Mortgage Acceleration

When it comes to home mortgages, there are two schools of thought: those that say that having a mortgage is a good investment, and those that say that you would do better by paying your mortgage off early.

Let’s look at both scenarios.

There are two major arguments favoring the idea that a mortgage is a good investment. The first is that it has tax benefits (mortgage interest can be deducted from your taxes); the second is that since the interest on a mortgage is usually low (around 6% in the last few years), you will benefit by making regular payments and investing your discretionary income (investing it where you can make more than 6%, of course).

Let's look at those arguments. As far as the mortgage interest being tax deductible, what it really means is that if you pay, let’s say, $10,000 in interest in a given year, you will save $2,700 in taxes (at a 27% bracket; even less money if you are at a lower bracket!). Think about this for a moment. Does it really look like a good investment to you? Paying the bank $10,000 to get back $2,700? I didn’t think so. It makes more sense to pay off the mortgage, and once it's paid off, you get to KEEP the $10,000 as disposable income.

Now, as far as investing your discretionay income instead of sending additional principal, let me say a few things.
Number one, you don’t have a 6% mortgage (as in our example). The bank likes to say it gave you a 6% mortgage, but in reality it is more like a 120% mortgage. You will never, ever, see a bank referring to a mortgage as having compound interest. And it does, just like a credit card. So if you have a 6% interest, it would only be 6% if you paid off your mortgage in one year. Which nobody, of course, ever does. A $200,000 loan at 6% interest (fixed rate) paid over 30 years will take $432,677 of your money, $232,677 of which is interest. As you can see, the interest is actually over 100%!

With this in mind, let’s face it, most people, including myself, are not keen investors. Many will have a Mutual Fund or retirement account that they rarely review, and investing does take a lot of planning and research. Without proper planning and research you could be “throwing darts” at your financial future. When you consider this, then paying off your mortgage early does make financial sense.

Let me give you an example: on the $200,000 loan we mentioned above, if you send only $30 a month extra (starting the first month) to be applied towards the principal (just $1 a day, less than a cup of coffee!) it will save you $17,697 in interest, and your loan will be paid off two years earlier! And you only sent in $10,800, making over 160% on your money!

Another thing to consider is this: You should pay off your mortgage so you can own your house out-right. Because if you miss a few payments, then you will find out who the REAL owner is! The fact is, you don’t really own your home until it’s 100% paid off. Most people are not aware that you don't reach 50% equity until year 21 of a 30 year mortgage! Look at the following chart to see how your equity builds up. You have more than $100,000 in equity at month 252 of 360 (considering no property values increase; only mortgage payoff)

And finally, think about this for a few minutes: How would you feel if you were totally debt-free? Think about it, close your eyes and visualize yourself being totally debt-free. How does that feel? Doesn’t it feel absolutely marvelous? It’s a great feeling to have.

So, if you are ready, let’s explore how you can pay off your home years sooner… and save possibly hundreds of thousands of dollars in interest, money you could use for whatever you want!

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