In today’s economy, prepaying a mortgage might not seem like a good idea. After all, most people are trying to save money, right? Why would you want to pay even more on your mortgage than you already owe every month?
Well, there are a lot of reasons. Let’s start by why some people think you shouldn’t pay off your mortgage.
The Argument For NOT Paying Off Your Mortgage
Are there people that argue against paying off your mortgage loan? Yep. Plenty.
This great article on USAToday.com makes the case quite well. Personal finance columnist Jim Waggoner says that you should not pay off your mortgage for the following reasons:
- Taxes– Jim says that paying off your mortgage early means that you can’t deduct your interest payments off your federal income taxes. On the surface, this seems like an appealing argument. But once you start digging, it’s not that great a perk. This article by US News and World Report explains why: most Americans pay $10,000 or more in mortgage interest payments each year. This deduction saves $2,500 in taxes. But think about it: you’re still out $6,500. It’s not that big a perk when you think about how much you’d save if your mortgage was paid off.
- Investing– This great article from Get Rich Slowly says that it makes better financial sense to pay your mortgage payments regularly, and invest the extra money instead. Theoretically, you make more in the long-term with this method; after all, average returns on stocks are 9% or so. Well, at least they used to be. In this economy, however, investing in the DOW takes a strong stomach and a high capacity for risk.
- Liquidity– Jim at USA Today also says that keeping your money in liquid form (ie: stocks, bonds, cds, etc.) is a better option. If you pour all your money into your house, then it’s like sinking it into a vat of concrete. It’s stuck there until you sell your home. Keeping it liquid means that you can access your money quickly when you need it. But, there’s a flip side to this, so keep reading…
The Argument For Paying It Off
Did you know that the word “mortgage” is French? Yep. “Mortgage” literally translates into english as “death contract”. Yikes.
There are several advantages to paying off your mortgage early.
- Freedom– Can you imagine the freedom of not having that mortgage payment hanging over your head each month? If you paid it off and eliminated your other debt, you could live debt-free. Bliss. Plus, you’d only have to earn enough to pay for your basic necessities: food, heat, electric…Imagine the possibilities this would open up for you! Perhaps you could quit your job and start a business. Become a painter. Backpack through Europe. The world’s your oyster.
- Less Stress- You can probably guess that not having a mortgage payment would mean significantly less stress in your life. You wouldn’t have to worry as much about losing your job, for instance.
- Liquidity– I know I put this in the drawback section, but I believe that paying off your mortgage early gives you plenty of liquidity if you look at it differently. For instance, if your mortgage payment is $1,500 per month and you pay it off, this means that you now have an extra $1,500 per month in your bank account. You could invest this, or build up a fantastic emergency fund. I’d call that liquid.
- Safety- Once you’ve paid off your mortgage debt, you truly own your home. This means you always have a place to go. And as Suze Orman says, you can’t live in a stock certificate. Yes you might earn more in the long term investing the money, but you might not. Owning your home is a safe investment for the simple reason that you always have shelter. That’s good enough for me.
Take It From Suze Orman
Need some more convincing? The Today Show interviewed Suze Orman on why you should pay off your mortgage. She brings up some great arguments in this MSN Video, so check it out!
Mortgage Calculator- How Much Money Will YOU Save?
I found this handy mortgage calculator at MortgageLoan.com. Basically, it shows how much money you save by paying extra on your mortgage each month. Here’s another cool mortgage calculator from Bankrate.com.
My goal is to get my mortgage paid by next December. If I can do that, I’m going to save over $318,000 in interest payments.
It’s a mind-numbing total. And, my loan is small compared to most people’s! I can’t imagine how much you’d save with a loan over $200,000. Wow.
How To Pay Off Your Mortgage
Paying off your mortgage is a pretty big deal. First I’ll describe the strategy I set up for myself, and then go into some other strategies.
1. My Plan
Here’s my situation: Andrew and I both work, we have no debt aside from our mortgage, and no children. So admittedly, this plan won’t work for everyone. This plan is just what I came up with that fits our particular situation.
Basically, it’s simple: we live on the money I earn, and save every penny of Andrew’s salary. We do not prepay our mortgage; everything goes into a high interest-earning savings account. We also have a cd.
The reason why we don’t prepay is because funneling our money into an interest-bearing savings account keeps it liquid. If we have an emergency, it’s there.
It’s also earning us money; prepaying a mortgage, either yearly or bi-weekly, basically means you’re giving it to the bank so they can earn interest on your money. No thanks.
Now, I make significantly less than Andrew does. Living off my income means we live well below our means. But doing this saves a ton of money every month. We don’t go on shopping sprees, we keep our heat low, and I can’t even remember the last time we took a real vacation.
Is it worth it? Absolutely yes. The sacrifice is small compared to what we’ll get. I loathe owing this money to the bank, and I won’t really feel free until it’s paid off. So yes, it’s worth it to me.
Can this strategy work for you? Of course it can. Everyone’s situation is different, but you can certainly come up with a similar strategy that fits your own situation.
Keep in mind, however, that my plan works for us because we have no debt. If we did have debt like car payments, student loans, or credit card debt then I’d pay that off first before working on my mortgage debt. And, we do still contribute to our Roth IRAs each month; this takes priority.
This plan also works for us because we’re not tempted to spend the money we’re saving. We put it into an ING Direct online savings account, which means that even if we did need it for something it would take 10 days to get out. The harder the money is to access, the less “real” it is, and the less we’re tempted to blow it on something frivolous.
2. Make Extra Payments
Another way to pay off your mortgage is to make one or two extra payments on the principal every year. Bankrate.com estimates that making one extra payment every year will trim 6 years off a 30-year mortgage. That’s a lot.
This great article, again from Bankrate.com, explains how to do it. Here’s a quote from the article:
Contact your loan service agent and find out if you may start sending a half-payment every two weeks without enrolling in their biweekly program. Some banks flat out won’t allow it. In some cases, the loan agreement prohibits partial payments. Some mortgage servicing companies will permit it — but you must write out very specific instructions with each check so that they know where and how to apply the money. If your mortgage institution doesn’t seem willing to oblige, don’t try this option.
Let’s clarify here: if you decide to make extra payments, make sure you write on the separate check “Prepayment On Principal“. This tells the bank exactly where you want that money to go. Skip this step and who knows where they’ll put it; perhaps on next month’s interest payments, which won’t do you any good.
I’m not a personal financial advisor, so please do your own research before deciding whether or not to pay off your mortgage early. I’ve done my best to pull good information from reliable sources, but the person who cares most about your money, and your situation, is you.
Many people think it’s not even possible to pay off their mortgage early. But it truly is. If this is a goal that’s important to you, important in your heart, then I believe that you can find a way to do it.
For me, paying off my mortgage is my #1 goal right now. I’m willing to make sacrifices in order to have the freedom that living completely debt-free offers. I’ve got 12 months to go, and I know I’ll get there.
Are you interested in paying off your mortgage early? Do you have any tips or tricks you can offer readers to help them along? If so, please send them in!
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