Here's What Happens When You Pay Off a Mortgage Early

It's common for people to sign a 30-year mortgage and spend three decades of their lives paying off their homes. But you may be inclined to try to pay off your mortgage at a faster pace, especially if you're receiving extra money regularly.

Paying off your mortgage early could save you money on interest. But in some cases, it could make more sense to stick to your regular payment schedule rather than try to get ahead of it.

The upside of paying off a mortgage early

Most mortgage lenders do not impose penalties for paying off a mortgage early. So for the most part, that's not something you have to worry about. And if you pay off your mortgage early, you could save yourself a bundle of money on interest.

Let's say you take out a $240,000 mortgage at 6.5% and manage to pay an extra $500 into your loan every month. Doing so will save you about $160,000 in interest on your mortgage, which is a substantial sum. You'll also get to shed your mortgage debt a lot sooner, which means you'll have one less monthly bill to worry about.

It doesn't always make sense to pay off a mortgage early

No matter what interest rate you have on your mortgage, paying off your loan ahead of schedule will save you some money -- it's just a matter of how much. But if you happen to have a really low interest rate on your mortgage, then an early payoff may not be a great idea.

Let's say you signed your mortgage in 2021, when borrowing rates were super affordable. You might be paying 3% on your 30-year mortgage. Meanwhile, right now, you can score upward of 4% interest in a high-yield savings account.

So, let's say you have an extra $1,000 you can put into your mortgage this year to pay it off ahead of schedule. That's a tempting thought, but it doesn't make sense to lose out on 4% interest in a risk-free savings account so you can save 3% interest.

It's sort of the same concept of using a credit card to snag cash back on a purchase, but facing a processing fee that's higher than the amount of cash back you're eligible for. If your go-to credit card gives you 2% back at restaurants but the place you're dining at charges a 3% surcharge for using your credit card instead of paying cash, then you're not coming out ahead financially by using your card. Similarly, it doesn't make sense to forgo a higher interest rate on your money to save a smaller amount of mortgage interest.

Of course, there is something to be said for shedding mortgage debt sooner. But before you decide to pay off your mortgage early, consider the interest rate on your loan. And if it's really low, you may want to consider sticking to your regular payment schedule, even if you have the ability to get rid of that debt at an earlier point in time.