Should I Pay Extra on My Mortgage?
I love my home.
We live in a beautiful, little ranch house on a quarter of an acre with a fenced back yard and a gorgeous mountain view out the front.
While there are many features I enjoy, the reason I love it the most is because it is ours. We’ve decorated, painted, broken things, made messes, laughed and cried inside those four walls.
Though I think of it as our house, it really isn't it. Not fully at least.
Like many Americans, a financial institution owns a significant portion of my house.
*Sidenote - sometimes I think about if I had to split my house proportionally with the lender, which parts I would choose to keep. I’m weird, I know.*
Of course, I don’t want it to stay this way forever. Every month I get a bit closer to that ideal by making my mortgage payment.
Some people want to speed up this timeline, and for good reasons. They do so by paying extra on their mortgage.
While this seems like a good idea, many homeowners find themselves unsure. Is it the right decision? Is it a good investment? Am I missing anything?
I’ve gotten these questions often enough that I believe it’s valuable to take a deep dive into the pros and cons of paying down your mortgage early.
PROS
Saving the Interest
This is the most obvious benefit, and likely the one you think about most. It can be frustrating to see several hundred dollars slip away each month on your mortgage statement. Maybe you wonder what you could do with that money if it wasn’t going to a nameless, faceless mortgage company (who probably isn’t even the bank you took the mortgage from).
It’s for this reason most people are motivated to get their mortgage paid off as fast as possible. This is well founded! Let’s look at an example.
If you take a $300,000 loan at a 7% fixed rate for 30 years, you will pay a whopping $418,526 in interest if held for the full term. That’s more than the loan amount!
There is no need for a lofty math degree to understand for every year you can chop off by paying early, there is a significant savings to you!
Better Cash Flow…. Later.
If not paying the mortgage, what could you use that money for?
Saving for children’s college education, travel, early retirement, and philanthropy are just a few areas I hear people talk about when they discuss what they would do if they had more dollars.
Tightening the belt now and paying off your mortgage early allows you to put money towards other areas you find more fulfilling down the road.
Increased Flexibility…. Later.
Mortgage payments are often one of the largest, if not THE largest, monthly fixed expense for families. Getting rid of this payment sooner gives you the chance to pursue other options which you otherwise could not consider.
I often see this in retirement. People who would otherwise retire sooner delay quitting work because they don’t want to start on their fixed income until this large monthly obligation is gone.
Not having a mortgage when your children are older or when beginning retirement allows you to spend less money which ultimately reduces stress about the future.
Increases Equity Faster.
Houses and real estate are generally good investments that appreciate over time. Building equity in your home not only increases your wealth but can also be accessed for other opportunities through products like home equity lines of credit.
While any borrowing should be approached with caution, many real estate investors successfully leverage lines of credit to acquire new properties and create profitable real estate portfolios.
CONS
While the benefits are tremendous, there is another side to this story. Here’s the potential downsides to be aware of when paying extra on your mortgage .
Worse Cash Flow… Now.
It is easily apparent that putting more money toward your home loan each month means less dollars to go around now. Often, this is during a more difficult season financially.
Early on in their mortgage term many people have children (who cost around $21,000/year per kid according to Good Housekeeping), are paying off other debt like student loans, are starting a business or are at a lower income point then they will be in the future.
In this timeframe, every dollar seems even more precious and there are many worthy, competing interests.
Less Flexibility… Now.
With that in mind, putting extra money toward your home loan limits your options in a critical season. While building equity and making life easier down the road is great, you may have to give up equally important things now.
Paying more on your mortgage may mean investing less in your retirement plan at work, saving less for your kids’ education, and having less available for other business/investing opportunities.
While home equity is important, it is only accessible by either selling your home (which comes with a host of considerations) or borrowing (which costs interest… what most people are trying to avoid by paying it off early).
Lost Opportunity
This all means there can be wonderful opportunities missed that could have helped accomplish your financial goals better if you put too much extra funds into paying down the mortgage.
Perhaps a missed investing opportunity would have yielded a higher return and added to your assets/options better than having a paid-off house.
A great example of this would be someone who has paid off their 30-year mortgage in 15 years. However, they weren’t able to save for college and are now taking out student loans to help their children get a modest, state school education. Maybe their retirement savings are behind as well. Even though they can put more money toward it now, they are too far off pace due to the time value of money they missed on.
Cutting to the Chase
So which approach is best?
It depends!
Context is everything in this decision. For starters, your mortgage interest rate plays a big role. The savings earned by paying off a 7.5% 30-year note is much more significant then the same loan at 2.75%.
Goals and circumstances also differ greatly. A government employee with a great pension and Social Security may have a more secure retirement picture and therefore focus on paying their house down sooner.
On the other hand, a couple who want to pay for their children’s entire private college education may prioritize funding a 529 college savings account while paying the minimum on their mortgage.
All this to say, your decision on how fast or slow to pay off your mortgage is as personal as your home itself.
The most important consideration is understanding your options and the tradeoffs. Well-educated investors can consider the possibilities and make informed decisions based on their values.
If you would like help understanding these options, feel free to chat with me. I’d be honored to have a conversation!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.