Today’s post is by Monica who is attempting to pay down her 30 mortgage ASAP. You can follow her personal finance blog at MonicaOnMoney.
Hi everyone! I always assumed that I would have a mortgage for the next 30 years.
But why?
Until recently, my goal was to pay off my house before I retire somewhere around 65 years old. But, I recently researched some online mortgage calculators and started playing with the numbers. Now I’m excited to figure out how soon I can pay off my mortgage.
Paying off your mortgage early is an amazing way to build your wealth and gain financial independence. Figure out how much you’re willing to pay each month or each year to save thousands of dollars in interest! Let’s look at some hypothetical examples based on some online mortgage calculations:
30 YEAR MORTGAGE, NO EXTRA PAYMENTS
Let’s consider if I choose a $200,000 mortgage and 4.5% interest rate on a 30 year mortgage. If I follow these payments and don’t make any extra payments, in 30 years, I will have paid $364,809 total, including over $164,809 in interest payments alone.
Wow! This is almost enough to buy the same house again!
BI-WEEKLY PAYMENTS
If I start the 30 year mortgage with bi-weekly payments, 1 extra payment each year will be sent as a principle payment. This will pay down my mortgage faster. So, the $200,000 mortgage will be paid off in only 25 years. I will pay $238,112 total, including $138,112 interest. These bi-weekly payments would save me $26,697.
Now we’re starting to really see the savings add up! And these bi-weekly payments can be set up automatically by calling your bank. You can set it and forget it.
15 YEAR MORTGAGE, NO EXTRA PAYMENTS
Or, I could choose a $200,000 mortgage with 4.5% interest rate on a 15 year mortgage instead. Refinancing to a 15 year mortgage is another way to save thousands of dollars on a mortgage. If I make those payments for all 15 years and don’t make any extra payments, I will pay $275,397 total, including $75,397 in interest.
That’s a savings of $89,412 compared to the 30 year mortgage! Wow!
IS IT WORTH IT?
So, is it really worth it? I say yes, absolutely! But of course, it depends on your financial goals. After paying off my mortgage, I will have financial independence and I can’t wait! What could you do with the extra money you save on all that interest? Maybe you could even BUY ANOTHER HOUSE with all that extra cash. Or you could just start saving all that extra money towards your retirement. Or you could retire early.
Related: How to Pay Your Mortgage With a Credit Card.
What do you think? How much money could you save?
When is it better to pay your mortgage slowly instead?
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Financial Independence.org says
I’m definitely a believer of repaying mortgage debt ASAP! Here in Australia we can use an offset account as opposed to paying the loan down directly. It has the same effect as paying off the loan (interest is calculated on Loan Amount – Offset Account Value) but keeps the funds fully liquid in case of emergencies. I regularly send 60%+ of my net income over to the offset account and at this rate the mortgage should be cleared in just under 5 1/2 years!
MonicaOnMoney says
Wow! I like that the funds are still fully liquid in case of emergencies. One of my biggest concerns with paying off my mortage early is needing that money later for an emergency or large purchase. Congrats on having a plan to get your mortage paid so quickly!
Thomas | Your Daily Finance says
We looked into getting a 15 years mortgage with a lower rate but at the last minute some deals on investments can up that could return a better percentage vs the amount I was paying on the mortgage. You have to do what works for you. I know many will say do the 15 but can you really afford the extra 300-400 per month and would you be missing out on investing in other things by doing so? Also if you get the 30 year do you have the disciple to stick to making those extra payments and not spending them on other stuff like trips clothes and eating out? We may refinance in the future to 15yr mortgage but for now I like the choice we made.
MonicaOnMoney says
@Thomas- Exactly! Those are great arguments for and against a 15 year mortage. I was worried about but always being able to pay the extra 300-400 per month so I went with a 30 year mortgage. Like you said, you have to do what work for you. What I like about a 30 year mortgage is that we could pay it like a 15 year if we wanted.
Ree Klein says
I recently commented on this very subject over at Single Moms Income. I’m passionately AGAINST the 15 yr mortgage…here’s why:
There are two reasons to take a shorter-term loan: 1) the rates are typically a bit lower and 2) you pay your home off faster. Both make for compelling reasons to choose a 15 or 20-year mortgage.
