Laura over at Consumerism Commentary put together a good post about paying your mortgage off early. Most of her post talks about paying a mortgage off in 15 years but she also mentions that any extra you put towards the principle saves you interest. I completely agree.
We recently refinanced our house and opted for a 30 year fixed loan at 4.875% interest. Just dropping our interest rate by almost a whole point is going to save us a significant amount of interest over the life of the loan but we also signed up for bi-weekly payments so that we are automatically paying an additional payment each year. This will help us shave years off of our loan. The best part about this bi-weekly program is that it’s a free service from my credit union. (Yet another reason to LOVE credit unions). I imagine that they are making a bit of money off of me with this program because they withdraw half my payment every two weeks but only pay the loan down when they have a full amount. Basically, they are holding some of my money interest free before the payment is made. Even considering that, I’m still happy to participate in the program!
On top of the bi-weekly payments, I’m randomly paying additional money on the principle when I’m comfortable with our savings account levels. I would imagine I’m making about 3 extra payments a year when combined with the bi-weekly program. That should help me pay off the balance relatively quickly.
How much quicker?
Just participating in the bi-weekly program is going to shave 67 months off of my loan and save me over $55,000 in interest. That’s a lot of money for something that seems transparent to me.
When I add in what equates to about 2 extra payments worth of contributions each year, my loan shrinks by a total of over 12 years (including bi-weekly benefits) and saves me over $116,000 in interest over the life of the loan. That’s HUGE. Basically I’m changing our loan to an 18 year loan instead of a 30 year loan.
Now that I’ve run the numbers, I may have to increase the contribution a bit more. I’d like to get this below 15 years, and in actuality, I’d like to get it paid off before my daughter goes to college in 12 years. That’s going to take some work!
10 years into our original 30 year mortgage, my wife and I had about 6 years left (really a couple years if we continued our accelerated schedule).
But we refinanced instead. Reset back to a 30-year term, and took out as much cash as we could.
My reasoning is that the government is printing cash like it’s going out of style. Extra cash with stagnant output means inflation. Inflation means the dollar is less attractive, which means foreign countries will likely dump their dollars. That means more inflation.
If one believes that inflation is inevitable, as I do, then taking as big of a loan as possible now makes great sense. I put the money we took out of the mortgage into foreign currencies such as the Loonie, Renminbie, Australian dollar, and even gold.
If inflation hits, then our debt will be inflated away.
I personally do not believe in paying off your mortgage early. Numbers suggest that when you pay the minimum and invest the difference, you will come out with more money in the end.
My wife and I paid off a $40,000 mortgage in five years. We paid multiple payments every month and I was able to take advantage of a very large increase in stock investments to help get us over the top in the five year period. What a wonderful feeling it is to know you have one more bit of freedom.