Owning a mortgage-free home has become a trend. Nearly 40 percent of homeowners own their homes outright, according to the National Association of Home Builders (NAHB). This is the highest it’s been in 13 years. Two-thirds of these mortgage-free homeowners are baby boomers aged 60 and over.
But is paying off a mortgage a wise move? For many, it could offer peace of mind, but there may be some financial ramifications to going mortgage-free. Knowing the pros and cons will help you make the right decision for your circumstances.
Can You Pay Off Your Mortgage?
Most lenders will allow you to pay off your mortgage early. It’s referred to as prepaying a mortgage. These types of mortgages don’t come with a prepayment penalty.
But some mortgages do have a prepayment penalty. If you’re not sure, refer to page one of your closing disclosure. You may also find it in a section of your mortgage noted as “Right to Prepay”. If you’re still not sure, contact your mortgage servicer.
Pros to Prepaying Your Mortgage
There are several advantages to paying off your mortgage early. The obvious one is that it will reduce your baseline expenses. If your mortgage takes a large chunk of your monthly income, and you have a fixed income, eliminating this expense will provide more expendable income.
You’ll save on interest payments. Depending on the loan size, interest rate, and term, this could equal thousands of dollars.
Another advantage is if your mortgage rate is higher than the risk-free returns. In other words, paying off a debt that charges interest is equivalent to earning a risk-free return equal to that interest rate.
For example, if your mortgage rate is higher than a low-risk investment, like a tax-free municipal bond, you’d be better off paying down the mortgage than investing your money in that bond.
Paying off a mortgage is a fast way to build equity. That way, if down the road you want to borrow against your home, you can tap into its equity.
For many people, peace of mind is a significant advantage to paying off a mortgage early. It’s an emotional goal.
Cons to Paying Off a Mortgage Early
For those who have low interest rates on their mortgages, there are several disadvantages to paying off a mortgage early.
One is if you need to catch up on retirement savings. Instead of taking a large amount of your savings or income to pay off your mortgage, contribute more to a 401(k) plan or other retirement accounts. Your savings will grow tax-free until you withdraw them.
If you carry high-interest debt like credit cards and you have a low-interest mortgage, paying off the mortgage early could cost you. You’re better off eliminating the high-interest debt and keeping the low-interest good debt. Mortgages are considered good debt since they’re tied up with an asset.
If you itemize your tax deductions, once you pay off your mortgage, you’ll no longer have any interest to deduct from your income on your federal tax returns.
There’s also the opportunity cost. If you use all your savings to pay off your mortgage, you may miss out on investments that earn a higher interest rate than your mortgage rate.
For example, according to The Motley Fool, the S&P 500 Index has returned an average annual rate of 12.2 percent over the past decade. Even the current mortgage interest rates are lower than that.
If you take your savings to pay off your mortgage, you reduce your liquidity. Your money will be more difficult to access. And remember, it will temporarily have a negative impact on your credit score by reducing the average age of your accounts and your credit mix.
Methods for Prepaying Your Mortgage
If you’ve decided to pay off your mortgage. There are different methods to do it. It depends on your circumstances as to which one is right for you.
Extra Annual Payments
Make one extra payment at the end of the year and apply it to your principal. It can help you pay off your mortgage without too much financial hardship.
Paying It Off in Full at One Time
This one is a big move, but it may make sense if you have a high interest rate. But you’ll want to have enough cash to do this without draining your total savings account.
Biweekly Payments
Be disciplined enough to make an extra payment every two weeks. It could come off the top when you receive your paycheck. Unfortunately, not all lenders will allow this. However, if yours does, it’s a way to pay off your loan early without breaking the bank.
Refinance Your Mortgage
While in this current environment, this method may not be the best option for many, if you have a high interest rate and current interest rates are low, refinance. You could go for a 15-year term to pay off your mortgage earlier.
A Middle Ground to Paying Off a Mortgage
Instead of paying off your mortgage, Schwab suggests considering chipping away at the principal to shorten the term of your loan.
By doing this, you’ll save a significant amount of interest while maintaining diversification and liquidity.
The Epoch Times copyright © 2025. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
