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Pay Off Your Mortgage Early

By MainStreet.com Staff Writers (01/07/08)
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The mortgage interest over the term of your home loan can add up to more than the original cost of the home. The total interest payments on a 30-year, fixed-rate $165,000 mortgage at 7% is $230,0001.

It’s no wonder, then, that many people try to pay down their mortgage early to reduce total interest costs. Although it seems like a no-brainer, you should consider your financial situation from tax deductions to credit card debt before making early payoff a priority.


  • What are your tax savings?
    Mortgage interest can qualify you for a tax deduction that effectively cancels out some of your interest costs. Factor in those tax savings to get an accurate picture of your total interest costs. One caveat: In order to benefit from the deduction, your total itemized deductions must be greater than the standard household deduction. (As a point of reference, the 2006 standard deduction was $5,150 for single taxpayers, $7550 for heads of households, and $10,300 for married people filing jointly.2)
  • Can you get a better return elsewhere?
    Early pay off will require an infusion of cash. Could that money earn more in another investment vehicle- for example in the stock market or a money market account. Consider where your money will have the most earning power.
  • Do you have other financial needs with a higher priority?
    Paying off a credit card with a 22% interest rate is clearly more important than chipping away at a 7% mortgage. Take into account your long-term goals too: Are you on track for funding your retirement? Your children’s education? Consider where your money could be better spent getting your future squared away.
  • What’s your debt temperament?
    Some people will never feel comfortable with a large outstanding balance on their mortgage, regardless of their financial picture. Determine your own debt comfort level before deciding whether to prioritize paying down your mortgage.
  • Will you be penalized?
    Some mortgages have prepayment penalties. Check with your bank to see if yours does and include them in your final assessment.
If you’ve carefully weighed all the options and decided to pay off your mortgage early, here are simple ways to do it:

  • Make bi-weekly payments.
    Make one-half of your regular monthly mortgage payments every two weeks. At the end of the year, you’ll have made 26 payments—the equivalent of 13 monthly payments. Automate these payments by scheduling them regularly either through your bank or your mortgage company (not all lenders allow it, but many do).
  • Round up your monthly payments.
    Add a little extra to your regular monthly payment—the surplus will be applied to the principal balance.
  • Bank extra whenever you can.
    Send any windfalls--tax refunds, raises, bonuses, even gambling winnings—to your mortgage company to further reduce your outstanding principal.
  • Avoid offers for payment programs.
    If you receive offers from third parties to set up bi-weekly payments, steer clear. Most have start-up and monthly fees that only reduce your efforts.
BOTTOM LINE
There are several fairly painless ways to accelerate the repayment of your mortgage and reduce total interest costs. Carefully weigh the benefits of paying off your mortgage early versus using the money toward other goals before you go this route.

1Interest.com Mortgage Calculator

22006 Standard Deduction

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