So, you want to pay off your mortgage early? The largest single expense in our life is usually the purchase of a house.
You will likely pay more for gas, food, and children/education over a lifetime than what you pay for your house, but for a single purchase the house is the most expensive and likely the most interest you will pay as well over 30-50 years depending how many times you refinance and spread out the life of the loan.
How Much More Can You Pay Each Month
We were on track to pay off our house early until things crashed starting in 2008. All of a sudden, our focus changed from paying the house off to buying as much in the market as we could since it was an amazing buying opportunity.
Now that we feel the market is towards the top and equities feel a little more expensive, we are back on the path of finishing off paying for our house. We have looked over several different scenarios at how much we would save by increasing the principal payment by $400, $500, $750, or $1000 a month. My wife also came up with a way to pay it off in 4 years which is intriguing as well, but I’m not going to list that below because there are too many “what if’s.”
We do scenarios all the time to see if we can afford things and really sometimes it’s just fun to see the math and see what potential is out there. We’ve done it with retirement and with investments.
Just a little bit more can pay off in the long run but remember that most of the interest for your mortgage is upfront so the more you can do early on the better.
Hypothetical Loan and Scenario
For each scenario, we are going to look at numbers for a $190,000 loan at 3.75% over 30 years. Perhaps you have just bought a $250,000 house and put $60,000 down or you are refinancing at $190,000.
If we make the minimum payments it will take until Spring of 2045 to pay off the loan and instead of paying $190,000, you will actually end up paying around $317,000 total or an extra $127,000 in interest. I’m sure there is nothing else you could do with that interest money, right?
But Isn’t It a Low-Cost Loan
Yes, rates are extremely low historically. You can get loans in the 2% area as well with a 15-year loan or an ARM if you are willing to go that direction.
You can also find numerous articles that say to not pay off your house and to keep a low-rate loan because it is so cheap and it is better to invest because you’ll get a better return than the interest you are paying, but we’re at the point where we can still invest greatly each month plus pay off our house.
We have no other debt so when the choice is presented to pay off the house or invest…we just say yes. Why not do both if you are able to? Whether or not you want to pay off the house or invest is totally up to you and your goals in life….there is great advice on both sides and you get to decide what works best for you.
If you are in debt and still figuring out finances then you can use this same plan to work towards paying down that debt which likely has a higher interest rate.
Scenario Number One: Paying an Extra $400 a Month
So you’ve decided that you can pay an extra $400 a month toward the principle of your mortgage. Maybe you have paid off a car and instead of spending that money away, you have decided to invest that $400 a month or use it to pay off your house. Instead of 30 years, you have now decreased your overall payments to 17 years and 3 months by paying an extra $400 per month. Cutting off 13 years is impressive.
You will still pay $100,276 in interest and save $27,663. Again you would think you would save more in interest by cutting off so many years, but most of that is paid upfront at the start of your monthly payments.
Your first payment is likely 75% interest and 25% principal and then slowly (and I mean slooooooowly) works its way so by the end you are almost only paying principal the last year of the loan. Each payment only moves up your principal payment by $2 a month so in this scenario of a $888 payment you paid off $288 in principle that first month (without the $400) and the next month you will pay off $290, but in those two months you will pay $1198 in interest…not awesome, but it’s the way it works.
In the chart below here is what it looks like year to year. It also shows how many months of the 360 months (30 years x 12 monthly payments) you have paid off at the end of each year.
So, if you pay an extra $400 a month by the end of the first year you haven’t paid off 12 months of principle you have actually paid off 27 months of principle. That’s not too shabby…. others will say to use the extra $4800 for a Roth or other retirement investment… which is great too…or do both and life is extra awesome…if you are able to do so.
You will pay off fewer principal payments over time because the principle each month will get larger as the interest decreases the more payments you make.
So an extra $400 a month will again cut your mortgage down to 17 years 3 months and save you $27,663 in interest. The total cost of your $190,000 mortgage will be $290,276.
Scenario Number Two: Paying an Extra $500 a Month
So you’ve decided that you can pay an extra $500 a month toward the principle of your mortgage. Instead of 30 years, you have now decreased your overall payments to 15 years and 3 months. Cutting off 15 years is impressive.
By paying $100 extra a month compared to $400 you will cut off another 2 years of your mortgage. You will still pay $91,346 in interest overall…but you will save $36,593 in interest compared to a 30-year loan.
Scenario Number Three: Paying an Extra $750 a Month
Now we are getting really aggressive.
So you’ve decided that you can pay an extra $750 a month toward the principle of your mortgage. Maybe all your cars are paid off or you’ve received a large raise or moved into management and have money to spare. Instead of 30 years, you have now decreased your overall payments to 12 years and 4 months.
Cutting off 18 years is amazing.
By paying $250 extra ($750 overall) a month compared to $500 you will cut off another 3 years of your mortgage and 5 years compared to an extra $400 a month.
You will still pay $77,188 in interest…but you will save $50,751 in interest.
Scenario Number Four: Paying an Extra $1000 a Month
Now we’re just getting crazy! You just want to get rid of the mortgage and just be free of this burden. You are getting extra aggressive.
So you’ve decided that you can pay an extra $1000 a month toward the principle of your mortgage. Instead of 30 years, you have now decreased your overall payments to 10 years and 4 months. Cutting off nearly 20 years is hard work and a great accomplishment.
You will still pay $66,456 in interest…but you will save $61,483 in interest which is huge, for many people that is one year’s worth of salary!
Other Things to Consider: Taxes, Lump Sum, Investments, Financial Freedom
Taxes
If you are using the mortgage interest as part of your taxes you will want to consider what happens once that has gone away. The government has been talking about taking away this benefit anyways because not many people are able to itemize enough to use it, but it’s something to think about. Always good to check how this impacts yours tax-wise.
Lump Sum Payoff
Also, do you really want to put this much money away toward your home? Should you be setting aside this money and then just paying it off in a giant lump sum so that you at least have the money disposable to you rather than in your house?
Investment Options
Are you limiting your investments just to pay off your house? While paying off your house is great, compound interest and dividends are awesome, especially the earlier you get started. If you are investing regularly for at least 11 years and getting a 7% return by year 11 you are getting a bigger return on interest than you are paying in which means your money is working harder than you.
I’m not a fan of just putting everything towards one thing like only a house or only investments…I like multiple streams, but that is a decision you need to think about as well.
Financial Freedom from Mortgage
And of course, you need to consider what life would be like without a home loan. Seems pretty awesome! How much stress does that release in your life? I remember the day when my parents paid off their house, it was right when I finished high school.
They worked hard on just a single income and a teacher’s income no less and were able to do it because they started early and stayed committed to the goal. It allowed my dad to put the extra money into retirement and he finished working in his 50s and which is pretty awesome. That is my plan except accelerated even more!
What is your plan to pay off your mortgage? Going early? Staying the course with a cheap long-term loan? Or is renting the only way to go for you?
