Is Paying Off a Mortgage Early Worth the Cost
Paying off a mortgage early usually means paying a prepayment penalty, which typically ranges from 1% to 5% of the outstanding loan balance during the first three to five years. After the penalty period, most lenders charge nothing extra, and the real question shifts to whether the savings on future interest outweigh what you pay to exit the loan.
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What Goes Into the Early Payoff Amount
The total payoff figure is more than just the remaining principal. You will owe the remaining balance, any accrued interest through the payoff date, and possibly a fee if your loan is still in the early repayment window.
- Prepayment penalty percentage or flat fee
- Accrued interest up to the payoff date
- Recording or administrative fees
- Escrow reimbursement for property taxes and insurance
How to Calculate Whether Early Payoff Saves Money
Run the numbers by comparing the prepayment penalty against the total interest you would pay over the remaining loan term. For example, a 3% penalty on a $200,000 balance is $6,000 upfront. If the loan carries a 5% rate and you have 20 years left, the interest you would otherwise pay is far higher than that penalty, making early payoff a net win.
| Scenario | Prepayment Penalty | Remaining Interest (Est.) | Net Savings |
|---|---|---|---|
| 3% penalty, 20 years left at 5% | $6,000 | $115,000 | +$109,000 |
| 2% penalty, 5 years left at 4% | $4,000 | $20,000 | +$16,000 |
| 5% penalty, 1 year left at 3% | $10,000 | $3,000 | -$7,000 |
When Paying Off Early Does Not Make Sense
If your loan is near the end of its term, the penalty may exceed the interest you would otherwise pay. Similarly, if the penalty is steep and you have higher-interest debt, a home equity line of credit, or investments that reliably out-earn your mortgage rate, keeping the mortgage and directing cash elsewhere can be the better financial move.