Pay Off Mortgage Early 🏠
What does it take to pay off your mortgage early? Let's have a look.
Mortgage Payments, Front loaded Interest, and Principal
Take an example. Say you find a house you love. You've been saving and your ready to purchase. The house costs $450,000 and you put down $100,000 leaving a mortgage of $350,000 and say a 30 year term fixed rate of 6.5%. Given these parameters your monthly payment would be $3,100.24 including an escrow payment of $888/mo for property taxes.
Using the Mortgage Calculator that could result in:
• Balance of $350,000.00, paying $3,100.24
per month with 6.5% interest
• You'll pay $796,406.40
• Full term you would've paid $796,405.71 with a minimum
payment of $3,100.24
• You saved 0 years and $-0.69
| Year | Interest Payment | Principal Payment | Mortgage Balance |
|---|---|---|---|
| 2024 | $1,895.83 | $316.41 | $349,683.59 |
| 2025 | $1,874.64 | $337.60 | $345,750.34 |
| 2026 | $1,852.03 | $360.21 | $341,553.67 |
| . | . | . | |
| 2053 | $138.85 | $2,073.39 | $23,559.98 |
| 2054 | $11.91 | $2,200.33 | $0.0 |
As you can see, this results in paying for 30 years and $796,406.40, with the interest front loaded. Notice in the first year you pay ~$1.9k in interest and ~$300 towards the principal.
In contrast with the last year you pay $12 in interest and ~$2.2k to the principal.
Results of Paying Extra per Month
The Mortgage Calculator allows you to adjust all these parameters and see how different scenarios play out. Say you pay an extra $500 per month and leave the other parameters the same.
| Year | Interest Payment | Principal Payment | Mortgage Balance |
|---|---|---|---|
| 2024 | $1,895.83 | $816.41 | $349,183.59 |
| 2025 | $1,841.16 | $871.08 | $339,034.84 |
| 2026 | $1,782.82 | $929.42 | $328,206.40 |
| . | . | . | |
| 2042 | $90.08 | $2,622.16 | $14,007.24 |
| 2043 | $3.69 | $2,708.55 | $0.0 |
This results in paying off the same mortgage 11 years earlier and saving $191,576.19. Pretty dramatic difference. Try it out for $1,000 extra per month. Adjust the interest rate and other parameters to see how it affects the results and how that can affect your estate and retirement planning.
Analysis
Paying extra on your mortgage can save you thousands whilst earning equity in your home. Then you can even redeploy the extra capital towards retirement planning or other investments. It's a great way to build wealth and save on interest.
Conclusion
Use the mortgage calculator and other financial calculators and tools to explore scenarios and make informed decisions. Do your due diligence and consult with a financial advisor to make sure you're making the best decisions for your financial future.
Everyone's circumstances and finances are unique, but one constant is planning and exploring make all the difference. Once you have a plan, stick to it, and make small adjustments as needed.