Should you pay off your mortgage early?

If you’re a homeowner, the idea of paying down or paying off your mortgage early is an appealing one. The thought of eliminating monthly payments, building your home equity, and saving on interest can make mortgage prepayment seem like a smart financial move. But while it may be tempting to put extra cash toward paying down that debt, it may not always make the most financial sense. With interest rates, market conditions, and personal financial goals to consider, directing those extra funds elsewhere — such as into investments with higher potential returns — may be the smarter long-term move.

Before you make additional mortgage payments, ask yourself the following questions:

1. Do you have high-interest debt?

Mortgage loans generally have relatively low interest rates compared to other kinds of debt. If you're looking to save on interest, you’ll typically be better off paying down any high-interest debt (such as credit card debt) first before attempting to put more equity into your home.

2. Do you have enough emergency savings?

In general, we recommend having three to six months’ worth of expenses in an emergency fund. These funds are designed to help get you through a potential job loss or help you pay for unexpected expenses (like home repairs or medical emergencies) without having to take on additional debt or sell investments. Unlike money in a savings account, any cash put toward paying down your mortgage will no longer be liquid if you suddenly need it. Consider making progress toward building your emergency fund before making extra mortgage payments.

3. Are you saving enough for retirement?

Before making any extra payments toward your mortgage, make sure you’re taking full advantage of any employer match for retirement plans and health savings accounts (HSAs) available to you. An employer match is a powerful tool for saving, and you can’t recoup lost years, so make sure to prioritize those opportunities. If you’re not on track for the retirement you want, in most cases, it can be more effective to focus on those savings — which can be in tax-advantaged accounts and have annual limits — rather than paying off your mortgage early.

4. What is your mortgage rate?

If the rate on your mortgage is lower than what you’d expect to earn on the alternative use of the funds, you might be better off saving that money instead. Consider the expected rate of return as well as the risk. For example, if your mortgage rate is 3% and the alternative is to save the money in a CD that earns 5%, you’re likely to be better off putting the money into the CD.

5. Does your mortgage have a prepayment penalty?

If you are planning to pay off all or a large share of your mortgage, some lenders may have a prepayment penalty clause that could cost you thousands if you’re not careful. If you’re not sure whether your loan has such a penalty, reach out to your lender or check your monthly mortgage statements.

Weighing your mortgage prepayment options

Whether paying down your mortgage is the right move depends on your financial stability and the specific terms of your loan. In many cases, strategically allocating extra cash elsewhere can be the smarter choice. Before making any decisions, consult with your Edward Jones financial advisor to ensure you understand your options and the potential impacts on your financial future.