Monday, May 10, 2010

Should You Pay Off Your Mortgage Early?

I only know of one person who has ever saved up all the cash needed to purchase a home. Not even my grandparents could do it. If you want to own a home, a mortgage is just about the only way the average person can do it. When you get a mortgage you are agreeing to pay a (usually) set amount of money (a large amount!) every month for thirty years. It can be overwhelming to commit to something for the next thirty years of your life, but once you start making those payments, it is easy to just accept that that is the way it is and keep making those payments for the next few decades. Except there is the option of paying it off early.



In today's instant gratification society it can be hard to find extra money in your budget each month when there are so many other tempting things calling for your money. Even if you can find some extra to send to the mortgage company, it can seem like only a small drop in the bucket of the total mortgage. One has to wonder if it is worth it to send extra money in. Well, I believe it is. If you can scrape together enough extra each month to equal one extra payment a year you can pay off your mortgage five years early while saving yourself tens of thousands of dollars in interest. Let's look at an example.

According to this mortgage calculator if you take out a 30 year fixed rate loan of $200,000 at 6% interest you will have a payment of $1199.10 every month for thirty years (starting in January of 2010). At the end of the term in December of 2039 you will have paid a total of $431,676.38 with $231,676.38 of that being interest only. You read that right, you will pay more in interest than what the original loan was for. If you were to make one extra payment each year towards the principal only you would pay off your loan in June of 2034 paying just $181,913.68 in interest for a total of $381,913.68. This is a savings of $49,762.70.

If you can get enough money to pay even more each month then you will pay it off even sooner. But why should you pay off your mortgage early? There are many good reasons. Do you like owing people money? I don't, therefore we are trying to get out of debt as quickly as possible. I don't like getting a paycheck each month that is already spoken for by other people. Wouldn't it be nice to have more control over your money? Imagine all the things you could do if YOU were able to keep that $1200 a month for yourself rather than sending it to the mortgage company.

You could easily save for retirement, pay for your children's college, donate to charities, go on an extravagant vacation, purchase a new car with cash and much, much more if you don't have a mortgage payment. If you didn't have a mortgage payment you wouldn't be as tied down to your job. If you want to change careers mid-stream or switch to a part-time work schedule not having a mortgage payment would make those things much more possible.

Right now my husband and I are in our upper thirties. We have 29 years left on our mortgage. That means that we will be past retirement age by the time we pay it off if we don't pay extra. That doesn't sound like fun to me. I would rather sacrifice a little bit now and enjoy myself a lot more later. Not having a mortgage payment is a huge form of financial security - one that I really want to have as soon as possible. It is all about short term sacrifice for long term gain.