Owning a Home is a Great Financial Asset!

You’ve found the perfect home and are ready to become a home owner. An offer is accepted, you sign your name what seems like 500 times and the home is yours! A month later, you begin making monthly payments and will continue to do so for many years of your life.
Home with Blue Bonnets

We all enter into home ownership with different dreams and different budgets, and most of us do so with the assistance of a home mortgage on a 15 to 30-year payback plan.

So, should you make paying your mortgage off early a priority or just make the minimum monthly payment?

Paying off your mortgage early usually makes sense in your financial plan.

There are two sides to every interest rate- the getting side and the paying side. You always want to try and be on the getting side and once your mortgage is paid off, you can use that money to invest. Plus, paying off your mortgage early will save you many thousands of dollars in interest.

The Value of a Dollar:

Anything extra you pay on your mortgage comes 100% off your principal balance. Could you make one additional mortgage payment per year (it can be broken down into monthly increments)? Say you have a $200,000 30-year loan with a 5% interest rate. With the traditional 12 payments a year, you’ll end up paying $186,512 in interest. If you can make 13 payments a year, you’ll pay off your mortgage in 26 years and pay $153, 813 in interest. So, one additional mortgage payment per year equals potentially $32,699 interest savings!

30-Year vs 15-Year Mortgage:

Which do you have? If this is your first home and money was tight, you probably opted for the 30-year mortgage, so your monthly payments would be lower. However, did you know you’ll pay MORE THAN DOUBLE the amount of interest over the life of your loan? Refinancing to a 15-year is also an option but just making additional payments regularly will also reduce your principal and help you pay your mortgage off quicker.

On the flip side though, if you are comfortable investing and you have a low interest rate, don't pay off your mortgage early.

Instead of paying it off early, use any extra money you have each month the invest. Rates have been historically low lately, and the thought is that your money could earn higher returns in the stock market than the interest rate you're paying on your mortgage. The downside is you're slower to build equity in your home.

Not sure what makes sense? Use a mortgage calculator to play around with your specific numbers and see what makes sense for you.