Should You Pay Off a Mortgage Early?


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Should You Pay Off a Mortgage Early?

The Answer May Surprise You!

Imagine a married couple — let’s call them Matt and Donna Smith — bought their dream house two years ago. The house was $250,000, and they paid $50,000 as a down payment. Since then, both have gotten raises, and with the extra cash, they are now asking themselves a crucial question: Should we pay off the mortgage early?

The math on this is clear: You should absolutely not pay off a mortgage early. You could lose money by doing this. But it’s funny how math is much less absolute when it’s dropped into the real world. There are hidden variables at play that make the decision to pay off a mortgage early the best option for the vast majority of Americans.

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Pros of paying off your mortgage early

  • Save money on interest. If you are paying interest, the fewer payments you have the less interest you will pay.
  • No more monthly payments. If you no longer have to pay a mortgage payment, which on average could be between $2,000 to $3,200, you could use that money towards other things like investments and/or other expenses.
  • You own the home outright. If you own your house free and clear you don’t have to worry about losing it to foreclose if you run into money issues. You can also benefit from the equity in your house.
  • Peace of mind. Paying off your mortgage gives you peace of mind because you it is something that you do not have to worry about.

Cons of paying off your mortgage early

  • Harm your credit score. By paying off your mortgage it will drop your credit score, it will be a small drop but nonetheless it will decrease it.
  • Mortgage prepayment penalties. A mortgage prepayment penalty is a fee you pay the lender if you pay off, sell or refinance your mortgage within a certain amount of time. Prepayment penalties usually range from 2 to 5 years depending on your mortgage terms. Not every lender charges these fees so it will be something you want to clarify.
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