renovation — becoming mortgage-free could improve your debt-to-income (DTI) ratio. That can boost your creditworthiness and possibly get you better loan rates and terms.

This isn’t a top concern for everyone, but it can be helpful if you’re still navigating big financial moves.

4. Peace of mind

For many people and especially retirees, that emotional payoff is worth more than the numbers on a spreadsheet.

“The clients who benefit the most from paying off their mortgage are those entering retirement with no other debt, a healthy emergency fund and enough savings to comfortably live on,” says Avery.

Dig deeper: Life-proof your savings: How to build an emergency fund on any budget

Potential drawbacks to early mortgage payoff

Paying off your home loan can feel like a win, but it’s not always the most strategic move, especially if it comes at the cost of cash flow, investment growth or tax benefits. Here’s what to watch out for.

1. You might miss out on better investment returns

If your mortgage interest rate is low, putting that money into a diversified portfolio could net you a better return over time. This is especially true if you still have several years (or decades) to grow your investments.

“Play it smart, not just fast,” says Seiler. “A cash-flow assessment with your advisor, financial coach or CPA is a strategic play you should make before committing to keeping or paying off your mortgage.”

Say your mortgage rate is 3%, but you could reasonably earn 6% to 8% investing in an index fund or exchange-traded funds. Over 10 or 15 years, that difference adds up.

2. You could trigger an unexpected tax bill

If you’re pulling money from 401(k)s, IRAs, or other retirement accounts to pay off your mortgage, that withdrawal is likely taxable. It could bump you into a higher tax bracket and shrink your retirement savings faster than expected.

“I had a client who pulled a big chunk from their 401(k) to pay off their mortgage early — and didn’t realize the tax bill it would trigger,” says Avery. “They were shocked, and it impacted their retirement budget.”

Before you tap your retirement accounts, check with a professional to understand the full tax implications.

3. You’ll lose liquidity

Once you put money into your house, it’s no longer easy to access. Sure, you could take out a reverse mortgage, home equity loan or HELOC in a pinch. But that’s not always ideal or guaranteed.

If a medical emergency or home repair pops up, you’ll want enough liquid savings to cover it without relying on credit.

“Liquidity is queen, especially when you’re no longer bringing in a steady paycheck,” says Avery. “[For those] who’d have to drain their savings or investment accounts, holding on to that low-interest mortgage a bit longer might be the smarter move.”

4. You may lose your mortgage interest deduction

If you still itemize deductions on your tax return (and your mortgage interest is part of that), paying off your loan could increase your taxable income. This won’t apply to everyone, especially after the standard tax deduction increased, but it’s still worth running the numbers.

“Keep in mind that you are able to deduct the interest up to $750,000,” says DeFlorio. “It’s important to speak with your tax preparer to understand what impact this change may have on your future tax burden.”

Dig deeper: 5 common investing myths: Why you don’t need thousands to get into the market

Alternatives to paying off your mortgage early

Good news: There are plenty of ways to speed up your mortgage payoff without sacrificing your savings or triggering a tax bill. Here are a few smart strategies.

Make extra payments toward the principal

Even small extra payments can make a big difference if you apply them directly to your loan’s principal. You’ll pay less interest in the long run, and you’ll knock years off your loan.

Another perk? You’ll more quickly build equity in your home, which is a valuable asset you can use to consolidate high-interest debt, pay for home improvements or cover large expenses down the road.

Just make sure to tell your lender or mortgage company the extra goes toward principal, not future interest or your escrow account.

Switch to biweekly payments

Instead of making one monthly payment, split it in half and pay every two weeks. Because there are 52 weeks in a year, this adds up to 13 full payments annually, instead of 12. That one extra payment can shave several years off a 30-year mortgage. And it’s a big win that doesn’t require a huge lift.

Put windfalls to work

Tax refunds, bonuses, inheritance, cash from downsizing — any unexpected money can help you chip away at your balance faster. Just make sure you’re not sacrificing your emergency fund or dipping into high-growth investments to do it.

“Sometimes, the best move isn’t the most obvious one,” says Seiler. “Don’t rush to pay off your mortgage without looking at the full financial impact.”

Refinance to a shorter loan term

If your goal is to be debt-free by retirement, refinancing to a 10- or 15-year mortgage could be another workaround to paying off your mortgage early. You could get a lower interest rate. And while your monthly payment will be higher, you’ll pay much less interest overall.

Just be sure the upfront costs of refinancing make sense for your timeline.

Dig deeper: When to refinance your mortgage: 4 key times when refinancing can make sense

Other stories in our home loans and mortgages series

FAQs: Mortgages, home loans and your money

Learn more about mortgages and how home loans work with these common questions.And take a look at our growing library of personal finance guides that can help you save money, earn money and grow your wealth.

Can I use home equity to invest in a rental or investment property?

You can use a home equity loan for real estate investing, but borrowing from your home equity is risky, especially if you don’t know if an investment is a sure thing. Among the two most popular ways to tap into your home’s equity are home equity loans and home equity lines of credit. Both types of loans are ways to borrow from the money you’ve already paid into your home, based on your home’s appraised property value. And there are no restrictions as to how you can use the money you borrow. Learn more about the benefits and risks of tapping your home equity for a second home or investment.

What is a reverse mortgage?

A reverse mortgage is a type of loan that allows homeowners ages 62 and older to borrow against their home equity, using their home as collateral. With a reverse mortgage, you take out a loan against your home — with closing costs and interest rates — only instead of making payments to a bank or lender, the reverse mortgage pays you from your home’s equity. As long as you live in your home and can pay property taxes and homeowners insurance, the loan isn’t repaid until you sell your home, either to move or after you die. Explore how it works, who can benefit — and who should steer clear altogether — in our comprehensive guide to reverse mortgages.

What happens to my mortgage if I die?

Mortgages are treated differently from other debts, but how you write your will and set up your estate plan can make a big difference in what happens to your mortgaged home after you die — and how much of an asset you’re able to leave for your surviving family. Learn more in our guide to mortgages after a death — including steps you can take to avoid complications for your loved ones.

Do I need an appraisal for a home equity loan?

While many home equity loans require an appraisal to determine your home’s current value, if you’ve recently bought your home and have excellent credit, you might be able to find a lender that offers no-appraisal home equity loans. These loans use digital tools and hybrid models that assess your home’s features and recently sold homes in your neighborhood, among other factors, to determine your home’s value. Start with specialty digital lenders and marketplaces like Lending Tree or Rocket Mortgage. And learn how they work and what to expect in our guide to no-appraisal home loans.

Is it worth paying for a financial advisor to plan for retirement?

Yes, for most people. A financial advisor can help you manage your money as you plan for retirement, while giving you a sense of how much you can spend during retirement to make your savings last. Their financial advice and market expertise may also help maximize your savings. If you’re anxious about retirement, working with an advisor can also give you peace of mind by assuring you that you’re on the right path. Start with our guide to finding a trusted retirement advisor.

Sources

About our writer

Cassidy Horton is a finance writer who specializes in banking, insurance, lending and paying down debt. Her expertise has been featured in NerdWallet, Forbes, MarketWatch, CNN, USA Today, Money, The Balance and Consumer Affairs, among other top financial publications. Cassidy first became interested in personal finance after paying off $18,000 in debt in 10 months of graduation with an MBA. Today, she’s committed to empowering people to stand up and take charge of their financial futures.

Article edited by Kelly Suzan Waggoner

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