Paying off your mortgage might sound like dream. You might have heard people talking or reading about people paying off their mortgage early. I’ve heard the reasons why people prefer not to pay off their mortgage and reasons to pay off their mortgage. Personally, I am trying to pay off my mortgage early and I’ll explain the reasons why.
Paying off your mortgage should only be considered after you pay off all your other debt. Your other debt may not have any incentives to keep such as high interest rates or no tax write offs. Pay off your credit cards, loans, and other debt that you have first before considering trying to pay off your mortgage.
Mortgage Is Debt
Debt is one thing I write about to try and eliminate. Although you may think you own your house, until you officially pay off your mortgage, that house doesn’t 100% belong to you. If you fall short on your payment, your bank could take possession of your house and evict you. Although you are paying off your house each month, it still doesn’t belong to you yet…not until the mortgage is paid off.
Mortgage Gives Me A Tax Write Off But…
Mortgage interest and property tax can be tax write offs. I’ve heard the argument why eliminate the tax write off incentive. Yes, when you file your taxes you can use these as write offs and it does help. But, take a look at how much you’re paying in interest and how much tax incentives you receive. In my experience, I’m paying more taxes than tax incentives. I rather not pay all the interest, reduce my tax incentive, and keep the money in my pocket.
If you have a 30 year mortgage, likely you are paying twice the amount of interest than principal early in your mortgage payments. Yes, interest can be deducted but the amount you’re paying to borrow is high.
I Could Invest Instead
This one is tricky because it’s one of those “it depends” scenarios. I am a proponent of investing and I’ve done it myself through real estate, 401K, and 529 plans. The scenario is why pay off my mortgage when I could be investing in more real estate. Again, it’s a “it depends” and it depends on what your goals are. If your goal is to build a huge investment portfolio instead of paying off your mortgage, then that is ok. Personally, having done some investments, I feel that the next step is to pay down the mortgage and be financially free from it.
Reducing The Number Of Years
If I were to put extra money towards my mortgage principal how much benefit will I see? I use this extra payment mortgage calculator all the time. You enter your loan details plus recurring or one-time extra payment amounts. When you hit Calculate, it’ll give you a comparison between not paying extra payments and paying extra payments. Here’s an example I entered into this website.
Home Price: $400000
Loan Amount: $320000
Interest Rate: 3.25%
Loan Term: 30 years
Extra Payment Amount: $300
Frequency of Additional Contribution: 12/year
I entered that an additional $300 per month will be contributed towards the principal of your loan. What effect does extra payments have on your mortgage? See the below comparison.
With no extra payments, you pay off your mortgage in 30 years. With $300 extra per month, you can shed off almost 8 years off your loan. The reason why it reduces the amount of years is because every time you contribute an additional payment towards your principal, the interest calculated is against a smaller balance amount. Play around with this calculator and see how you could reduce the life of your mortgage.
If you have a 20 year loan, 15 year loan, or 10 year mortgage loan, play around with the numbers. If you can’t commit to pay an additional amount each month, that’s ok. You can enter in one-time payments or recurring payments every other month or other period.
I believe that paying off your mortgage after you’ve paid off all other debt is a good idea. Take a look at what your financial goals are. If you are focused on investing, this may not be the right time for you and that’s ok. This is my next goal towards financial independence. If you are interested in following my journey, email subscribe to get alerts of latest posts or follow me on Facebook.