Comments on: Paying Off The Mortgage Early

By: journey2million

journey2million — Fri, 05 Mar 2010 08:48:51 +0000

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.

By: Dennis

Dennis — Mon, 09 Mar 2009 17:34:20 +0000

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.

By: I. Claudius

I. Claudius — Wed, 18 Feb 2009 18:12:38 +0000

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.

By: momstheword

momstheword — Fri, 16 Jan 2009 19:20:04 +0000

I am glad you posted this. I have been really wanting to work toward paying off our mortgage but had read mixed reviews on it. I love the $50 a month and then an extra $1000 a year. I guess we just really need to sit down and come up with a plan. momstheword´s last blog post..SUPPLEMENTING OUR INCOME (THE EARLY YEARS)

By: HIB

HIB — Mon, 12 Jan 2009 21:53:21 +0000

Paying off a mortgage early certainly looks appealing given the recent fall of the stock market. We would not apply more to our principle payments given our impending move, but there is a lot to be said for NOT having a mortgage. Great post! -HIB HIB´s last blog post..Interview: 2 Million Dollars Made in Network Marketing - It’s All About Leadership!

By: John

John — Mon, 12 Jan 2009 20:21:39 +0000

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?

By: Always Read the Return Policy & Primetime Quickhits | Prime Time Money

Always Read the Return Policy & Primetime Quickhits | Prime Time Money — Mon, 12 Jan 2009 06:42:02 +0000

[...] Remodeling This Life shares a great guest post about paying off the mortgage early. [...]

By: Amy

Amy — Mon, 12 Jan 2009 01:55:01 +0000

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

By: LAL

LAL — Sun, 11 Jan 2009 06:12:27 +0000

I can't and won't pay off the mortgage faster. Mostly because it will create a discrepancy in my net worth. Too much skewed to the home equity and not enough in retirement/savings. I also think there are other priorities for me. I don't want to finance our next vehicles so rather than paying off the house, my next big goal is to save for newer cars. Ours are 9 and 10 years old so we are due. LAL´s last blog post..Family and money

By: Emily

Emily — Sun, 11 Jan 2009 02:44:27 +0000

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.