How To Pay Off My Mortgage Quickly

How To Pay Off My Mortgage Quickly – Pick up almost any mainstream book or talk in the personal finance space and you’ll hear “pay off your debt early.”

The math of additional principal payments is amazing. You’ve heard it before: On a 30-year mortgage with a 4% interest rate, one additional P&I payment each year will knock off 4 years and 2 months of your loan. This will save you hundreds of thousands of dollars in interest.

How To Pay Off My Mortgage Quickly

You can easily make more mortgage payments each year by entering into a bi-weekly payment plan with your mortgage servicer (although it’s better to manually transfer the extra principal as explained here) .

If My Rate Is So Low, Should I Pay Off My Mortgage Early?

If you can get a 7% return on your investment over the long term, why would you put more money into your mortgage to protect yourself from a 3.5% rate?

If you look at the chart below, you’ll notice that there was a time in the not too distant past when mortgage rates were in the double digits. This means that every additional principal payment you make on your loan will save you from paying 10+% in interest on your loan.

When mortgage rates were as high as they were before 2000, you were paying so much interest that it didn’t make sense to overpay on your mortgage.

If this concept is new to you, let me put it in a simple example. Let’s say you borrow $100 from someone at 3% weekly interest. You owe them $103, next week.

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With the borrowed money, buy whatever you want, sell the lemonade and earn $100. You can pay off your loan now and pay the $3 interest next week when it’s due, but you’re told that if you invest $100, you’ll earn 7% until next week. That means if you invest your money one week and make another $7, you can pay off your $103 the next week and still have $4 left.

Extrapolate this idea over 30 years, and you’ll make money on your investment faster than you can pay your creditors in interest.

If you’re like most people, what I say “makes sense” in concept, but it still helps you see the math.

So let’s look at an infographic that will help you understand how you can get a higher net worth in the long run if you invest more money instead of paying more on your loan principal.

Managing Rising Home Loan Interest Rates: Should I Pay Off My Mortgage Early?

Let’s say you buy a $200,000 home with a 10% down payment, so your mortgage debt is $180,000. This is a 30 year loan with 4% interest This means that the principal and interest (P&I) payment is $859

Let’s also say you follow my advice to save more than 10% of your income so that in addition to your 401(k) contributions and emergency fund savings, you have an extra $200 a month and you’re trying to figure out what are you going to do. do it.

For many people, it comes down to two options: Paying more toward your mortgage each month or investing for the long term.

40 years later, take a closer look: Which choice leads to a higher value? (If you take the time to digest the infographic, I promise you’ll have an “ah-ha!” moment).

Why Is Most Of My Mortgage Payment Going To Interest?

So my final answer is that you should invest the extra money you have instead of paying more on your mortgage?

You don’t have to! Mathematically speaking, this can be considered the “correct answer”, but there are many variables that can change what works best for you.

First, there is no guarantee that you will achieve your project with your investment. You may expect to earn 7% or more, but the reality is that all investments involve risk and you never know what will happen. Meanwhile, your interest rate in mortgage negotiations. You have a fixed interest rate (assuming it’s a fixed rate loan), and the extra principal you pay is guaranteed to save you money on that rate!

Second, you may have personal or religious values ​​that urge you to get out of debt as quickly as possible. And if so, do it. The worst thing you can do is make financial decisions that go against your beliefs. Sometimes, achieving peace of mind is more important than the absolute efficiency of your assets.

How To Pay Off Your Mortgage Early

Third, there are two variables that change how much you go “up front” to invest more money instead of more principal payments: 1) the length of your loan and 2) the ratio of your additional payment to your P&I amount. It is important to calculate the circumstances for your situation to find out what the benefits are and from there decide which route you prefer.

If nothing else, recognize that financial planning is about navigating a delicate balance between numbers and emotions. Feeling naturally emotional can sometimes hurt you financially (such as buying high and selling low), while what makes more financial sense on paper can stress you out more than this amount ( such as putting more money into investments instead of paying off your mortgage loan). taken by your mortgage principal).

Justin is a fee-only financial planner and student loan specialist. He and his team practically work for their clients in 25+ countries. “Expert vetted” means that our Financial Review Board has thoroughly evaluated the article for accuracy and clarity. The review board consists of a panel of financial experts whose goal is to ensure that our content is always objective and balanced.

Written by Miranda Markitt Arrow Law Contributing Writer Miranda Markitt is a contributing writer. Miranda writes about topics related to investing, saving and home buying. Miranda Markitt

Consider Using A Heloc To Pay Off Your Mortgage Early

Edited by Lori Dupnock Edited by Lori Dupnock Arrow Right Editor, Home Lending Lori Dupnock is the Mortgage Editor for the Home Lending Team. LinkedIn Connect with Lori Dupnock on LinkedIn

Reviewed by Chloe Moore, CFP® Reviewed by Chloe Moore, CFP® Arrow Right Founder, Financial Staples Chloe Moore, CFP®, is the founder of Financial Staples, a fee-only virtual financial planning firm based in Atlanta. and serves clients across the country. Connect with Chloe Moore, CFP® on Twitter Chloe Moore, CFP® on Twitter LinkedIn About our review board Chloe Moore, CFP® on LinkedIn

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Should I Invest Or Pay Off My Mortgage?

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