Pay Off Mortgage Early

January 11, 2008 | Mortgage Acceleration | 24 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.

Popularity: 100% [?]

Subscribe to the RSS feed

Get E-mail Updates

Tom Voli

Search

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

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.

Russ Carlisle on November 3, 2008 at 6:51 pm

I would like to know what you advise as the best way to pay off the mortgage early would be.
Thanks,
Russ Carlisle

Tom Voli on November 6, 2008 at 6:35 am

Russ,

This really depends on a few variables such as tax liability, available cash reserves, and disposable monthly income.

As a general rule, reducing interest paid in combination with paying extra towards principal will provide the best results. I will have software completed in about 30 days that will provide a good road map for getting this done. Send me an email to tom@tomvoli.com and I will be happy to let you know when it is done and review its uses with you.

Angie on January 2, 2009 at 2:59 pm

I heard that in general if you make 1 extra house payment a year that you will cut your 30 year loan into a 15 year loan. Any truth to that?

Tom Voli on January 2, 2009 at 3:07 pm

Angie,

No. This is incorrect. 1 extra payment per year will cut about 5 years off the loan life. Many people never get started because they are not sure what affect the extra payments have. It really takes a financial road map. I suggest checking out http://www.newfoundequity.com to get more info.

Liinda Caufield on January 8, 2009 at 10:07 am

Is it typical on a refinance agreement to have a prepayment clause that says I will not be intitled to a refund of part of the finance charge?
Thanks -
Linda

Tom Voli on January 8, 2009 at 10:39 am

Linda,

Yes. This is standard verbage.

Rich on January 15, 2009 at 6:20 pm

Paying off a mortgage early seems like the smart thing to do now given the economic enviroment. I’ve been reading a lot of “old” articles on the net that were written when the stock market was going strong.
I have a 30 yr loan at 6.5% that I’m 10 years in on. My savings acct yield is a paltry 1.45%. Seems like a no brainer to pay off the mortgage (as opposed to refinance and pay points, fees, et…)
Thanks,
Rich

Tom Voli on January 15, 2009 at 6:24 pm

Well put Rich.

Jim on January 30, 2009 at 8:35 am

Since it’s tax time, I thought I’d try to cunch some of these numbers by doing some ‘what-if’ scenarios using turbotax. My typical deductions from taxable income are: me + my spouse + my 3 young kids + mortgage interest paid + property taxes paid + state/local taxes paid.
I’m only 5yrs into my mortgage. I’m fortunate that I can add another $500/month to my payment. That will save me $79k in interest apparently .. (using several of the online calculators), and I’ll pay off the house in about 13 years. During the next 13 years I’ll see a reduction in the mortgage interest I can deduct from my taxes, but this year alone, that portion is only saving me about $3k in taxes.
At the same time, I’ll also be contributing to a 529plan for the kids’ college fund(s).
And, last but not least, for the forseable future, I’ll continue working my butt off to ensure my Job security :knock: on wood. good luck to you all.
- Jim

Tom Voli on January 30, 2009 at 9:02 am

Great job Jim!

I applaud your sense of self reliance. Many people just go month to month without any real analysis into their repayment structures.

One thing I still suggest is to change the first mortgage from the self accelerated 30 yr fixed to a 1st position line of credit. This automatically increases your plan by taking advantage of the interest that could be earned on your current checking and savings cash flow. The net result is more interest savings than you are seeing with your current plan of attack, and much less managemnet needed. The equity line combines your 1st mortgage/ checking / savings account into 1 account. No need for extra payments or juggling funds to make things happen. contact me for more info and we can run a scenario together online. (949) 290 1795.

Ken on February 24, 2009 at 9:53 am

Tom, I have finally reached that pivtol point where I can make that last payment on my 20 year mortage (in year 17 now). Anything I should know? worry about? or do before I call the bank and do the deed? My credit score is 843, one thing I wonder is will it drop because of not having a mortage? I have been thinking of a new car, any reason buy before or after I pay off the mortage?
Thanks - Ken

Tom Voli on February 24, 2009 at 2:27 pm

Ken,

Congrats on reaching that goal!

