Pay Off Mortgage Early

January 11, 2008 | Mortgage Acceleration |  3 comments

If you are like an increasing number of American homeowners you have a strong desire to be out of mortgage debt as quickly as possible. These past few years have left many people very gun shy of mortgage debt. Normally, our vision of retirement is not complete until that ball and chain is cut loose.

Homeowners armed with great information are taking advantage of mortgage acceleration. This is greatly reducing the amount of interest we pay on our mortgages and shifting this savings to paying down the mortgage. It can cut many years off the life of a mortgage without higher payments.

The average homeowner keeps their mortgage for no more than 7 years. Then for whatever reason, the refinance or sell. This puts them back at month 1 starting the 30 year clock all over again. As a result, they typically are left with payments that are 80% - 85% interest. This is great for the banks but it isn’t help us pay off our mortgages.

A 30 year amortized loan does not reach a point of 50% interest - 50% principle until the 231st month! That’s almost 20 years! The worst part is that your loan balance is 60% of what is was day 1.

Some argue that paying off the mortgage early eliminates interest deductions necessary for income tax relief. I personally do not agree with this. For every dollar you save in taxes you spend an average of $2. It is always better to payoff the mortgage as quickly as possible, even if just to gain liquidity for future investment.

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Reader Comments

diana on January 29, 2008 at 8:23 pm

Sorry I could not find it on your website, but I wanted to know a bit more about subprime mortgage crisis.
Thanks

Craig on May 31, 2008 at 1:01 am

While I agree that not paying off the mortgage early solely to reduce income taxes (through interest deductions) still results in net (after tax) cost to the borrower, it is still worthwhile to consider alternative investments which could produce greater after-tax returns than the after tax “return” through early mortgage retirement.
For example, paying off a 6% mortgage might yield a 4% after-tax return, while a 9%-12% yield from long term (15-30 year) investment in the stock market might produce a post-tax return of 6%-8% (or possibly greater if lower long-term capital gain tax rates are considered).
The net after-tax yield in the latter case should account for the standard deduction for those who would not itemize without the mortgage deduction (however, once the mortgage interest is itemized, other deductible items may be included).
Specifically, the value of the mortgage deduction would be equal to: MI - SD + OD
where:
MI = Mortgage Interest
SD = Standard Deduction
OD = Other Deductions (up to the amount of SD)

Tom Voli on May 31, 2008 at 6:05 am
tom@tomvoli.com

Vert true Craig. I always suggest that in any case you can earn eslewhere more than the mortgage costs it is worthy of consideration. The key is to also manage the risk tolerance. Many homeowners would rather have no debt and have no worry. I totally undersand that if you invest in the stock market conservatively and with long term objectives this minimizes risk but many have a hard time avoiding stress while it goes through the ups and downs. For those with discipline it can be a very lucrative avenue and a diverse portfolio is better than having all your eggs in 1 basket. I do feel however that there is no better time to invest in additional real estate as we are reaching the bottom of another cyclical period and with the same long term objective this can provide even higher returns while still being very conservative. Again, risk tolerance and portfolio diversity should be considered. Thank you for your comments.

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