Why should I focus on paying off my mortgage? I get several questions about mortgages from many different people. Should I get a 30 year or a 15 year? Should I refinance? Should I pay off my mortgage? Literally, within the last week, I received phone calls on each of these questions. Truth be told, I get these questions all the time. 

Why should I focus on paying off my mortgage?

Don’t get me wrong, I am not tired of providing answers and my opinion to those that ask me. I love answering these questions and looking at all the different scenarios. However, the answer usually involves providing a new perspective that they can use when looking at the options for their mortgage.

A great rule of thumb is to always pay as little interest as possible. With a mortgage, that means getting the lowest rate and paying it off in the shortest amount of time.

To get a better sense of this, I am going to provide two different scenarios.

First, we have Joe and Mary. 

They buy their first home at 30 years old. They get a mortgage for $300,000 at a rate of 4% for 30 years. Joe and Mary are under the impression that a mortgage is something you will always have. Several people tend to refinance their mortgage every 5 years, re-upping to a new 30-year loan, in our scenario let’s say it is always at a 4% interest rate. Joe and Mary feel there is a benefit that since the balance is reduced every five years, their new payment is always lower. It helps their cash flow as other expenses in life seem to increase. They keep their loan, following the payment schedule until one day the loan is finally paid off when they are 70 years old. They end up paying $301,830 in interest over those 40 years.

Secondly, we have Pete and Anna.

They buy their home at the age of 30 as well. They get a mortgage for $300,000 at a rate of 4% for 15 years. Pete and Anna can’t wait to not have a mortgage payment. 15 years later, they are 45 years old and their home is paid off. They ended up paying $99,430 in interest over those 15 years. Then they are done. There are so many other things that they could do with that old monthly payment.

Mortgage monthly payment made:

Joe and Mary – 480 monthly payments

Pete and Anna – 180 monthly payments

Total interest paid to the bank.

Joe and Mary – $301,830

Pete and Anna – $99,430

There are actually a few other factors that would fluctuate too much to make this a rather simple analysis. The truth is, every time Joe and Mary refinance, there are additional costs that most people add to their loan. These costs would range anywhere from $2,000 to $6,000. Additionally, the interest rate I used for Pete and Anna should be lower, as the 15-year rate is almost always lower than the 30-year rate.

The point is Pete and Anna, by getting the 15-year loan, pay less interest. They also have a mortgage payment for only 15 years as opposed to the 40 years that Joe and Mary have. This gives Pete and Anna 25 years where they could start to save up that monthly amount and invest it. 

But we already have a 30-year mortgage

You might ask, “We already have a 30-year mortgage. Do we need to refinance to a 15 year?” You do not have to. There may be a benefit once you analyze the refinance costs and the interest savings. But the truth is, you can very simply figure out how much additional principal you need to add to your existing 30-year mortgage payment to pay it off in 15 years(or sooner!)

But the 15-year mortgage payment is more than the 30-year payment

Yes, that is because you are paying it off more quickly. And actually, the amount of the payment that goes towards interest is less in a 15-year mortgage payment. Remember, we want to pay less interest and pay the mortgage off as soon as we can.

But what if I invest the difference of the payments

I have heard it argued that people should get a 30-year mortgage because it is cheaper per month than a 15-year mortgage. They could then invest the difference at a potential higher yield and come out ahead of the game. Yes, theoretically that could be, depending on the interest rates and investment gains, however, those people aren’t properly taking risk into account. 

For instance, if you have a mortgage of $200,000 and you have $100,000 in your investment account. It is like you borrowed $100,000 on your home and invested the money. If you disagree, look at it from the other side.

If you had a mortgage of $100,000 with tons of equity in your home, would you borrow an additional $100,000 to invest it in the stock market? No way. Any wise financial advisor would tell you that’s crazy. It is because of the risk. The risk of the stock market and the risk of owing the bank. 

Why should I focus on paying off my mortgage?

None of us knows what the future holds. We plan and hope and we need to do our part to put ourselves into a place where we can provide and take care of our families and others around us. One big piece of that is paying off our loans and when we can pay off our mortgage, our options open up and we will be able to see other areas where we can grow, invest and make this world a better place.

As always, if you have questions or what to discuss this topic further. Please feel free to shoot me an email or schedule some time to talk.


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