Is it a Good Idea to Pay down your Mortgage Faster?
The idea of paying down your mortgage faster is not a novel idea; however, given
the current economic climate, doing so could present homeowners with some decided advantages. In
determining whether it is a good idea for your situation, keep in mind the fact that an accelerated
mortgage pay-down will only work provided that you have a positive cash flow and/or if you have the
available cash to do so. Also, this is typically only a good idea if you are interested in investing
extra funds in a risk-free, conservative method. Clearly, if you think you might be able to earn more
on your funds in another investment avenue, an accelerated mortgage pay down option might not be the
best idea for you.
Let's take a look at an example. Let's suppose you are in your mid-forties and you
are in fairly good financial condition. The remaining balance on your 30 year mortgage is $200,000.
You have a fixed rate 6% mortgage. Your monthly principal and interest payment is $1,230. Provided
that you continue to make the scheduled monthly mortgage payments, you would be scheduled to pay off
your mortgage in another 28 years; just shy of your 75th birthday.
Rather than continuing with the scheduled payments as they are, let's suppose you start
paying more per month. By doing so, you can easily shave several years off your mortgage and even earn a
guaranteed return on your money because you will avoid paying interest on your mortgage for those years
you shave off when you make accelerated payments. Once your mortgage is paid off, you can even continue
to put aside the same amount of money per month into a retirement savings account. Over the course of just
a few years, you might just be surprised at how much money you can accumulate.
If you were even more ambitious and financially able to do so, you could pay even more money
per month towards your mortgage and pay it off in half the time. Imagine being able to pay your mortgage off
in about 15 years instead of the scheduled 30. That would certainly save you quite a bit of money in interest.
Home refinancing can also assist you in this type of accelerated mortgage pay down. Provided that
you have good credit scores
(find out the important of credit scores and how to obtain a
free credit reports here), you very well might be able to refinance your existing mortgage at a much better interest
rate that what you are currently paying. With a lower interest rate you will be able to pay even more toward
the principal of your mortgage loan each month.
It should be kept in mind that there are some possible disadvantages to paying down your mortgage
early and one of those drawbacks is that you will lose out on income tax deductions because your interest payments
will decrease much faster than if you continued making scheduled monthly payments. While this is true,
remember that paying down your mortgage loan early is really the same thing as when you earn a tax return rate
that is the equivalent of your mortgage interest rate. In today's economy there are few, if any, places where you
are able to earn a risk-free, guaranteed 5% or 6% on your money.
Of course, the possible impact of future deflation or inflation must also be taken into consideration.
Although an accelerated mortgage pay down strategy will provide you with guaranteed results, it will not provide you
with full protection for high inflation. In fact, if we should encounter a period of extreme inflation, it might not
make financial sense to continuing paying down your mortgage early. In this type of situation, it could be better to
cease making accelerated payments and instead to allow your mortgage to run its course as you continue to pay the
During a period of deflation; however, an accelerated mortgage pay down strategy could be an excellent
idea. This is because in this situation you would be paying down the mortgage much sooner while dollars are actually
less expensive instead of when dollars are more costly.
Ultimately, paying down your mortgage faster can be a great idea, provided that it makes sense for you
in your situation and in the current economic situation. Always make sure you run the numbers to make sure you will
really benefit from paying down your mortgage early and continue to check the math to be certain it still makes
financial sense for you to do so.