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Pay Off Mortgage Early? - Things to Consider

By Edited Dec 6, 2013 5 5

If you do a Google search on "pay off mortgage early", you will find that there are varying opinions as to whether or not this idea is a wise choice financially. Much of the discussion centers on the financial benefit of reducing your long-term total interest payment on a mortgage as opposed to investing the extra cash you would put towards your mortgage and earning a better return. The matter is further complicated by tax implications (since mortgage interest is deductible), inflation, and interest rates.

In the end, if you have asked yourself "should I pay off my mortgage?", the answer depends on your own personal situation. Not only do you need to consider the rate of return on paying off your mortgage versus investing that same amount of cash, but you need to evaluate things like your level of comfort with risk, your spending discipline and the psychological affect of debt elimination. You also need to consider your long-term financial goals like funding retirement or your children's college tuition.

Without considering all the factors involved, the simple and obvious benefit of paying off your mortgage early for most people is the reduction in total interest paid over the life of the loan. As an example, a 30 year loan of $200,000 at 5.0% interest will result in $186,000 of total interest payments over the 30 year period. If an extra $100 per month was paid toward the mortgage's principal, a $37,000 savings in interest payments would be realized and the loan would be shortened to 25 years.

If you decide to pay off your mortgage early, there are a few different ways to go about it. The first way is to refinance your 30 year mortgage loan to a 15 year term loan. If interest rates have declined since you initiated your original loan, you may even be able to get a 15 year loan with the same monthly payment amount. The downside to this approach is that a refinance will cost you a few thousand dollars upfront.

The more popular way to pay off a mortgage early is to simply pay extra towards the principal at some interval (every month, once a year). The nice aspect of this method is that you can always suspend the additional payments if you experience a financial crisis. If you decide to go this route, be sure to check with your mortgage company on how best to pay towards the principal without incurring any fees or causing any other issues. Also, make sure any extra payments are clearly marked (directly on the check) as slated for "principal only".

The last method for paying off your mortgage early is to simply set aside a separate savings account to pay off your loan in one lump sum. The advantage to this method is that your money is liquid and could be accessed in case of a dire financial emergency. Likewise, the disadvantage is that your money is liquid and you could tap into it for not-so-good reasons.

Ultimately, your success in trying to pay off your mortgage early will depend on your level of discipline. Have a goal, identify the best method and go for it.

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Comments

Feb 16, 2010 7:19am
CWilliams
Very helpful information. Thumb Up!
Feb 23, 2010 7:20am
Netwelth
Great info. thumbs up
Mar 4, 2010 9:39pm
Allen-Douglas
Great information. I wish we had taken half of the money we placed in the stock market and used it to pay off our mortgage.
Mar 19, 2010 10:12am
Ampersand
Great explanation of the pros and cons for each method of paying down your mortgage!
Apr 23, 2010 10:48pm
ccdursina
Very helpful info on Paying Off your Mortgage Early. rated up!
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