BUT, you never know what the future holds. Consider this scenario…you took a 15-yr mortgage and everything goes fine until you lose your job (pick a reason), then your spouse loses his/her job or worse yet dies. You get a roommate, but the bills are still too high to make ends meet. Because you have equity in your home, no bank will help…even just to extend your term to make the payment more affordable.
If you’re lucky, you’ll be able to sell, if not, you could lose your home to foreclosure.
It’s a pretty bleak scenario, but I’ve seen exactly this happen. Taking a 30-year term is good insurance. Besides, you can always pay the 15-yr payment and pay if off early but you’ve got a safety net in case bad things happen…and they do.
MonicaOnMoney says
@Ree – You bring up a great point about one disadvantage of the 15 year mortgage which is a reason why many people opt for the 30 year mortgage instead. Actually, it’s part of why I also have a 30 year mortgage but pay it like a 15 year mortgage. Thanks for adding these details!
MBM says
You raise some good points, and I agree that if a 15-year isn’t going to give you too much wiggle room in the event of a loss of income or unexpected expenses, then it’s probably better to go 30. However, if you can easily afford the payment, it’s a great loan. The rates are usually significantly lower than a 20 or 30-year. I wouldn’t advise going shorter than a 15-year, though. A 10-year fixed usually prices out the same way as a 15-year, so you’re really not gaining any extra benefit for the added risk of the higher payment.
canadianbudgetbinder says
For us we wanted to get rid of our mortgage before we were 40 which we have accomplished. We bought our home just over 4 years ago $265,000 at 3.99% for 25 years… we put down the max 20% pre-payment each year, paid weekly along with a nice down payment. We could have used the money to invest in other ventures but decided just to get rid of it and then focus more on investing. If it were me I’d take the shortest route with the biggest savings as long as my budget was relatively balanced because you don’t want to put all your eggs into one basket.
MonicaOnMoney says
Congratulations on paying off your house! I’d love to pay off my mortgage before I’m 40. Paying weekly is another great idea, I think I’ll try that too since I agree with taking the shortest route with the most savings.
Allison says
We are doing this too. Trying really hard to get our paid off ASAP!
MonicaOnMoney says
@Allison- That’s great, Good luck paying off your mortgage!
GamingYourFinances says
Hi Monica! We also decided to pay off our mortgage early. We set a goal of 5yrs and it’s been very motivating! We only have 9 months left now. We see it as a major milestone on the road to financial freedom. Our preferred method was quarterly lump sum payments.
MonicaOnMoney says
Congratulations! I look forward to reading more about how to paid of your mortgage on your blog. I agree that having a written goal is so motivating! That’s why I love to write and talk about paying off my mortage.
DC @ Young Adult Money says
I know for a fact if I paid off more than the minimum payment I would save thousands of dollars, but I also have a rock-bottom interest rate so I have a hard time getting motivated to do this.
MonicaOnMoney says
@DC- That’s another great argument with interest rates so low lately. It’s definitely a personal decision and and we all have to choose what’s right for us.
Holly@ClubThrifty says
I know that the math doesn’t always make sense…but I absolutely refuse to pay on something (anything) for thirty years. Thirty years!
Way too long. I want to get rid of our mortgage as soon as possible. We have a 15 yr. mortgage and we still pay over.
MonicaOnMoney says
@Holly- You’re right! 30 years is such a long time! It’s awesome that you’re still paying more on your 15 year mortgage. Good Luck!
John S @ Frugal Rules says
I am like DC in that I know it lowers the amount of interest, but we have a good rate so I am not incredibly motivated, right now, to pay more. We try what we can, but a fluctuating income does not always allow for the extra to be made.
MonicaOnMoney says
That’s true. Having a fluctuating income makes it harder to plan ahead and pay more on anything.
Kali @CommonSenseMillennial says
I’m with DC and John. I have an extremely low interest rate and my home is valued for a whole lot more than my mortgage. It doesn’t make any sense for me to throw a bunch of money at my mortgage when I could be saving and investing that extra money. My investment accounts – which is where I’m pushing all my extra money that could go toward the house – are more likely provide me with a higher rate of return in 30 years than what it would cost me in interest payments on my 30-year mortgage (thanks to that low rate).
