Paying Off Your Mortgage Early
Some financial “experts” say that you should have the biggest mortgage you can get, and for the longest time period you can get, and never pay any additional principle. The reason, because of the low interest rate in comparison to the yield that you could get by investing in the stock market. Are they insane? During the past 8 years, the stock market has declined in value and has had a negative return (see Dow Jones Inflation Adjusted). The drawback on paying extra on your mortgage is that you have no access to that equity unless either to take out another loan or sell your house. So pay extra on your mortgage is a long term investment.
Since interest on mortgages is calculated based on the current loan balance, if I pay extra towards principle on my mortgage, I get a guaranteed rate of return equal to that of my interest rate, tax free, for the remaining time on my loan.
For example, if I have a $100,000 loan at 6% for 30 years, I would normally pay $115,838 in interest for a total outlay of $215,838. However, if during my first mortgage payment put an extra $1,000 towards principle, it will give a savings of about $5,000 that I would not have to pay in interest.
If I make an extra $1,000 each year of this mortgage, then I will have the 30 year loan paid off in only 22 years, and have saved over $36,000 in interest.
However, if make bi-weekly payments (as described in Top 5 Companies in Utah to Avoid, which counters the Money Merge Account Scam), then I am essentially making an extra mortgage payment each year. I will have the 30 year loan paid off in only 25 years, and have saved over $25,000 in interest.
If I make put an additional $200 toward principle each month, then I will have the 30 year loan paid off in only 16 years, nearly half the time, and have saved over $58,000 in interest.
An extra $500 each month toward principle, and that 30 year loan will be paid off in only 10 years, one third the time! And I would save over $82,000 in interest.
Some people opposed to paying off mortgage early because they want the tax deduction. What ignorant fools! If you are in the 25% tax bracket, it is as though you are spending $100 in interest in order to save $25 on your taxes. I’ll save you the trouble; for every $100 bill you send me, I’ll send you back $25. You do not save any money; the government has tricked you!
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Comments
Oh the joy of double taxation. Just because it’s tax deferred doesn’t mean you won’t have to pay taxes on it. You will have to pay taxes on the principle that you invest, and you will again have to pay taxes on the capital gains.
By paying off your mortgage earlier, you are using money where you have already paid taxes, and there is no capital gains. Not to mention that you get a guaranteed return on your investment!
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One thing you need to consider is that many people are investing tax deferred income in the stock market. Thus I would rather have $300 tax deferred invested each month rather that an after tax amount of $200 toward my mortgage.