My wife has often suggested that we pay extra towards our mortgage to payoff our mortgage early. But is that a good idea? When making the decision, there are two sides.
On one side, you can payoff the mortgage early, and be free from the debt that much earlier.
On the other side, you can use that money that you would have used for the early mortgage payoff, and invest it for a greater return in the long run.
Our mortgage interest rate is something like 5.75% fixed for 25 years. Plus the interest on the loan is tax deductable. So if you take that into account, the interest rate is like less than 4.5%. If we invest that extra money into the stock market which has averaged over 10% for the long term, we are coming out ahead! It’s kind of like Uncle Sam is loaning us money that we can invest.
The second option only works if you actually invest the money, and don’t just spend it on junk. Currently, I am maxing out my 401k, and my Roth IRA, and my wife’s Roth IRA. She is also putting money into her 401k plan, and we will soon be bumping that up. So are we blowing the extra money? I don’t think so.
Be aware that if you choose the early mortgage payoff option, that you make sure the bank knows to apply the extra money towards the principal. Otherwise they may apply it all towards the towards the interest. Or worse, they may shove it into some low interest account where it sits doing nothing.