Should You Pay Off Your Mortgage Early? (2024)

FAQs

Is there a downside to paying off mortgage early? ›

Another downside to paying off your mortgage early is the potential prepayment penalties. Because it eats into their ability to make a profit, lenders charge fees when you pay your mortgage off too early. While prepayment penalty fees can vary, most are a small percentage of the outstanding loan balance.

The Bottom Line

Paying off your mortgage early can save you a lot of money in the long run. Even a small extra monthly payment can allow you to own your home sooner. Make sure you have an emergency fund before you put your money toward your loan.

It's typically smarter to pay down your mortgage as much as possible at the very beginning of the loan to save yourself from paying more interest later. If you're somewhere near the later years of your mortgage, it may be more valuable to put your money into retirement accounts or other investments.

“Shark Tank” investor Kevin O'Leary has said the ideal age to be debt-free is 45, especially if you want to retire by age 60. Being debt-free — including paying off your mortgage — by your mid-40s puts you on the early path toward success, O'Leary argued.

You may not want to pay off your mortgage early if you have other debts to manage. Credit cards, personal loans and other types of debt usually carry higher interest rates than your mortgage interest rate. Remember, the higher the interest rates, the faster your accounts accrue debt.

Paying it off typically requires a cash outlay equal to the amount of the principal. If the principal is sizeable, this payment could potentially jeopardize a middle-income family's ability to save for retirement, invest for college, maintain an emergency fund, and take care of other financial needs.

According to Census Bureau data, over 38 percent of owner-occupied housing units are owned free and clear. For homeowners under age 65, the share of paid-off homes is 26.4 percent.

Receive mortgage documents: The mortgage company will send you a canceled promissory note, updated deed of trust and certificate of satisfaction. These documents prove that your mortgage is paid off. Save them in a secure location.

Paying down a mortgage with funds from your 401(k) can reduce your monthly expenses as retirement approaches. A paydown can also allow you to stop paying interest on the mortgage, especially if it's fairly early in the term of your mortgage.

They stay away from debt.

Car payments, student loans, same-as-cash financing plans—these just aren't part of their vocabulary. That's why they win with money. They don't owe anything to the bank, so every dollar they earn stays with them to spend, save and give!

What is the average mortgage balance in the US? ›

New mortgages—nearly all of which sport higher APRs and higher monthly payments than older mortgages—increased the average mortgage balance to $236,443 in September 2022, a 7.3% rise from September 2021. For the second consecutive year, the average mortgage balance increased by more than $10,000.

There's no age limit for getting or refinancing a mortgage. Thanks to the Equal Credit Opportunity Act, seniors have the right to fair and equal treatment from mortgage lenders.

After California comes New York at 1.7 million and Pennsylvania at 1.5 million. Yet no-mortgage owners in California are only 33% of all homeowners – and only four places have a smaller share: D.C. at 24%, Maryland at 28% and Colorado and Utah at 30%.

Paying off the mortgage ahead of retirement can be a real stress reducer. Your monthly expenses will be cut, leaving you less vulnerable to a sudden property tax increase, an emergency repair, or the impact of inflation. You'll save on the interest you would owe by keeping the mortgage.

The Dave Ramsey mortgage plan encourages homeowners to aggressively pay off their mortgages early, however. One recommendation Ramsey makes is to convert your 30-year mortgage into a fixed-rate, 15-year home loan. Not only will you pay off a 15-year mortgage in half the time, but you'll also pay much less in interest.

Paying your mortgage off early, particularly if you're not in the last few years of your loan term, reduces the overall loan cost. This is because you'll save a significant amount on the interest that makes up part of your payment agreement.

The mortgage interest deduction is a tax incentive for homeowners. This itemized deduction allows homeowners to subtract mortgage interest from their taxable income, lowering the amount of taxes they owe. This deduction can also be taken on loans for second homes as long as it stays within IRS limits.

Once you pay off your house, your property taxes aren't included in your mortgage anymore, because you don't have one. Now it's on you to pay property taxes directly to your local government. How often you pay property taxes depends on where you live.

21%! While most Americans expect to have their mortgage paid off by retirement, more than one in five of those individuals are still paying off their homes at age 75.

How many Americans are debt free? ›

Fewer than one quarter of American households live debt-free.

We utilized this data to look at the share of homeowners who are 65 and older and still have a mortgage in each of the nation's 50 largest metros. Across those 50 metros, an average of about 19% of homeowners who are 65 and older still have a mortgage.

The average mortgage term is 30 years, but that doesn't mean you have to get a 30-year loan – or take 30 years to pay it off. While it offers a relatively low monthly payment, this term will likely require you to pay the most in total interest if you keep it for 30 years.

Store a copy of each of your mortgage statements for a few years to make sure all of your payments are accurate and accounted for. Keep your personal copy of your deed, promissory note and Closing Disclosure for as long as you have your loan.

The good news is that there are ways to make home insurance cheaper. Even though paying off your mortgage doesn't affect your house insurance premiums, these factors can help lower them.

Additionally, if pulling money from a tax-advantaged retirement plan such as a 401(k), 403(b), or IRA during retirement will push you into the next tax bracket, you may want to forgo paying down your mortgage and instead put the money into savings.

Making an extra mortgage payment each year could reduce the term of your loan significantly. The most budget-friendly way to do this is to pay 1/12 extra each month. For example, by paying $975 each month on a $900 mortgage payment, you'll have paid the equivalent of an extra payment by the end of the year.

People with a 15-year term pay more per month than those with a 30-year term. In exchange, they are given a lower interest rate. This means that borrowers with a 15-year term pay their debt in half the time and possibly save thousands of dollars over the life of their mortgage.