MonicaOnMoney says
@Kali- It’s great that you have a low interest rate and your home’s value is more than your mortgage! You make a great point about how investing might be a better option than paying down the mortgage for some people. Thanks for sharing!
Mr. Utopia @ Personal Finance Utopia says
The 15 year option would probably save you even more since rates on those loans are generally less (it’s less risky to the lender since there’s a shorter horizon to default). While everyone’s financial situation is different, I believe my strategy would be to go with a 30 year term and then make extra payments as I’m able to in order to more quickly pay down the principal. The 30 year term will have lower payments and this allows for some flexibility if an unexpected event happens in life (it’ll be easier to cover the lower payment on a 30 year mortgage than a 15 year one if say you were laid off).
Anthony @ Thrifty Dad says
When I bought my home and refinanced my mortgage, I stretched my amortization, even though we’re paying off our mortgage much faster than our amortization was set at. For me, it’s a bit of added security, in case something happens. You could still pay your mortgage as if you took out a 15-year amortization by making the extra payments, but sign up for say a 20-yr mortgage. That way, you’re paying the same amount of interest as a 15-year mortgage, but you have a buffer, if in case you lose your job, work is slow, etc. Just make sure you don’t stretch yourself too thin.
MonicaOnMoney says
@Anthoy- Paying off your mortgage like its a 15 year mortgage is a great way to pay it down early. That’s the method I’m currently using too. It’s nice to know that I don’t have to pay extra if I can’t one month.
Little House says
I hope to purchase a house in the near future and though I’ll probably get a 30-year mortgage to start with (since houses are so dang expensive where I live!) I intend to pay it off in 20 years instead. I want to be mortgage free before 60!
Heather says
This may be a silly question but I’m curious and have never purchased a house so I’m not sure. Wouldn’t a safe alternate route for this be to get a 30 year mortgage and attempt to make double your payments each month. That way it would allow for the months that you’re tight on money to have that extra wiggle room but you would still be paying it off much faster and with less going towards interest?
Adam @ Debts & Dollars says
We just signed our 30 year fixed mortgage a few months ago but our interest rate is also extremely low. Right now are focus isn’t on getting that paid off right away but our other debts such as the credit cards and student loans. Once we get those taken care of we’ll be shifting full focus to the mortgage.
Darren says
Isn’t the mortgage interest you pay over a year a tax deduction? I would think that it might be better to take that extra money and invest it in something that gets a higher rate of return (above your mortgage rate) instead of paying off your mortgage faster. Especially if you put that money in a 401(k) or IRA that you can get a tax deduction from as well.
Kali @ CommonSenseMillennial says
Yes, mortgage interest is a tax deduction. I agree with you, I think it’s smarter to put the extra money somewhere that will return more than the interest rate on your mortgage – you’d make more than you’d save plus there’s the benefit of the tax deduction you mentioned 🙂
Tara @ Streets Ahead Living says
I think it can be hard to decide to pay off the mortgage early if the interest rate is low. While in your situation, that is huge savings, some people argue that putting that money in your retirement may be better spent. It all depends on personal preference. It will be nice to be debt free sooner, however so that’s a major benefit of paying it down faster!
MonicaOnMoney says
That’s a great point an I agree that it’s an individual decision. For a long time, I invested instead of paying extra on my mortgage and recently decided to get rid of my mortgage ASAP.
snarkfinance says
I always seem on the outs with this one in the personal finance (online) community. It mathematically doesn’t make sense to pay down a mortgage under a certain interest rate, if that interest rate is well below the return one feels could be generated elsewhere. In times of low investment return of market decline, it makes sense to pay down a mortgage. In boom times, it makes very little sense on a mathematical level. Now, if one personally sees the early payment of a mortgage as fitting into a larger life-strategy, then go for it, but doing it just to “get rid of debt” isn’t a good enough reason alone.
FYI, I like the way you broke things out in the article, very clear and concise and a good introduction to the subject.
Done by Forty says
Thanks for this post! We are big proponents of paying off your mortgage early (paid off this past June), but this strategy has its own basket of risks. If you lose your job midstream in your payoff period, getting at your equity is pretty hard (had you invested those funds, it’s more easily accessible). And, like others have noted, on average you’ll probably come out ahead investing (though proving that theory with your own funds takes some guts).
