Paying off your mortgage ahead of time might sound like an incredibly savvy thing to do — and in some cases, it is. But it’s not the right money move for everyone.
Pay off a mortgage in five years? It’s an aggressive strategy that may or may not be the smartest choice.
Benefits and Risks of Paying Off a Mortgage Early
Achieving homeownership is, well, an achievement. And since you’re here reading an article about paying a mortgage off early, you’re clearly an overachiever.
Paying off any kind of debt early usually seems advisable. But for most of us, our home is the single largest purchase we’ll ever make — and paying off a six-figure loan in only a few years could wreak havoc on the rest of your finances.
In addition, some mortgages come with a prepayment penalty, which means you could be on the line for additional fees that might eclipse whatever you’d stand to save in interest payments over time. (Mortgages tend to have lower interest rates than many other common types of debt anyway.)
That said, if you have the cash, paying off your home early can lead to substantial savings, not to mention helping you build home equity as quickly as possible.
Let’s take a closer look at the risks and benefits of paying off a mortgage early.
Benefits of Paying Off a Mortgage Early
The main benefit of paying off a mortgage early is getting out of debt. Even minimal interest is an expense it can be nice to avoid.
Additionally, paying off your home early means you’ll have 100% equity in your home, meaning you own its whole value, which can be a major boon to your net worth.
Risks of Paying Off a Mortgage Early
Paying off a mortgage early may come with risks, and not just prepayment penalties (which we’ll touch on again in a moment). In many instances, it can be a plain old bad financial move.
Depending on what your cash flow situation looks like, and what the interest rate on your mortgage is, you might stand to out-earn early payoff savings if you funneled the extra cash to your investment or retirement accounts instead. (You can use this handy dandy mortgage calculator to see how much interest you stand to spend over the lifetime of your home loan — and then compare that to how much you might earn if you invested that money instead.)
Additionally, if you have other forms of high-interest debt, like revolving credit card balances, it’s almost always a better idea to focus your financial efforts on those pay-down projects instead.
To recap:
| Benefits of Paying Off a Mortgage Early | Risks of Paying Off a Mortgage Early |
|---|---|
| Saving money on interest over time | Possible repayment penalty |
| Building home equity quickly | Lost opportunity for investment growth, which could outweigh interest savings |
| No longer having to make a mortgage payment every month | Less money for other important goals, such as paying down credit card debt |
Watching Out for Prepayment Fees
One of the biggest risks of paying off a mortgage before its full term is up is the potential to run into prepayment penalties. Some mortgage lenders charge large fees to make up for the interest they’ll be missing out on.
Fortunately, avoiding prepayment penalties on home loans written after 2014 is easier: Legislation was passed to restrict lenders’ ability to charge those fees. But if your mortgage was written in 2013 or earlier — and even if not — it’s a good idea to read the fine print before you hit “submit” on your lump-sum payment, and ideally before you accept the contract at all.
Steps to Paying Off a Mortgage Early
You’ve assessed the risks and benefits and decided that paying off the mortgage early is the right move for you. Nice!
Now let’s take a look at how to get it done.
Pregame: Considering Repayment Goals When House Shopping
This option won’t work if you’ve already found and moved into a home, but if you’re still in the home-shopping portion of the journey, looking at inexpensive homes can be a great first step toward paying off your mortgage fast.
After all, if the home has a lower price tag, it’ll be easier to reach that goal in a shorter amount of time. Ideally, you want its value to appreciate, so you’ll still want to shop around before just choosing the lowest-priced house on the block.
Maybe you signed your home contract years ago and are just now considering getting serious about early mortgage repayment. Take heart! There are some easy steps to follow to vanish your mortgage in five years or so.
1. Setting a Target Date
The first step: figuring out exactly when you want the mortgage paid off. Choosing your target date will make it easier to figure out how much additional money you need to send to your lender each month.
Five years is a pretty tight timeline for this kind of debt repayment process, but it could be doable depending on your earnings and commitment.
2. Making a Higher Down Payment
The higher your down payment, the less loan balance you have to pay down, so if you can manage it, offer as much as you can right at the start. There are many assistance programs for down payments that might boost your offer and put you on track for paying down your mortgage early.
Also, realize that first-time homebuyers — who can be anyone who has not owned a principal residence in the past three years, and some others — often have access to down payment assistance.
3. Choosing a Shorter Home Loan Term
Obviously, if you want to pay your mortgage off in a shorter amount of time, you can consider choosing a shorter home loan term; most conventional mortgages are paid off over 30 years, though it’s possible to find loans with 15- or even 10-year terms.
However, your interest rate might be higher on those loans in order to make the deal worthwhile to the lender, so for many borrowers, choosing a longer home loan term and making aggressive additional payments is a better option.
4. Making Larger or More Frequent Payments
One of the most achievable ways for most borrowers to pay off a home loan early is to pay more than the monthly minimum, either by adding extra toward the principal in the monthly payment or by paying more than once per month.
Unless you’re due for a six-figure windfall, chipping away at the debt this way might be the smartest option.
But how does one come up with the additional money to funnel toward that goal?
5. Spending Less on Other Things
As with most debt repayment strategies, chances are you’ll need to find other budgetary items to cut back on in order to set aside more money to put toward the mortgage. This could be as small as ditching the daily latte or as serious as choosing to give up a car.
6. Increasing Income
Another option, if there’s just nothing left to cut? Finding ways to increase your income, perhaps by starting a side hustle or asking for that long-overdue raise.
The Takeaway
Pay off a mortgage in five years? While paying off your home loan early could help you save money on interest, sometimes the money is better spent on other financial goals and projects.
Whether a cash-out refinance sounds appealing or you’ll soon be on the hunt for a new mortgage, see what SoFi offers. SoFi’s fixed-rate loans can be used for refinancing or a new purchase.
What about the home loan rates you can find with SoFi? They’re competitive, and locking in soon could be beneficial.
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