I recently read an article that was titled, “Should You Pay Off Your Mortgage Early?” Since I often encourage others to get rid of all debts as soon as possible, this article intrigued me. What could possibly be a positive about allowing your home mortgage to linger for the full 30 years? Just as I expected, it was a calculation between the amount that one could gain by investing rather than putting it toward the mortgage. If one could make 6% interest on an investment right now, then the author argues that they should invest rather than pay off the 5% mortgage. While I do understand the logic, I still don’t fully agree with the argument.
Your home loan rate is most likely around 5% at this current moment in time. If you would put your money into a high-yield savings, you might make 1.5%. If you put it into a CD (certificate of deposit) at the bank, you could get a little higher rate, most likely around 2.5%. Clearly, 5% is still greater than 1.5% or 2.5%, so in these scenarios, I would advise that you focus on paying off your mortgage.
One could argue that the stock market has averaged a 12% gain per year, and if we were investing for the long term, we could definitely win by investing our additional funds rather than put more toward the mortgage. But, have you seen the market lately? No one really knows what will happen given our unstable economy.
I would much rather guarantee myself a 5% rate of return by paying down a mortgage than investing in a volatile stock market that could either plummet 20% or gain 20%. Wouldn’t you?
Let’s say we just purchased a house and took out a loan for $100,000 at 5% for 30 years. My payment would be $537 a month. At this point in time, I could pay a lot more than $537 a month, so I decide to put an extra $1,000 toward the principle each month. How much money could I save, and how many years could I take off the mortgage?
According to this handy dandy calculator, I would save $76,368, AND I would pay off my loan in just over 6 years rather than 30! Isn’t that great! Then, after those 6 years, I am completely debt free and can sock away over $1,500 a month into investments.
You may think this is unrealistic….”no one has an extra $1,000 a month to put toward their mortgage!” Incorrect. My friends are on this very plan. They had a mortgage that was a little lower than $100,000, and they decided to go with the 15 year loan to save on the interest. Since they got such a good interest rate, their payment is still incredibly low, allowing them to put an additional $1,000 toward each mortgage payment, PLUS they are contributing to their Roth IRA each month. They will be mortgage free in less than 5 years, and I am incredibly proud of them.
You may have purchased your home a while ago and you are wondering how much you could save if you started making extra payments now. Enter in your numbers in the calculator above and find out what the numbers are!
How much could you save, and how much sooner could you get rid of that mortgage?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.