Should You Pay Off Your Mortgage Early?

The following is a post by MPFJ staff writer, Derek Sall. Derek is the owner of the blog, LifeAndMyFinances.com, where he teaches people how to get out of debt, save money, and become wealthy.

Have you ever thought about paying off that mortgage faster than the typical 30 year term?

Is it a smart thing to do? What are the pros and cons of doing so? These are all great questions and should be considered carefully. Let’s dive into each of the positives and negatives of doing so, and then you can make a confident decision of what you want to do.

 

The Interest Expense 

When buying a house, most people put a little bit of money down, but then take out a 30-year loan for the majority of the remaining payment. If your loan percent is 4.5% or so on a $250,000 house, then you can plan on paying an additional $180,000 in interest. That’s right, you will pay a total of $430,000 on your $250,000 home.

This sounds like a great reason to pay the house off early, but many home-owners think that they can earn more than 4.5% by investing their money instead of paying off their loan quickly. So, they decide to keep the loan for its 30 year life, but invest a few hundred bucks in the market each month to build their retirement fund.

While this does make sense, many people don’t actually invest the money that they said they would. Instead, it goes toward a new boat or new car, which depreciates in value and often costs them much more in the long run than if they would have put the money toward their home mortgage. By putting extra money toward the home loan, you are guaranteeing yourself a 4.5% return, which isn’t amazing, but it’s something.

 

Mortgage Tax Deduction

Many people are advised to keep their mortgage because of its tax incentives. Because you are paying interest on your loan, the government will reduce the taxes that you owe each year.

It sounds all well and good, but this is how it really works. You pay in 4.5% on your home loan each year and because of this, the government will not tax you on this payment, which essentially pays you back 1% or so. In other words, you pay in $5,000 in interest each year to avoid $1,250 in taxes paid in. By doing the math, you are essentially still losing $3,750 on this deal. Do not buy a house and pay the interest just to avoid tax payments. It makes absolutely no sense.

 

Cash Flow

One of the best ways to get wealthy today is to increase your cash flow.

With more cash each month, you have more opportunity for investing and can then increase your overall wealth much faster than your neighbor down the street (who is making payments on everything you see in his yard). To do this effectively though, you basically need to reduce your cash flow to nothing for a few years while paying off your mortgage debts. Many choose to keep their mortgage and stock up their reduced cash flow (after they pay their mortgage) each month. In the end, the difference may be negligible, but I believe that there is much more power in that large cash flow only a few years later when your mortgage payments are gone. Just think of how much cash you would have each month if you no longer had to pay your mortgage!

 

My Biased Opinion

I’m sure you already know my opinion of whether you should pay off your mortgage or not. Over the last couple of years, I have reduced my consumer debts from $45,000 down to zero, have saved up $15,000 for emergencies, invest over 15% of my income, and am now working to eliminate all of my mortgage debt ($54,000) by the end of this year.

If I can accomplish this, I will owe absolutely nothing to anyone which means I can freely give as much as I want and invest as much as I want – all before the age of 30. With absolutely no payments, do you think I could become wealthy in the next 40 years of my life? Absolutely! And, if you begin working toward debt freedom, I believe that you can soon be wealthy as well.

How about you all? Do you think it’s best to pay off your mortgage as soon as possible, or only pay the minimum required and save the money for later needs?

Share your experiences by commenting below! 

***Photo courtesy of http://www.flickr.com/photos/68751915@N05/6808984167/sizes/l/

Comments

  1. We are currently not working towards paying off our current home early, but that is because we want to buy our second home within the next few years. We plan on putting as much money as we can towards that house and we hope to be mortgage free by 30.
    Michelle recently posted…Would You Move To A Completely New Place?My Profile

  2. Your first point is spot on.
    I paid off my mortgage in 2 years by making it a conscious, active goal. Saving for retirement through payroll deduction is more passive.
    I would not have had the discipline to invest $86,000 (mortgage amount) in two years.
    Now, a few years later I am in a position to invest more than I used to. I was contributing 15% of my income even during the payoff years.
    Bottom line: Deciding to pay off a mortgage early is about more than just math. It’s about freedom!
    Mortgage Free Mike recently posted…3 Ways I Paid Off My Mortgage FasterMy Profile

  3. We’re currently putting extra money towards the mortgage each month if we can. Making sure we’re putting enough in savings and retirement first of course! It’s nice to pay it off early but unfortunately I live in LA where homes are pretty expensive. It might end up being a few years earlier…but we’re still going to get gouged on interest.
    Christine @ ThePursuitofGreen recently posted…Keeping my Pearly Whites CleanMy Profile

    • That must be painful to know that you are going to be gouged with those interest payments, but at least you are avoiding some of them by paying extra each month! Sure, you might not be able to pay off your home in 10 years or less, but with those little extra payments here and there you could easily be saving thousands of dollars each year!
      Derek@LifeAndMyFinances recently posted…Paying Off The Mortgage Update: March 2014My Profile

  4. I am wondering about the credit rating aspect of it. I can pay off my mortgage about 2.5 years early, but worried if it will adverse to my credit worthiness. I have excellent credit and do not want to jeopardize it.

    • Hi Michele. Keep in mind that I am no credit expert, but as far as I understand, paying off your mortgage early will have absolutely no adverse effect on your credit score (that is, as long as your mortgage does not penalize you for paying extra on your mortgage). Plus, once you pay off that mortgage, why do you need excellent credit anyway? I wouldn’t think you would be looking at financing anything else. I sure wouldn’t!
      Derek recently posted…What is Delayed Gratification and How Important Is It?My Profile

      • Hi Derek,

        Thanks for the reply. I don’t think my mortgage company would penalize me, but I’ll certainly ask. They actively want people to pay extra since it is a line item on my invoice for the last few years.

        Since, hopefully, I’ll live for another 40-50 years, I may need credit again. Besides, I’m doing alot of work on the house, so I may or may not decide to go for a credit line based if there are any surprises outside of my budget.

        • Are you at all handy Michele? Or do you know some handy people? Accomplishing house projects yourself can save you a ton of money. I redid my entire bathroom (including the cement board and tile) for only $600. To have a contractor do this would have been at least $2,000. My point is, it is best to avoid taking out a line of credit. I know everyone does it, but if you can pay with cash and avoid paying for a project with future money (ie. your line of credit), then you will be so much more satisfied with the finished result. Avoid buying things with credit and keep your cash flow healthy. You’ll be glad you did in the long run. Thanks for reading Michele. Best of luck to you in all of your future financial decisions! 🙂
          Derek recently posted…Massively Improve Your Net Worth With This PlanMy Profile

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