There are two schools of thought on the practice of paying down a mortgage early versus taking that extra money and investing it. This article will discuss the benefits of paying down your mortgage early.
The obvious benefit of paying your mortgage early is the reduction in how much interest is paid. At the beginning of a mortgage, such a large amount of every payment goes towards interest and so little goes towards the principal that it’s almost appalling. By paying the extra amount each month, you chip away at the principal of the loan much faster, meaning you pay much less in the long term life of the loan.
You actually need to alert your lender that you want to extra cash applied to the principal of the loan because some lenders (crafty as they are) will credit the account as a future month’s payment. You should send an email telling the lender to apply the extra money to the principal and ask for confirmation.
Not only do you save on interest, but you also will find yourself mortgage-free at an earlier age. Some people find the idea of being completely debt-free incredibly appealing.
How much should you increase your payments? It depends on your personal goals. Here are some sites with mortgage calculators to help you figure out how long it will take you to pay off your mortgage if you pay different amounts:
www.fool.com
www.vertex42.com
www.bankrate.com
www.interest.com
You can also find out exactly how much interest you will save yourself from paying if you run the numbers on this online calculator at www.move.com. For example, if you paid off your $200,000 thirty-year home mortgage in fifteen years (with a fixed interest rate of 5.4%), you’ll only pay $92,243 in interest instead of $204.302.
Those numbers can be shocking – especially to those who didn’t realize they agreed to pay that much interest in the first place!
Some people decide to get a shorter loan (a fifteen-year loan instead of a thirty-year loan, for example), but this locks you into a tighter payment schedule, which means you may end up getting burned if you lose your job or become disabled or decide you want to apply that extra cash elsewhere (say for an adoption or to help an elderly parent in need.)
While many people argue you’d make more if you took that extra money and invested it, you have to ask yourself if you’re disciplined enough to actually do that. Many people find it’s easier to write the check for more each month on their mortgage payment than it is to take the time to invest more.
Paying off your mortgage early will definitely save you money. The question that remains is the following: Would you save even more money if you invested that extra money and took the tax deductions off the interest paid on the mortgage payments? A lot of that answer depends on your ability to discipline yourself to make those investments, and to choose your investments wisely.