For us, we decided to pay extra on the mortgage but if you’re going down that road, I’d say it’s important to have a healthy emergency fund and to pay it off that debt as quickly as possible. And, of course, try to still invest during this period to diversify where you’re putting your funds, in the event that the market outperforms your mortgage interest rate.
MonicaOnMoney says
Thanks for sharing! That’s true, if you lose your job that you might have been better off investing instead of paying off the mortgage. It’s really a personal decision and job stability as well as an emergency fund really come into play too. Congrats on paying off you mortgage!
Tammy R says
We have been tossing this question around – to pay off quick(er) or not to pay off in 30? Pay off quick(er) won out. It’s simply ridiculous to think we’d be over 60 when we paid it off. We are a little late to the Paying Down Debt game, but we do now make bi-weekly payments and we’re also paying an additional amount to principal every month. This is going to allow us to pay off our mortgage in our early 50s. We didn’t go full-tilt and use up all of our income because we have put off fun and travel for waaaaay too long – and we want to invest. We don’t want to spend every cent to pay off our mortgage because I personally can’t stand sitting in the house and that’s about all we’d be able to do. We spend very carefully, so I’m hoping this balance will pay off. Ok, silly pun. Sorry Monica! Great article!
Nick (@ayoungpro) says
I’m all for paying of the mortgage early. I know that I could probably earn a better return on that money elsewhere, but the peace of mind would be amazing!
MonicaOnMoney says
It would be amazing! One of my biggest motivators is having peace of mind.
Lisa E. @ Lisa Vs. The Loans says
As of right now, I’m paying the minimum on my mortgage. Reason being I have a lot of other debt with high interest rate that I need to tackle first (CC debt, student loans). Since I locked a pretty good interest rate on my mortgage, I won’t worry about paying it off early until it is the only debt I have.
MonicaOnMoney says
Good point, I did the same with my debt. I started by paying off all debt except my house first. Then making sure I had money for any emergencies before adding extra money on the mortgage.
Cat Alford (@BudgetBlonde) says
Sounds awesome, Monica! Go for it!
MonicaOnMoney says
Thanks for the support Cat!
Alexa says
I think it’s definitely a good idea to pay off your mortgage early as long as all of your other debts are paid off first. I hope to get a 15 year loan when I buy my home. That way I know it won’t take any longer than that 15 years.
Anne @ Unique Gifter says
We opted to aggressively pay down our mortgage. The end result was that we only spent about 8% of the loan value in interest, as opposed to the ~100% that the 30 years have. Now we have massive free cash flow and much, much lower liabilities, should anything ever go wrong.
femmefrugality says
We don’t own yet, but when we do it would be ideal to pay it off as quickly as possible. That being said, if paying it off more quickly meant we couldn’t send our kids to dance lessons and soccer, we’d probably just pay the normal amount. I don’t know. We plan on buying well below our means so hopefully we would never find ourselves in that situation even if we did pay it off quickly.
Savvy Scot says
We only bought our house 18 months ago, but are gearing up to remortgage on a very aggressive repayment schedule in the near future 🙂
Michelle says
I am accelerating my mortgage payment…but, my loan is so small that it doesn’t make sense to hold on to it. Good look with your repayment!
kelly @stayingonbudget says
A 30 year mortgage paid over 30 years is crazy! Last year, I took out a mortgage for the first time at 3.625–the plan is to pay off in less than 4 years because the balance not crazy and the interest rate is low–making the goal easier. With all those extra payments–I have lots of plans and will never have to worry about a mortgage again–ever!
James Salmons says
Years ago I was shocked into realizing the amazing value of paying off your mortgage faster. Rates were a little higher then, but this is what happened.
I had a sizable down payment so only owed $55,000 on the house and had payments of $425 a month. I asked the banker to figure how much earlier my loan would be paid off if I paid an extra $25 a month, thinking it might be a few months even. When I got the numbers and saw 8 years I was shocked!
At that time I was just beginning to learn about money and had no idea how little went on principal in the early years of your mortgage. Now I do, but I also realize that the greatest benefit is not the savings. When you owe no one for anything there is an emotional benefit that is worth even more. It takes a lot of unrealized stress out of life when you do not have to worry about how you will keep a roof over your head.
