Should You Pay Off Your Mortgage Early Now That Rates Are Super Low?

Paying off a home loan early could save you lots of money on interest. But does that make sense given today's mortgage rates?

These days, most mortgages don't come with a prepayment penalty, which means that if you choose to pay off your home loan ahead of schedule, you won't be charged any fees for doing so. What will happen, however, is that you'll spend less on interest on your loan.

When mortgage rates are high, paying off a home loan early makes a lot of sense. But today's mortgage rates are sitting near historic lows, and if you've signed a mortgage in the past few months or are in the process of finalizing one now, you may be wondering whether it makes sense to pump extra money into that loan. The quick answer? It depends.

You'll still save money

The argument for paying off your mortgage early boils down to saving money on interest. Even with today's rates being low, knocking out your loan ahead of schedule could save you a lot over time.

Say you've signed a 30-year, $200,000 mortgage at a rate of 2.8%, which is very competitive. If you stick to your standard repayment schedule of 360 months, you'll end up spending a total of $95,691.53 on interest in the course of your repayment. But watch what happens if you manage to pay off that loan in half the time. Suddenly, you're looking at spending just $45,092.37 on interest. That's a huge difference, even with a low rate. Plus, you'll then get the benefit of shaking your housing debt sooner.

But think about the opportunity costs

On the other hand, low mortgage rates make the idea of paying off a home loan early less attractive. Whenever you spend money on something, you need to consider the opportunity cost -- meaning, other potential uses for that cash that you're giving up.

We just saw that paying off a 30-year, $200,000 loan in half the time would result in about $50,600 worth of interest-related savings. But here's what could happen if you invest that money instead. The stock market has historically delivered around a 9% average annual return. Even if we go with a return that's a bit more conservative -- say, 7% -- if we take the extra money you'd be pumping into your mortgage and invest it at 7% over 15 years, you'd earn about $163,000 in returns. That's a lot more than the $50,600 you'd save by paying less interest. (Of course, stock market returns are never guaranteed, but mortgage interest savings are guaranteed when you pay off a loan early, so note that important distinction.)

Another thing to keep in mind is that mortgage interest can serve as a tax deduction if you itemize on your yearly returns. So in addition to the opportunity cost of having less money to invest, you'll need to consider lost tax savings as well. (On the other hand, if you don't itemize on your returns, this point is moot.)

What's the right move for you?

Paying off a mortgage early is a personal choice, so there's no right or wrong answer as to whether it makes sense to do so given today's interest rates. If you're thinking of making extra mortgage payments to knock out your loan ahead of schedule, ask yourself:

• Can I afford to put more into my mortgage right now?
• What am I giving up to pay down my home loan, and it is worth it?
• Am I trying to repay my home loan in time for a certain milestone, like retirement?

From there, you can let your answers guide your decision so you ultimately make the right call.