The Advantage of Paying off a 30-Year Mortgage Early

Some people argue that it is better to invest extra cash in the stock market than to pay off a 30-year mortgage early. While investing in the stock market can create more long-term liquidity, investing in your home is always a safe and smart financial decision; it means you’ll always have a place to live - a roof over your head.

If you know of awesome investments that are guaranteed to pay off, invest your extra cash in them. In today’s economy, however, few investments are guaranteed, so you may want to consider a less risky investment - your home.

If You Plan to Live in Your Home Long-Term

Once you have a home that you know you’re going to stay in for the rest of your life, it’s best to pay off the mortgage early. Before making larger mortgage payments, though, be certain that you have a 30-year mortgage with no prepayment penalty. That way, you will not be penalized for making larger mortgage payments.

Eliminate Your Largest Monthly Expense

A mortgage payment is the largest monthly expense for most people. If you pay off a 30-year mortgage early and eliminate your largest monthly expense, you’ll have a bigger chunk of change in your retirement. Alleviating the stress and financial burden of your largest monthly expense means you won’t need as much money in your 401k to cover that cost once you’re retired.

How Much Can I Save?

Let’s suppose I have a 30-year mortgage of $200,000 at 6 percent interest. If I proceeded as planned and took the 30-year route, my monthly payment would be $1,200. My interest, however, would total $230,000 in 30 years - that’s more than the value of my home! That transforms a $200,000 home into a $430,000 home!

To reduce accumulated interest, let’s say I decide to send in an extra $100 a month, making my mortgage payment $1,300. Just sending in that extra $100 reduces a 30-year mortgage to 25 years, saving me tens of thousands of dollars over the loan term.

Now let’s suppose I have the financial resources to pay even more. If I pay $1,700 a month, I can get my mortgage down to 15 years. This increase of $500 a month will end up saving me over $125,000 in interest than if I had stuck with the plan and paid off my home in 30 years. That’s a big savings! (Note: Never apply for a 30-year mortgage if you plan to pay it off in 15 years. Interest rates on a 15-year mortgage are lower than that of a 30-year mortgage, so if you plan and expect to pay off your mortgage early, go ahead and save yourself a lot of money by applying for a 15-year mortgage.)

A Little Is Better Than Nothing!

If some months are financially better than others, you can always just send in one or two extra mortgage payments per year. Be sure, however, to indicate that those additional payments apply to the principal balance.