You’ve probably heard that paying off your mortgage early is a good idea because it reduces your total interest outlay. But there are other virtues of paying more than your monthly mortgage bill. AdviceIQ Network member Larry R. Frank Sr., a financial advisor in Roseville, Calif., is wise in the ways of saving money. His thinking:
Conventional wisdom says that making extra payments toward your mortgage saves interest. True, but that’s not all. Increasing your mortgage payment also means larger equity value and more money in your pocket when you’re older. In other words, it boosts your wealth.
First off, paying extra on your mortgage saves you money over the life of the loan. Let’s look at an example using this online calculator to see how it works. For example, say you take out a 30-year $200,000 mortgage with an annual interest rate of 4%. Under those conditions, you pay $955 a month for the next 360 months, which adds up to $343,739 in total. Now, if you pay an extra $100 a month, the calculator says you pay a total of $316,884, saving $26,855 in interest.
This is where most articles on the topic simply stop. They fail to explore the extra equity value in your home, during the repayment period, which is similarly striking.
As the mortgage meltdown in the early 2000s showed, your dwelling's equity matters. In the early years of ownership, home equity is a cushion should home values decline. If you decide to sell, the extra equity value in your home means extra funds that may generate the income you need. It also means more reverse mortgage payments if you decide to tap your home’s value for income later on when you are retired. If the home value grows on top of the mortgage payment acceleration, even more gains accrue to you.
Another advantage is the money available after the mortgage is paid off. Shortening the length of the mortgage and thus having that extra money – from not having to pay a mortgage – available to your budget sooner is a major benefit that most people often overlook. From the example above, if you add $100 to your monthly payment, you shorten the mortgage term by almost five years (from 360 months to 301.)
Some argue paying off your mortgage early is unnecessary because you could take that money and grow it by investing it somewhere else. Indeed, the $30,100 extra payment is not available to you during the mortgage period. But it is likely that you need that $100 per month now less than you need that $955 later in life. A retiree, for instance, may need money more because of lower income and poorer health. Besides, there is risk in investing the money elsewhere. You may not be able to get a return that breaks even in the end. Extra payments don’t have that risk.
Paying off a mortgage faster is about increasing equity value and having more money later on in retirement. More equity today is more income later, when you really need it.
