4 Things You Must Do Before Paying Off a Mortgage Early

by Maurie Backman | Updated July 19, 2021 - First published on Feb. 13, 2021

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Thinking of knocking out your home loan ahead of schedule? Do these things first.

Mortgage lenders don't let borrowers finance homes out of the goodness of their hearts. Rather, they make money by collecting interest on those loans. If you pay off your mortgage ahead of schedule, you'll end up spending less money on interest than you would by sticking to your original repayment term. As such, you may be thinking of paying off your mortgage early. But before you do, be sure to check these items off your list.

1. Check for a prepayment penalty

Most mortgages today don't come with a prepayment penalty, so if you signed yours fairly recently, this probably isn't an issue. However, if you have an older home loan or a jumbo mortgage, then you could be on the hook for a fee if you pay off your loan ahead of schedule. Take a look at your loan documents or contact your lender to see if you'll be subject to a penalty or not.

2. Make sure your emergency fund is complete

Paying off a mortgage early is certainly a responsible move, at least in theory. But before you put any extra money into your mortgage, you should first make certain that you're all set on emergency savings. Your emergency fund should, at a minimum, have enough money to cover three months of essential living expenses. And for better protection, it helps to have more like six months' worth. If you normally spend $4,000 a month on bills and only have $10,000 in savings, you're better off socking away at least another $2,000 before pumping extra money into your home loan.

3. Pay off less healthy debt

Today's mortgage rates are sitting near record lows. But even if you signed your home loan years ago, there's a good chance the interest rate attached to it is less than the interest rate you're paying on an outstanding credit card balance. If that's the case, then you're better off paying off your credit card first, and then tackling your mortgage. Another thing you should know is that mortgage debt is considered the healthy kind to have, and a home loan balance won't hurt your credit score as long as you make your monthly mortgage payments on time. A credit card balance, on the other hand, could lower your score if it's very high relative to the amount of available credit you have at your disposal. So paying it down first makes sense.

4. Assess your living situation and plans to move

If you're planning to stay in your current home for the next decade or longer, then paying off your mortgage early could result in a nice amount of savings on interest. But if you think there's a good chance you'll move in the next few years, then you may want to hang on to your extra money in case you need it to buy your next home. You may, for example, decide to move to a town with a better school district for your kids, but in doing so, you could get stuck paying more for a house. Or, you could end up moving to a different home whose property taxes are higher. Keeping more cash on hand will buy you more options and give you more flexibility if your housing situation changes.

Paying off a mortgage ahead of schedule could result in you spending a lot less interest, and there's a clear benefit to that. But before you pay off your mortgage early, make sure you won't be penalized for doing so, and make sure there's not a better use for your money. Once you make extra mortgage payments, you can't get that money back, and the last thing you want to do is repay your loan early and then come to regret it.

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