Updated: Jul 29, 2021
It used to be that you worked hard over the course of your life, burned through your mortgage, and then burned the papers in the front yard and partied. That doesn't happen too much these days. Very few people stay in their homes long enough to pay off a 30-year mortgage. And if you can pay it off early, it can be the best way to spend your money. It could have a massive positive effect on your long-term financial plans and goals.
There is certain security found in owning your own home. With every year that passes, most count how many years are left until the home is free and clear. You can make extra payments on your mortgage to pay it off quicker and save thousands of dollars in interest. For example, paying 1/12th of your monthly mortgage payment ($84.66 of $1015.74), in addition to your normal payment on a $240,000, 30-year mortgage, at a 3.03% rate, can save you over $16,000 in interest over the life of the loan and cut the number of payments from 360 to 318. That's some money that you could SAVE or spend elsewhere.
But do not think about paying off your mortgage if you have high-interest debt elsewhere. Always pay off your credit cards and student loans first. Some advisors say, any extra money should go to the loans with the highest interest first as a general rule of thumb. But I recommend that you attack the smallest loan while paying minimum monthly amounts on all the larger loans in order to pay off as much as you can of the smaller loan first. After paying off each small loan add all of the money that you are now saving to your monthly payment on the next biggest loan. Do the same after paying off every loan and by the time you are on the last loan you are paying a ton each month, AND your debt is melting away extremely fast. This snowball approach to debt also has a significant, positive emotional impact on your psyche and energizes your confidence and excitement as you work through your remaining debt and financial goals.
Now you can use the momentum you have gained from paying off all of your high-interest debt and tackle paying off your mortgage. Once you have your high-interest debt paid off take all of the money you were paying monthly on the last highest amount loan and add it to your monthly mortgage payments. Make sure it is applied to the mortgage principal and you will be on cloud nine when you see how fast your mortgage balance gets paid off. It is quite possible that you literally can save more than $125,000 on a $240,000 mortgage loan if you follow this approach. Wouldn't it be nice to have $125,000 to go into a college fund or to go into your retirement savings?
However, there are some arguments against paying off all of your mortgage early. Long-term mortgage rates are now between 3% and 4% today for most homeowners. If you deduct the interest paid from your federal taxes each year, the actual rate you are paying is closer to 2.5% if you are in the lower tax brackets. A healthy balance and approach between paying off your high-interest debt and the following three areas of investment are a good idea before using your extra money to pay off your mortgage:
1 - Retirement:
You may need to focus your extra money towards your retirement before you pay off your home. Owning your own home won't mean a thing if you have to sell it to afford medication and food. Saving for retirement should especially be important if your mortgage is scheduled to be paid off before you retire anyway.
2 - Insurances:
If you have others who are dependant on you, good insurance coverage is necessary. Your family's needs should be addressed by your policies. You should have Automobile, Life, Healthcare, Homeowners or Renters, Disability, and potentially other supplemental insurances. Make sure that you have enough coverage to take care of your family. Disability insurance is expensive, but such a good idea. If you are unable to work for a long period of time, it takes away a lot of your worries by providing an income.
3 - Emergency Fund:
Having enough money in a savings account to cover three to six months' worth of expenses, including your mortgage payment will help prepare you for any emergencies that might come your way. For example, if you break your arm and cannot work for two months, your loss of income will be covered by your emergency fund. Better yet get disability insurance to cover this scenario. On the smaller side, a broken dishwasher or car repair won't stress you out as much if there is money designated for repairs.
But in general, there are still some homeowners who will really benefit from paying off their mortgages early. Include it in your debt reductions plan. If you have a small mortgage and or don't deduct your mortgage interest on your yearly taxes, the actual cost of your mortgage is higher. Paying off your mortgage is a good idea. Also, if you are paying private mortgage insurance (PMI) because you owe more than 80% of the home's value, you should pay it down as quickly as possible. Eliminating your PMI payments will reduce your monthly payments and give you a faster return on your investment, assuming you add the PMI payments to your monthly mortgage payments thereafter.
Many lenders will encourage the payment of a mortgage early. On some home mortgages, the mortgage company offers a program that deducts the payments from your checking account twice a month. Each payment was half of the regular payment. Because there are 26, not simply 24, bi-weekly periods a year you are making an extra payment during the year. If you are paid bi-weekly, the situation can really help you in your budgeting as well. Programs such as these are convenient and usually free.
Another way to do the same thing is to take your monthly mortgage payment and divide it by twelve. Add that amount to each payment you make, and you will be making one extra payment each year. This will shave years off of your mortgage if you make sure that the extra payment amounts are applied to the principal of your mortgage. Make sure that your agreement contains no prepayment penalties. Most mortgages will not include prepayment penalties.
You can do this!