I am not aware of any issues arising from the final payment or transfer of the deed. As for your credit score, it will not have any immediate impact on your score either way. However, over time there will be an adjustment due to average AGE of the credit accounts. This was an account you have had for 17 years and that weighs into the scores. However, this could be insignificant as long as sufficient credit activity remains. Just don’t go completely dormant with paid off credit cards that are never used and no other loans. The scoring system requires activity for optimal scores.

Mark on March 11, 2009 at 11:05 am

This crisis has spurred a lot of debate within my family. Do you think that this was all created during the Clinton years? Or, is this something that began after 9/11?

Tom Voli on March 11, 2009 at 12:21 pm

Mark,

This solution has actually been in place in the UK and Australia for many years. The US banks have kept it from us because it conflicts with their business model and threatens their cheapest source of funds….our checking and savings accounts. The principal is sound and can be extremely beneficial to anyone who earns more than they spend. Think of it like this…If you have a 100K mortgage at 5%, and a 50K savings account earning 3% (which would be a miracle at this stage) you are effectively earning 2% less than if that savings were moved into reducing the balance of the mortgage. The only reason people don’t do this now is the 30 year amortized mortgage is a closed end product. As a result, you can not get any of that back if it were needed later. However, if the mortgage were an equity line it would have the open ended features necessary to facilitate acceleration yet still remain accessible.

Jason on March 18, 2009 at 1:32 pm

Hello, is there anyway to get an open-end mortgage without financing and will this work on a 2nd mortgage of a primary residence?

Thanks,
Jason

Tom Voli on March 18, 2009 at 3:47 pm

Jason,

Any loan you have that is currently amortized can not be converted to an open ended product. It requires either opening an equity line in 2nd position or refinancing the first into a first position equity line. The benefits of doing so far outweigh the costs.

Tom Voli | Housing market - what’s it going to take for a turnaround? on March 20, 2009 at 9:54 am

[...] For those that are not in trouble I suggest paying off as much debt as possible. There was never a time for wasteful spending but now more than ever is a time to focus our efforts on minimizing our own risk by accelerating our debt repayment. Your mortgage is a great place to start. For more information check out a prior article on mortgage acceleration. [...]

Tom Voli | Do you need mortgage interest for tax deductions? on March 25, 2009 at 7:40 am

[...] at any level of income. There is no time that paying mortgage interest outweighs the benefits of paying off the mortgage early. You would be better served to have that money to invest [...]

Rima on April 12, 2009 at 6:31 pm

I came across this page during a google search. I am at least 25 years from retirement and only 1 year into my 30 year mortgage (now 29 because I have been making excess payments). I have some amount in my savings account and I was considering the best place to invest. The three options that I could think of were i) CD, ii) invest in retirement / mutual funds, iii) pay off a small piece of the principal. The CD and mutual funds are liquid assets that can be accessed in case of emergencies. But even the best CD rates are about 2 to 2.5% less than the interest I am paying on the mortgage. All things considered, I plan to divert 50% of my current and future savings towards principal and 50% towards long term mutual funds. I hope this balances all risks and works out well over time.

Tom Voli on April 12, 2009 at 6:48 pm

Rima,

I am in total agreement with your thinking. However, there is an option that you may not be aware of. There is a form of mortgage acceleration which allows you to pay down principle yet these prepayment5s are liquid and can be withdrawn if needed. This is the best option for the savings and unless the mutuals can provide a guaranteed 5% return…for these funds as well. Checkout http://www.newfoundequity.com .

Llama on May 1, 2009 at 8:55 am

My wife and I (still in our 30’s) began our big push in May 2008 to pay our mortgage off, back then it was at $96,000 at that time and my house is appraised at $220,000.

By the end of this month (May 2009) we will have it down to $41,000 and still dropping fast. I can’t wait to join the ranks of mortgage free people like you guys