Should I pay off my mortgage early?

If you're wondering whether early mortgage payoff is right for you, there are a few important questions you should ask yourself first about your financial situation. Also, look into how refinancing can help you erase your mortgage quicker. (iStock)

Determining whether to pay off your mortgage early can be both an emotional and financial decision. If your mortgage is one of your highest monthly expenses, paying it off early may sound like a good idea to help you save money on interest and eliminate a costly monthly bill.

If you're considering refinancing or other methods to help you reach your financial goals, then consider using online marketplace Credible. Credible can help you compare rates and lenders within just minutes. Plus, it's 100% free.

But do the numbers add up in terms of what you’d save? And if so, how can you successfully shave years off your mortgage?

Should I pay off my mortgage early

There are a lot of factors to consider when deciding whether to pay your mortgage off early. Before making any financial decisions, make sure you step back and see the big picture before you pay off your home. Here are five questions to answer to help you make the right decision.

  1. Does my mortgage have a prepayment penalty?
  2. Will I still have money for emergencies?
  3. Am I behind on retirement savings?
  4. Do I have other debt?
  5. How important is this goal to me?

1. Does my mortgage have a prepayment penalty?

One of the first things you might want to do is contact your mortgage lender to see if there is a prepayment penalty. With a prepayment penalty, you could be charged an extra fee for paying off your mortgage early.

According to Consumer Finance, prepayment penalties normally apply if you pay off a large amount of your home loan or your entire balance at once within a certain number of years. Usually, this penalty can be worked into the terms of original loan terms, so it’s important to check and make sure you fully understand the terms if a prepayment penalty exists.

You can use Credible as your refinance guide. Their online marketplace allows you to compare multiple mortgage lenders at once and find the best refinancing deals available.

HOW OFTEN CAN YOU REFINANCE YOUR MORTGAGE?

2. Will I still have money for emergencies?

Paying off your mortgage early is no small feat. If you decide to do this, you’ll also have to continue paying for all your other expenses including home maintenance and repairs. It’s important to make sure you have an adequate amount of emergency savings lined up. That way, you can be prepared for any unexpected expenses along the way.

3. Am I behind on retirement savings?

When you pay off your mortgage early, you automatically save money on interest. However, you may be able to earn more from your money by putting it to work somewhere else - like the stock market.

Consider whether committing to paying off your home will cause you to halt or stall other goals like investing in your retirement and diversifying your portfolio.

“Most Americans have inadequate retirement savings,” says Dominique Henderson, a certified financial planner. “If you’re in that boat, you may consider foregoing the acceleration of your mortgage and instead use extra funds for investment to play ‘catch-up’ in your retirement plan.”

SHOULD YOU REFINANCE YOUR MORTGAGE IF YOU'RE RETIRED?

4. Do I have other debt?

Mortgage interest rates are typically lower than with other types of debt, so it makes sense to pay off all your consumer debt first. This includes accounts like your auto loan, student loans, and credit card balances.

5. How important is this goal to me?

Owning your home outright can provide peace of mind by knowing that no one can take your house away from you. If this makes financial sense for your situation, then you’ll want to move forward with this goal.

Based on the current mortgage rates, it may be a good time for you to refinance. To see how much you could save, crunch the numbers, and compare rates and mortgage lenders using Credible's free online tools.

How to pay off your mortgage early

After answering all of those questions, you may be confident in your financial decisions — including the choice to end your loan term early. If you're ready to move forward, here are some easy ways to pay off your mortgage early and save some extra money.

  1. Refinance your mortgage
  2. Switch to bi-weekly payments
  3. Live on less than you earn and commit to paying extra

1. Refinance your mortgage

Refinancing your mortgage can help you save thousands on interest and even shorten your repayment term. If you refinance a 30-year mortgage to a 15-year fixed-rate home loan, your monthly payment may increase but you’ll be able to pay your home off earlier.

Even if you refinance to a new 30-year loan but lock in a lower rate, that means more of your payment can go toward the principal instead of interest. Shop around for the best mortgage refinancing offers for free with Credible’s home refinancing tool.

You’ll receive up-to-date mortgage quotes from top lenders and you can compare quotes and cost breakdowns to find the best offer for your situation.

HOW A HOME REFINANCE COULD SAVE YOU MORE MONEY

2. Switch to bi-weekly payments

Do you get paid bi-weekly? If so, split your mortgage payment up so you’re making bi-weekly payments instead of paying the entire amount once a month. There will be some months when you receive three paychecks and this will allow you to pay extra on your mortgage.

If you keep doing consistently over time, you can shave years off your mortgage repayment without even thinking about it.

Whether you seek to refinance your current loan or are currently shopping for a new home, the best place to start when making mortgage decisions is to compare rates and lenders via an online tool like Credible.

THE SECRET BENEFIT OF PAYING YOUR MORTGAGE BIWEEKLY

3. Live on less than you earn and commit to paying extra

See if you can lower your living expenses to free up more money to put toward your mortgage. Go through your budget and see which expense categories you can cut while still living comfortably. Maybe you can cook more at home and order take out less, lower some of your insurance premiums, or downsize to become a one-car family, for example.

Then, make a conscious commitment to pay more than your minimum mortgage payment each month. When you’re making extra payments, make sure it’s going toward the principal balance and not taxes or insurance.

5 WAYS TO PAY OFF YOUR MORTGAGE EARLY

Getting started

When deciding whether to pay off your mortgage early, it’s important to consider three main factors:

  • Your financial goals
  • Your values
  • What makes sense financially

“Since each dollar spend can only be spent once, you have to consider if the peace of mind for having no mortgage outweighs growing your retirement nest egg,” says Henderson. “This is a ‘values and goals’ decision and, therefore, won't have the same answer for each person.  Although there isn't a necessarily wrong or right answer (from the traditional sense), there is certainly an answer that could be wrong for your situation.”

However, if you are learning toward paying off your mortgage early, you can start by doing things like switching to bi-weekly payments or shopping around for a refinancing quote.

Use a mortgage payment calculator to see how much you could save by refinancing and realize that even putting a little extra money toward your mortgage can help shorten your loan, so you can retire your house payment earlier than expected.

HOW TO DECIDE IF YOU SHOULD REFINANCE YOUR MORTGAGE