Paying Off The Mortgage Early

Paying Off The Mortgage Early

This is a guest post from Ashley at Wide Open Wallet. Her blog takes “an honest look at family finances”. Check out her site and if you like what you see, don’t forget to subscribe to her feed!

Wouldn't we all rather be here right now?
Creative Commons License photo credit: booleansplit

We bought our house 4 years ago. The idea of taking on all that debt scared the bejeezes out of me. So before we signed the papers I sat down and figured out a reasonable amount of money to pay extra. I tried not to get crazy about it. Sure, I wanted to pay every extra dollar towards the mortgage. But I couldn’t expect my family to live with no disposable income for 10 years while I get rid of the mortgage payments. I mean, come on.

So we decided on $50 a month extra and a lump sum payment once a year of $1,000. Fine and dandy. We started it from day one. Paying $50 extra right from the get go was easy. We were excited to be in our new house and were adjusting to home ownership so really, it was actually kinda fun. (I just totally revealed the finance dork that I am. I called paying extra towards debt “fun”.) Now that we’ve lived here a while and it’s not new and exciting anymore that $50 is just part of the payment and we don’t think anything about it.

Over the years we’ve paid about $7,000 extra towards our mortgage. We should have 25 years 10 months left to pay. But according to their website, our lender says we have 22 years 10 months remaining. That $7,000 has taken three years off our loan. Wow. At $920 a month (principal and interest only) we have saved $26,000 in interest. Holy cow. Plus it let us get rid of our PMI early. I’m not even counting those savings.

I know numbers have been run showing that it’s better to invest that $50 a month. That the interest I’m saving on my mortgage isn’t as much as what I could be making in the stock market. I got one question for you, Dr. Phil style, “How’s that workin’ for ya?” I’ve been investing regularly in the stock market since 2002. At this point I’ve actually lost money. I have less money in my account then the amount I’ve contributed. I would have been better off putting that money under my mattress.

Now, I’m not saying that you shouldn’t invest. I will continue to invest in the markets. Yes, please save for retirement. But I’m glad that I also took the time, money, and thought to put some money else where as well. There were times when someone would corner me and go on and on about how I’m wasting my money by paying down my mortgage. They would have charts and graphs to show me how much less money I will have at the end of time. But so far, I’m glad that I continued to work towards my goal of being totally debt free. It’s important to have balance in all aspects of your life and money is no different.

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Comments

  1. Thank you for this post, Ashley and thank you for all the wonderful comments here too! I am a huge advocate of paying down a mortgage early since I believe an elimination of all debt is freeing and valuable. I am so happy to see others that embrace the same value and see that being debt free sooner is an investment that takes money but pays off in so many other ways beyond just the financial aspect of it. It provides greater security, more flexibility with money and time and for my family has meant that we have so much more time to live life together rather than be slaves to long houred jobs to pay a hefty mortgage until we’re grey.

  2. I read somewhere a suggestion to double your principle payment each month. Then you’ll have your mortgage paid off in 1/2 the time. If $50 is going towards the principle, then add $50 to the payment. The next month, you can pay $51. It isn’t painful that way, and at the beginning of the mortgage, you are paying mostly interest anyway. Presumably your salary goes up to make the payments easier later on

  3. I am thinking that with the market in the tank and having lost 30% of the value in my portfolio, paying down my mortgage is a much better investment and the gain is guaranteed, not some assumed 6 to 8% annual return. If the experts are correct and the market takes a couple years to recover, isn’t it a no-brainer to invest in the equity of your home?

  4. I. Claudius says:

    I’m not a great money manager and neither are the professionals from what I’m seeing. I paid off my home 6 years ago. We’ve owned it 10 years. I eliminated a 3k a month payment on a 15 year mortgage. I was very fortunate to able to do this and I’m very grateful every day. I never looked at my home as an investment; it was a place to live and raise my family. If it gained in value — all the better. When I put on a new roof, siding and windows, it was to stop leaks and keep it warmer, not to make it a showcase for flip-this-house. I’ve noticed a lot of people over the years saying that paying off your home is a bad idea. Their argument was the tax deduction and the 8% yearly return in the stock market — do I need to say anything more … Remember (and take this to heart), why on Earth would a bank that gives you a loan do *anything* in your interest? I just don’t think they have our welfare at heart, but maybe I’m jaded ;) Remember, they have an incentive for you to stretch that payment out as long as you possibly can. It depends on your circumstances, the location of the property, when you bought it, will it retain value, your retirement objectives, etc. If you can do it, pay down the mortgage, it will give you a hedge against future fiasco’s like we’re watching unwind right now. Of course, if your overleveraged and bought at the top, that’s a tough place to be.

    Claudius.

  5. Hi- saw your post while doing some research. I’m not a mortgage finance specialist, but I don’t think your math regarding the $26k of interest saved is correct at all. It sounds like you are multiplying the current amount of interest that you are paying with each monthly payment times the 3yrs. Thats not quite right since any additional principle paid each month is applied to principle starting at the very end of the loan amortization schedule, when the interest-to-principle ratio flips into the area of 10% interest, 90% principle. To accurately find out the interest saved, you need to get the Loan Amortization schedule from you lender, which shows each months payments over the remaining life of the loan and the proportion of interest to principle paid each month (a gradually decreasing % every month). Then based on the additional principle you are injecting each month, calculate how many months/years you will have repaid the entire principle early and then add the interest that you didn’t have to pay in those months- however you have to start at the bottom of the loan amortization table, not the top. Those bottom months are mostly principle anyway, so your interest savings are much smaller. To really get bang for your buck in interest savings, you need to accelerate the complete repayment of the loan to about half the life of the loan, where interest is still almost 50% of each months payment. Confusing I know…just get your Loan Amortization schedule and you’ll see what I’m saying quickly.

  6. I guess I’m one of those guys that would corner you with the charts and graphs (I have one of those examples on my blog journey2million.com)– but actually if you are paying PMI paying down the mortgage quickly until at least the PMI is gone might make sense. However in general I think there couldn’t be a worse time to put a lot of money toward mortgage pre-payment. The home interest tax deduction, combined with all time low mortgage interest rates means that your interest savings are unlikely to exceed what you could earn with even a fairly conservative fund investment as an alternative. Some pre-payment could make sense as a diversification tool but I think it should be a small portion of available extra cash (maybe increasing with age). Check out networthIQ.com and notice how many 2 million+ net worth individuals still carry some sort of mortgage on their primary residence, even though they obviously could pay it off.
    MrsMoneyMerge, the reason you might not want to pay off the mortgage and save all that interest, is that there may be an even better way to utilize your extra cash. The question isn’t whether its a better decision to pay off the mortgage quickly or blow the money on movies and fast food…but the question is whether there might be a better end result if that money were invested elsewhere. The reason the tax deduction is important is that the loss of it decreases the effective savings from paying down the mortgage, significantly enough to make other investment options more attractive. So, the analogy would be, if you’re willing to pay that extra $1 interest, you can get 33 cents back while also making an extra $1 (and probably more) through your investments. Accountants advise this because it is pretty straightforward math– if you instead invest your money and your investment beats the interest rate of your mortgage minus the tax savings (so for a 5% loan, say 3.75%) the investment is the better choice.

  7. Good article. I’m dealing with many of these issues as well..

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