By age 50, you should have six times your salary in an account. By age 60, you should have eight times your salary working for you. By age 67, your total savings total goal is 10 times the amount of your current annual salary. So, for example, if you're earning $75,000 per year, you should have $750,000 saved.

401(k) Rollover

The easiest way to borrow from your 401(k) without owing any taxes is to roll over the funds into a new retirement account. You may do this when, for instance, you leave a job and are moving funds from your former employer's 401(k) plan into one sponsored by your new employer.

Can I use my IRA to pay off my mortgage without penalty? ›

If you're still far out from retirement age, this option can make a lot of sense for you. The IRS allows you to withdraw up to $10,000 from your IRA without having to pay a penalty tax if you qualify as a first-time homebuyer.

1. WHICH DEBTS ARE NEVER FORGIVEN? Bankruptcy never forgives child and spousal support or alimony, criminal fines and restitution, and claims from drunk driving accidents.

The Standard Route. The Standard Route is what credit companies and lenders recommend. If this is the graduate's choice, he or she will be debt free around the age of 58.

Choose the right career

And one crucial detail to note: Millionaire status doesn't equal a sky-high salary. “Only 31% averaged $100,000 a year over the course of their career,” the study found, “and one-third never made six figures in any single working year of their career.”

Few people in the United States have the cash on hand to purchase a home outright, which is why more than 62 percent of Americans carry a mortgage, according to the U.S. Census Bureau. In total, Experian reports homeowners in the United States owed a total of $10.3 trillion in mortgage debt in 2020.

Here's the average debt balances by age group: Gen Z (ages 18 to 23): $9,593. Millennials (ages 24 to 39): $78,396. Gen X (ages 40 to 55): $135,841.

Along those lines, organizations like Fannie Mae and the Mortgage Bankers Association forecast that the average rate on 30-year fixed-rate mortgages will decline throughout 2023, continuing into the first quarter of 2024.

Summary: maximum age limits for mortgages

Many lenders impose an age cap at 65 - 70, but will allow the mortgage to continue into retirement if affordability is sufficient. Lender choices become more limited, but some will cap at age 75 and a handful up to 80 if eligibility criteria are met.

Though they can't discriminate, lenders take into account age-related factors for applicants 65 and older.

How many Americans own their house free and clear? ›

The country with the highest free-and-clear homeownership rate in the list above was Lithuania at 83%. In the U.S., the free-and-clear homeownership rate was 23%. If free-and-clear homeownership is the American Dream, then apparently Lithuania and many other countries are living the American Dream.

A third of California homeowners own their properties free and clear. Nearly 2.4 million homeowners across the state in 2021 had no property mortgage, the third highest among the states and Washington, D.C., the Orange County Register reported.

How Many Homes in the U.S. are Second Homes? Through our analysis we found that there are at least 2.64 million second homes in the U.S. that are for seasonal, recreational, or occasional use. How many homes are there in the United States?

Many people strive to pay off their mortgage before they retire. It's a legitimate objective, especially when you consider that 73% of seniors said their home is their most valuable asset, a 2021 survey by American Advisors Group found.

This means that if you make $100,000 shortly before retirement, you can start to plan using the ballpark expectation that you'll need about $75,000 a year to live on in retirement. You'll likely need less income in retirement than during your working years because: Most people spend less in retirement.

For guaranteed savings and the security of owning your home debt free, paying off your mortgage earlier is a better option than investing your extra cash.

When you pay off your mortgage, you stop paying interest and lose the ability to write off that expense. This makes your taxes go up. For example, if you had been writing off $3,000 of loan interest a year and you pay 25 percent federal tax, your tax liability would go up by $750 if you pay off your loan.

Save on interest

Since your interest is calculated on your remaining loan balance, making additional principal payments every month will significantly reduce your interest payments over the life of the loan. By paying more principal each month, you incrementally lower the principal balance and interest charged on it.

Homebuyers often choose a 30 year loan because it creates a more feasible monthly payment. The longer life of the loan, the smaller the monthly payments are. This protects borrowers from being obligated to pay large mortgage payments in situations where budgets may be tight.

How to pay off a $300,000 mortgage in 10 years? ›

A 30-year mortgage can be paid off in 10 years if you can pay almost double in mortgage payments. For instance, if you have a 30-year, $300,000 mortgage with a 5% interest rate, its payment would be $1,610 per month. But making a monthly payment of $3,182 would pay off the loan in a shorter term, roughly 10 years.

When you make an extra payment or a payment that's larger than the required payment, you can designate that the extra funds be applied to principal. Because interest is calculated against the principal balance, paying down the principal in less time on your mortgage reduces the interest you'll pay.

Instead of selling your property and triggering a capital gains tax, you secure a larger loan, pay off the old mortgage, and take out the difference as cash. This system lets you A) convert an investment property's equity into cash, while B) avoiding capital gains taxes.

Paying more toward your principal can reduce the interest you'll pay over time, as discussed above. Additionally, every payment that goes toward your principal builds equity in your home, so you can build equity faster by making additional principal-only payments.

The 10/15 rule is when you apply 1/10th of your monthly mortgage as an additional weekly principal payment. 💰 As an example, this scenario was calculated with a $300,000 mortgage at a 6% interest rate, which will leads to a $3,000 a month mortgage payment and $300/week extra principal payments to hit the 10/15 rule.

Paying a lump sum off your mortgage will save you money on interest. It will also help you clear your mortgage faster than if you spread your overpayments over a number of years. But this option holds risk. If you needed the money back in an emergency, such as job loss, it could be difficult.

There can be some real benefits—both financial and emotional—to prepaying your mortgage. You reduce your total interest payments, you reduce your monthly spending needs, and you have the security of a predictable financial benefit and the psychological benefits of knowing you are out of debt.