One of the goals of most financially savvy adults is to operate without any debt. While it is easy to avoid certain types of debt, such as credit card debt; debts such as mortgages and student loans are somewhat necessary to get a boost. While getting rid of your mortgage will cause you to lose some tax deductions, you can always take the money that you save, give it to your favorite charity, and keep those deductions, because in the end, having no debt obligations is a fantastic feeling.
The majority of the mortgages held are 30-year fixed rate mortgages. They are designed for the borrower to pay on his or her loan for 30 years, or basically one half to one third of their lifetime. If you were to start a new loan for $250,000 (which is currently about the average price for a new home), at 4% interest, paying just the minimums will end up costing you almost $180,000 in interest charges alone. That is in addition to the $250,000 in principal you must pay.
By putting just a little bit extra toward your mortgage each month, you will not only pay off mortgage early, but also save money on interest charges. For example, putting just $50 extra per month toward the principal amount will shorten your loan period by 26 months and save you over $15,000 in interest.
Now over the span of 30 years shaving just 2 years off the loan is not a huge feat. But saving $15,000 is nothing to laugh at. Paying just $50 extra will do that much and $250 extra will do even more. Doing so will cause the loan to be paid off in 21 years and 7 months, nearly 9 years earlier than scheduled. It will also save you over $56,000 over of the next 21 and one half years.
If you pay $250 each month extra toward your mortgage you will be putting out $3,000 per year. If you spread out your $56,000 in savings over those 21.5 years, you are saving $2,600 per year. So your extra $3,000 per year is truly only costing you $400 per year. Obviously you will not see those savings until you come to the end of the full 30 year term since they are interest charges you will not be paying during those 8.5 years you are debt free, but the savings are still very real.
There are three ways you can work toward paying off your mortgage early. You can take into practice the Miser for a Month tips and use the money you save toward knocking out that debt. Refinancing to a lower interest rate could help you save a few hundred dollars per month. Get your monthly payments lower, but keep paying what you have always been paying. Or earn more money; put your skills to work and for just a few hours of work per month you could be earning an additional $250 every month.
If you want to know just how much faster you can pay off your mortgage, and how much money you can save on interest charges, there are many different online mortgage calculators. If you run the amortization schedule you will see just where your payments are going, and you may be surprised how much of your money goes toward interest charges. Make your commitment this month to save money and pay off the mortgage early.
I sent my mum to the bank last week to pay her mortgage, her banker was not happy but she was! such a great feeling. I am a calculator junkie and am always amazed at how much you can save in interest with a very small monthly increase in your repayments.
We’re in the “pay it off quickly” camp… I love the flexibility that it will add in the future. Plus, it ensures that we’re disciplined savers.
Thanks for the great breakdowns, Sean! I love all of the math and factual proof on how all of this would play out.
If it makes sense to pay down your credit cards early to avoid interest charge (assuming you dont pay them in full every month), it only makes sense to do the same with the mortgage. Like you say, its a great feeling to not have the debt anymore, less stress and more opportunity to invest that (otherwise wasted interest) money into something else. Thanks Sean 🙂
I have to ask if you have figured inflation into your scenarios. The dollars you use to pay your mortgage payment in year 30 will be worth much less than the dollars you used to pay in year one. Then again, who owns the same house for 30 years anymore? These are all interesting variables and I feel they all need to be taken into account when making the decision.
Good analysis. These calculations do not take into account inflation, so the benefits will be a bit less. There are those who would rather keep a mortgage and invest their extra income because even with market risk you SHOULD be able to earn over 4% during a 30 year period. However, psychologically having $0 under liabilities on your balance sheet is a better motivator than the potential of having a fatter portfolio. It is definitely not cut and dry and if you want to get into it there are many more factors to examine, but most people want to be debt free as soon as possible.
