First I’d like to touch on why you might want to pay off the mortgage early. Elle from Couple Money recently wrote about accelerating their mortgage payments to save money. It is a great idea, and I thought I’d add a few ideas and tips of my own. Here is her simple plan and the impressive results that will go with it:
If we continue to pay $150/month extra towards principle, our 30 year mortgage will become a 20 year mortgage. That means we’ll save $42,408.57 in interest payments!
If we continue to pay $150/month extra towards principle and put down our $8,000 tax credit, our 30 year mortgage becomes a 18 year mortgage. That means we’ll save $55,113.56 in interest payments!
Some people will argue that you should keep the mortgage for the tax savings and invest, but saving 40 to 50 thousand dollars in interest and 10 to 12 years of bondage sounds like a pretty good argument for paying off the house. Assuming you are in the 25% tax bracket, arguing for tax savings means you think it is a good idea to give the bank a dollar to save 25 cents in taxes. Just pay off the loan, it will work out better for you.
The other argument that people make is that you can make more money investing than you pay in interest. I’d like to remind them of a few things. First, the last 10 years the stock market has been basically even. Sure you could have made money, but it isn’t a guarantee, and when you have to beat that 4-6% interest you are paying to the bank it is even harder. Even with the tax break from the deductible interest, it is still hard to make this work.
Keep in mind that unless it is in some sort of tax advantaged account, you would have to pay taxes on any gains as well. Very few people will recommend borrowing money to invest, but that is effectively what you are doing if you invest instead of paying off the mortgage early.
Cut 7 Years Off Your Mortgage With Bi-Weekly Payments
Many people get paid weekly or bi-weekly. If you are one of these people you probably plan your budget based on either 4 or 2 paychecks a month. However, 2 months out of the year you are going to have an extra paycheck as there are 52 weeks, or 26 2 week periods in a year.
Instead of just pretending you hit the jackpot during those special months, plan to pay your mortgage payments in every four week period. Doing this results in 13 payments instead of 12. You probably won’t even notice the difference, but it will cut seven years off of life of your mortgage, and save you lots of interest.
Some banks will even let you pay half a mortgage payment every two weeks to make this even easier. Make sure that they don’t charge you for it though. Some try and make you pay a fee to do this. If that is the case with your bank, just pay extra with each regular payment.
If you get paid monthly, or bi-monthly, this doesn’t really help. You are just going to have to suck it up and pay a little extra each time. Take your mortgage payment and divide it by 12. With a $1000 mortgage each month, you only have to add about 83 dollars to each payment to have the same effect. It is a little extra coming out of the budget each month, but it will be worth it when you get to say “I’m debt free” that much sooner.
If you are following Dave Ramsey’s Plan and are onto Baby Step 6, you definitely want to pay extra on the house. When my wife and I get to step 6, we are planning on putting as much we can on the house. I have a personal goal to have it paid off by the time I’m 30. Today is my 25th birthday, so I’ve got 5 years to really be gazelle intense. I’ll be sure to keep you updated.
By the way, tomorrow is the last day in my Total Money Makeover Giveaway, if you haven’t entered yet check it out here and sign up to win your copy.