What happens when you pay off a mortgage

The part of your payment that goes to principal reduces the amount you owe on the loan and builds your equity. The part of the payment that goes to interest doesn’t reduce your balance or build your equity. So, the equity you build in your home will be much less than the sum of your monthly payments.

With a typical fixed-rate loan, the combined principal and interest payment will not change over the life of your loan, but the amounts that go to principal rather than interest will. 

Here’s how it works:

In the beginning, you owe more interest, because your loan balance is still high. So most of your monthly payment goes to pay the interest, and a little bit goes to paying off the principal. Over time, as you pay down the principal, you owe less interest each month, because your loan balance is lower. So, more of your monthly payment goes to paying down the principal. Near the end of the loan, you owe much less interest, and most of your payment goes to pay off the last of the principal. This process is known as amortization.

Lenders use a standard formula to calculate the monthly payment that allows for just the right amount to go to interest vs. principal in order to precisely pay off the loan at the end of the term. You can use our calculator to calculate the monthly principal and interest payment for different loan amounts, loan terms, and interest rates.

Tip: If you’re behind on your mortgage, or having a hard time making payments, you can call the CFPB at (855) 411-CFPB (2372) to be connected to a HUD-approved housing counselor today. You can also use the CFPB's "Find a Counselor" tool to get a list of HUD-approved counseling agencies in your area.

If you have a problem with your mortgage, you can submit a complaint to the CFPB online or by calling (855) 411-CFPB (2372).

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• Paying off your mortgage early is a good way to free up monthly cashflow and pay less in interest.
• But you'll lose your mortgage interest tax deduction, and you'd probably earn more by investing instead.
• Before making your decision, consider how you would use the extra money each month.
• Find a financial planner near you with Smart Advisor.

Paying off your mortgage early can be a wise financial move. You'll have more cash to play with each month once you're no longer making payments, and you'll save money in interest.

Making extra mortgage payments isn't for everyone, though. You may be better off focusing on other debt or investing the money instead. Here are the pros and cons to paying off your mortgage early.

The pros of paying off your mortgage early

• Save money on interest. Each month that you make a mortgage payment, some money is going toward interest — so the fewer payments you have, the less you will pay in interest. Paying off your mortgage early could save you tens of thousands of dollars. (Just make sure to clarify with your lender that all extra payments will just be going toward your principal, not interest.)
• No more monthly payments. By eliminating monthly mortgage payments, you free up that cashflow to put toward other things. For example, you could invest the extra money or pay for your child's college tuition. The average monthly mortgage payment is currently $2,064 on a 30-year fixed mortgage and $3,059 on a 15-year fixed mortgage—paying off your mortgage could free up a sizable chunk of cash for you to save or put toward other expenses.
• You own the home outright. If you hit a financial rough patch, there's the possibility that you won't be able to afford monthly mortgage payments. Your house could be foreclosed upon if you default on payments. When you completely own the home, there's no chance of losing the house.
• Peace of mind. You may simply like the idea of not having a mortgage hanging over your head. The freedom that no mortgage payments gives you is a powerful motivator.

The cons of paying off your mortgage early

• Earn more by investing. The average mortgage interest rate right now is around 6%. The average stock market return over 10 years is about 9%. So if you pay your mortgage off 10 years early vs. invest in the stock market for 10 years, you'll most likely come out on top by investing the money instead.
• Mortgage prepayment penalties. A mortgage prepayment penalty is a fee you pay the lender if you sell, refinance, or pay off your mortgage within a certain amount of time of closing on your initial mortgage — usually three to five years. Not all lenders charge this fee, and you probably don't need to worry about it if you're waiting more than five years to pay off your mortgage. But you should always ask your lender first.
• Lose the mortgage interest tax deduction. As a homeowner, you can claim the amount you pay in mortgage interest on your taxes to lower your taxable income. You'll lose this perk by paying off your mortgage early.
• Hurt your credit score. Several factors make up your credit score, and one is your mix of credit types. For example, maybe you have a credit card, car loan, and mortgage. By taking away one type of credit, your credit score will decrease. This should be a fairly small drop, but it's something to consider.

Questions to ask yourself before paying off your mortgage early

How would you use the money you'd be saving on monthly payments?

If you're paying off your mortgage early so you can have more monthly cashflow, you should have an idea of how you'll use that extra money. If you want to cut out your $900 mortgage payment and invest $900 per month in its place, that could be a good use of the money.

Ultimately, it's up to you how to spend the extra cash. But if you can't think of what you want to do with the money, paying off your mortgage early might not be the best financial move. Remember that even if you pay off your mortgage, you'll still have regular costs related to your home, like maintenance and homeowners insurance.

How does paying off your mortgage early fit into your retirement plan?

The answer to this question will be different for everyone.

If you know you want to stay in this house during retirement, paying it off now so you don't have to make monthly payments in retirement might be the right move.

But if you're, say, 10 years away from retirement and haven't started investing yet, investing will be a better use of the money than paying off the mortgage early.

Do you have other debts to pay off?

The general rule of thumb is that you should focus on paying off higher-interest debt before lower-interest debt. You may be paying a higher rate on a credit card or private student loan than on your mortgage, so you'd benefit more by paying those off early.

Don't pay so much toward your higher-interest debt that you risk defaulting on mortgage payments, though. Yes, credit cards can be expensive, and the issuer may take legal action if you default on card payments. But defaulting on mortgage payments can be an even bigger risk, because you could lose your home.

What other options do you have?

If you're looking to ultimately free up some room in your monthly budget or save money on interest, making extra payments on your mortgage isn't your only option.

Refinancing can help you lower your monthly payments, either by lowering your rate or by lengthening your loan term so you have more time to pay off your balance.

If paying off your loan early is the goal, refinancing into a shorter term will help you achieve that while saving money on interest.

If you have a large amount of money you want to put toward your mortgage, you might want to consider a lump sum payment or mortgage recast.

With a lump sum payment, you make one large payment toward your principal so your mortgage will be paid off early. But with a recast, you pay that same lump sum and ask your lender calculate what your monthly payment should be based on your new, lower principal amount. Then you'll have the same term length but a lower monthly payment going forward. 

There's no clear right or wrong answer about whether or not you should pay off your mortgage early. It depends on your situation and your personal goals.

Mortgage calculator

Use our free mortgage calculator to see how paying off your mortgage early could affect your finances. Plug in your numbers, then click on "More details" for information about paying extra each month. You can also use a formula to figure out your monthly principal payment, though using a mortgage calculator is generally easier. 

Mortgage Calculator

Home Price

Down payment

%

Length of loan (years)

Interest rate %

$1,161 Your estimated monthly payment

More details Chevron iconIt indicates an expandable section or menu, or sometimes previous / next navigation options.

Total paid$418,177

Principal paid$275,520

Interest paid$42,657

Ways you can save:

• Paying a 25% higher down payment would save you $8,916.08 on interest charges
• Lowering the interest rate by 1% would save you $51,562.03
• Paying an additional $500 each month would reduce the loan length by 146 months

By putting a few hundred dollars toward your mortgage per month, you could own your home in full years sooner. But even if you don't have that much extra money each month, you may decide to put just $50 or $100 toward your payments.