We’ve been asking ourselves this question and I’ve been working on a post about our thoughts. Many of my FB fans when I asked this question a few days back said they would pay off their mortgage for the sense of security. We have the money to pay our first house off completely in cash right now and we are 3 years into a 5 year term over 25yrs. I think we have our answer but some might find it odd that we had to question whether it was the right or wrong thing to do. Everyone has their own personal reasoning I guess. Thanks for sharing this. Mr.CBB
I also know it can save you money and years off your mortgage by paying bi-weekly instead of monthly.
very true. You just need to make sure your mortgage company allows it. Some of them have been known to charge a fee to do this. Just just need to make sure the fee is worth it.
Mortgage loans are compounded monthly. That is why you can pay them usually 5 to 15 days late with no penalty or interest accrued. For the “biweekly” payments to work, one needs to have a loan which is compounded daily. While it may cost money to have it converted after a loan is taken out, you can usually choose this option before the loan is written.
Also, you need to account for inflation. You throw out “interest savings” numbers, but how does that translate to today’s spending power? If one is able to lock in today’s super lower rates, and assuming they can sleep at night with the debt, I’d think a rational person would want the cash flow today over the savings 25-30 years from now. If you have debt, inflation is your friend.
I have my mortgage through U.S. Bank and they charge something like $5/month to do Bi-weekly payments, plus there is the fee (I think a couple hundred) to set it up. Right now I’m just adding $50/month extra until sometime next year when we start throwing a lot more towards it.
You can always pay bi-monthly on your own – you just have to setup the payments from your checking account instead of having your mortgage company do the ACH withdrawals. Mortgages companies that charge a “fee” for setting up bi-weekly payments are basically scamming people.
I’m in the camp that says always pay it off as fast as you can. Keeping a mortgage around for the tax deduction is a little silly. Say you can deduct $1000 in interest, you don’t get $1000 back, you only get the tax % your at (15% tax rate, means $150 deduction) The only time you shouldn’t pay it off is if you can invest cash for significantly higher returns then your mortgage rate. Killing your mortgage feels great! The younger you can experience the feeling the better!
I can’t wait to pay off our house just for the feeling of security. No matter what, you have your home.
Honestly, with the rock-bottom rates that are lower than inflation I have no incentive right now to pay it off early.
We are definitely in the prepayment camp for our own reasons. 35 months to go and we will be moretgage free at age 35. Yes, we could possibly be making more by investing our extra cash at this moment…..BUT there are so many uncertainties out there right now. I would rather prepay my mortgage at the moment.
Way to go! We just did it in our mid-30s as well and it is VERY rewarding!
We’re currently at a 3.25% 15 year mortgage (14 more years to go) and are in no rush to pay it off, even after we take care of other debt. As long as we feel we’ll be able to get higher rates of returns from relatively safe investments, we’d rather put our extra money elsewhere. It also helps that our mortgage payment (including taxes and insurance) is small because we have a modest house (no $250K house for us!) so it’s not a huge line item that we’re super worried about maintaining.
I am a huge fan of early payments. I double paid my car loan and had it paid off in about two years, saving me 3 years of payments and thousands in interest. I paid off my 10 year student loans in 2 years. Next up, my mortgage, with a $99k balance to go!
I see both sides of the argument. On the one hand you you save the monthly payment by getting rid of the mortgage. On the other hand, having a paid off house ties up a lot of your money. If you are going to pre-pay your mortgage, make sure you have a hefty emergency fund. If all of your cash is tied up in your house it is much less liquid.
I kind of agree with Jon. There are pros and cons. I know for us we are less concerned about paying off our mortgage and more focused on investing. With interest rates as low as they are we get more gains with investing right now. If things change though our strategy will change.
On the liquidity argument: As someone who just paid off their house this year (in 10 years instead of 30!) I can say that liquidity becomes basically a non-issue. 1) We have very low monthly bills, 2) I can keep a non-drawn HELOC on the house to gain access o the equity for an emergency, and 3) I am saving my entire mortgage payment every month in cash at this point. I always had an emergency fund while we were doing our 10 year pay down, and I always contributed first to my 401K (for the tax bennies). I now feel very financially free…. While I don’t “want” to lose my job, if I did, we could survive for years on our savings now, since our monthly bills total around $1,800 / mo. with no mortgage payment.