The pros and cons of paying off a mortgage early depend on the borrower's financial circumstances, the loan's interest rate, and how close the individual is to retirement. Another consideration is whether to invest that money instead. Consider the interest cost that could be saved by paying off a mortgage ten years early compared to various investment returns earned by investing the money in the market.

How Paying off a Home Affects Your Finances

Mortgage payments are made up of two components: interest on the loan and a principal amount that pays down the total outstanding balance. A $1,500 monthly payment might pay $500 toward interest. The other $1,000 will reduce the principal loan balance. Interest rates on a mortgage loan can vary depending on the economy and the borrower's creditworthiness.

A loan payment schedule over a 30-year period is referred to as an amortization schedule. The payments for a fixed-rate mortgage loan mostly go toward interest in the early years. A larger portion of the loan payment is applied toward reducing the principal in later years.

Assume that you have a 30-year mortgage with a starting balance of $200,000 and a fixed interest rate of 3.5%. It would work out like this.

Components of a Mortgage
Payment Number	Monthly Payment	Principal	Interest	Loan Balance Remaining
1	$898.09	$314.76	$583.33	$199,685.24
109 (10 years)	$898.09	$431.10	$499.99	$159,679.65
229 (20 years)	$898.09	$611.45	$286.64	$97,665.59
301 (25 years)	$898.09	$754.10	$143.99	$48,613.86
360 (last payment)	$898.09	$895.48	$2.61	0.00

A larger portion of the fixed monthly payment goes toward paying interest during the first ten years, but the percentage of the monthly payment that goes toward interest versus principal reverses as time goes on. More than $611 went toward principal while $286.64 went toward interest after 20 years. All but $2.61 of the last monthly payment went toward paying the principal balance.

The portion of the mortgage loan payment that's applied to principal and interest changes over the years because the loan balance is higher in the early years and smaller in the later years. You're paying interest on more of a balance in the early years. Less interest is owed as the monthly payments eventually reduce the outstanding loan.

How much interest will you save?

Some homeowners choose to pay off their mortgages early, and the benefits can vary depending on your financial circumstances. Retirees might want to reduce or eliminate their mortgage debts because they're no longer earning employment income. Let's assume that a borrower has received an inheritance of $120,000. There are ten years left on their mortgage. The original mortgage was $200,000 at a fixed interest rate over 30 years. This table shows what it would cost to pay off the loan ten years early and how much interest would be saved based on three loan rates: 3.5%, 4.5%, or 5.5%.

Cost to Payoff Mortgage Ten Years Early and Interest Saved
10 Year Balance Remaining	Interest Rate	Total Interest Cost for 30 Years	Interest Saved
$97,665	3.5%	$123,312	$20,270
$104,735	4.5%	$164,813	$28,411
$111,657	5.5%	$208,808	$37,618

The higher the interest rate, the larger the amount remaining on the loan will be with ten years left on the mortgage.

Save interest by paying off the loan

The total interest cost for the 30-year loan would be $123,312 at the 3.5% interest rate. The borrower would save $20,270 by paying it off ten years early. Saving more than $20,000 in interest is significant, but the interest amount saved represents only 17% of the total interest cost for a 30-year loan: $103,042 in interest has already been paid in the loan's first 20 years ($123,312 - $20,270), which accounts for 83% of the total interest over the life of the loan.

How Investing Affects Your Finances

It might be worth considering whether some or all of your money might be better off invested in the financial markets. The rate of return earned from investing might exceed the interest you'd pay on the mortgage over the final ten years of the loan.

The "opportunity cost," the foregone interest that could be earned in the market, should be considered. But many factors go into evaluating an investment, including the expected return and the risk associated with the investment. This table shows how much could be earned on $100,000 if the money was invested for ten years based on four average rates of return: 2%, 5%, 7%, and 10%.

How Much $100,000 Can Potentially Earn in Ten Years
Invested Amount	Years	Rate of Return	Investment Gain
$100,000	10	2%	$22,019
$100,000	10	5%	$62,889
$100,000	10	7%	$96,715
$100,000	10	10%	$159,374

These investment gains were compounded. Interest was earned on the interest and no money was withdrawn during the ten-year period.

Investment Gains vs. Loan Interest Saved

A homeowner would earn $22,019 based on an average rate of return of 2% if they invested $100,000 rather than use the money to pay down their mortgage in ten years. There would be no material difference between investing the money versus paying off the 3.5% mortgage based on the $20,270 saved in interest from the earlier loan table. But the homeowner would earn $62,889 if the average rate of return was 5% for the ten years. This is more money than the interest saved in all three of the earlier loan scenarios whether the loan rate was 3.5% ($20,270), 4.5% ($28,411), or 5.5% ($37,618). Repaying their mortgage rather than investing the money not only saves the borrower the interest they would have paid on the mortgage, but it also frees up money that otherwise would have gone to monthly repayments. This money could also be invested with the same rate of return.

Different investments come with different risks

Each type of investment comes with its own risk. U.S. Treasury bonds would be considered low-risk investments because they're guaranteed by the U.S. government if they're held until their expiration date or maturity. But equities or stock investments have a higher risk of price fluctuations, called volatility, and this can lead to losses.

There's a risk that some or all your money could be lost if you decide to invest your money in the market instead of paying off your mortgage ten years early. You would still have to make ten years of loan payments as a result if the investment loses money. The stock market can provide sizable returns, but there's also a risk of sizable losses. Just as taking on more risk can magnify investment gains, it can also lead to more losses so the market risk is a double-edged sword.

A 10% investment gain isn't an easy goal to achieve, particularly after factoring in fees, taxes, and inflation. Investors should have realistic expectations as to what they can earn in the market.

What the Experts Have to Say

Frequently Asked Questions

The Bottom Line

It's important to consider the interest rate, the remaining balance, and how much interest will be saved before you decide to pay off a mortgage loan early. Borrowers can use a mortgage loan calculator to analyze the amortization schedule for their loans.

Another important thing to keep in mind is that mortgage interest is tax deductible for many homeowners. Interest paid reduces your taxable income at the end of the year. Consult a financial planner and a tax advisor before deciding whether to pay off your mortgage early or invest that money. A professional can help you analyze your own personal situation and goals.