Madame says
You’re absolutely right! Depending on your overall financial goals/picture, generally paying off your mortgage as soon as you can is a definite advantage. I’ve just bought/am building a house and am planning to pay down the mortgage as best I can, with an annual lump sum payment to go towards the principal.
MonicaOnMoney says
@Marissa- Thanks for your support, I really appreciate it!
Paul @ The Frugal Toad says
Have to disagree with this strategy Monica. With a mortgage interest rate of 4.5% and YTD market returns of 16%, 5 Year is 27%, why would you not invest at least a portion in the market? Better yet, you can increase your return by investing pre-tax dollars in a company sponsored 401k. Historic long-term returns are consistently above 8% so you are giving up some potentially big gains. I have a 30 year fixed mortgage at 3.5% and agree that a bi-monthly payment is a great way to reduce total interest liability but would never pay off early!
Miss Entrepreneurette says
We definitely plan on paying our mortgage off early when we’re done paying down other debt and have a good savings account going. We hope to be able to own several homes by the time we retire (or sooner!) as rental properties. Luckily our mortgage on our current (first) house is crazy small (by california standards at least) so I think/hope we can get it paid off in 10-15 years at most.
Michael | The Student Loan Sherpa says
4.5% is a pretty low interest rate. I think it is a question of opportunity cost. If you have a chance to invest in something that will be earning you 10%, then it makes more sense to invest the money rather than paying off your mortgage.
CF says
While I still have my student loan (5.5% interest), I am not interested in paying off my mortgage (2.99%) early. I do make extra payments each year, using some of my unbudgeted money, but I’m not on an accelerated payment schedule. I also don’t plan on living here forever – if it was a permanent home or even a place I planned on staying for 5-10 years, I would be more interested in paying it off quickly.
Ree Klein says
I also feel very strongly that you should never take a loan with a term less than 30 years. There are two reasons to take a shorter-term loan: 1) the rates are typically a bit lower and 2) you pay your home off faster. Both make for compelling reasons to choose a 15 or 20-year mortgage.
BUT, you never know what the future holds. Consider this scenario…you took a 15-yr mortgage and everything goes fine until you lose your job (pick a reason), then your spouse loses his/her job or worse yet dies. You get a roommate, but the bills are still too high to make ends meet. Because you have equity in your home, no bank will help…even just to extend your term.
If you’re lucky, you’ll be able to sell, if not, you could lose your home to foreclosure.
It’s a pretty bleak scenario, but I’ve seen exactly this happen. Taking a 30-year term is good insurance. Besides, you can always pay the 15-yr payment and pay if off early but you’ve got a safety net in case bad things happen…and they do.
Hopeless Adventurer says
I loooove love that you do this! B and I have become quite the OCD budgeters haha and our currently saving money (lots of money and honestly saving) to build a mortgage free small house. That first interest rate comparison you did is crazy! You really could buy another house at that point.
Caleb says
I think the best thing to do for any type of financial goal is work with a professional consultant. This will make things much easier for yourself and map things out for you.
moneystepper says
I’m a big supporter of paying down your own mortgage as quickly as you can. I agree with “Rich Dad, Poor Dad” when it says that your own home is a liability (in that it creates future costs, but doesn’t generate income).
Although I see the argument in the low interest world we are currently in to invest in other products (yields on BTL of 6%, average market return of 10%, etc etc). However, paying off your own mortgage is essentially the same as obtaining the risk-free rate.
For example, the mortgage rate for a 10 year fixed mortgage in the UK is 4.09%. A UK 10-year gilt is currently 2.93%.
For me, its better to pay off your home mortgage first, and obtain a higher risk-free rate.
Then, think about obtaining higher interest rates through investing in equities, other property, etc, afterwards.
brian says
Awesome tips I wrote something similar on how to lessen the time on your mortgage, hope ya check it out 🙂
stephen stamper says
besides just adding some extra onto each payment.. If you really want to compound the effect of getting the mortgage paid off early, hit it with some big lump payments toward principle (if possible) as early on as possible. Mortgages are designed with our first payment mostly interest/little principle, and then last payment mostly principle/little interest, so the effects of hitting the mortgage AS EARLY AS POSSIBLE with some big extra principle payment are huge.