47. Pay Off Your Mortgage

If you’re living in the house of your dreams, you plan to stay there, and your mortgage payments are within your means, you might want to think about taking steps to pay down your mortgage early. Or pay it off entirely.

For years we’ve had it drummed into us that the tax savings of home ownership make carrying a mortgage worthwhile. You’ll need to look at your own situation, and perhaps run it by your accountant, but when you do the numbers, the savings are actually not that significant. Besides, many people are beginning to realize that the freedom of owning their home outright far outweighs whatever tax savings there might be.

There are several ways you can approach mortgage paydowns:

1. Lump sum payments. If, in addition to your regular salary, you receive sizable cash infusions from time to time, consider using them to pay down your mortgage. Before you make a large payment, however, make sure your lender will re-amortize your loan so that your monthly payments will be reduced.

2. Extra principal payments. You can significantly reduce the term of your mortgage and save many thousands of dollars over the life of your loan by making the next month’s principal payment each time you make your regular monthly payment. You will need to get a copy of the amortization schedule from your lender. Or, if you have a variable rate loan, your lender will provide for you, at no charge, the calculation they use to determine the next month’s principal payment.

3. Since the amount of the payment that is applied to principal increases with each payment, there may come a time down the road when the increased principal payment becomes more than you can handle. If that happens, you can simply pay whatever amount is comfortable for you toward the principal each month. You’ll still save a substantial amount in interest payments, and be able to pay off your mortgage sooner than you would have otherwise.

4. Sell your home and move to a smaller, less expensive home. Depending on the equity you have in your home, and on real estate values in the area where you now live and in the area you would be moving to, it is possible you could use the proceeds from the sale of your current home to pay for your new home in full, or at least significantly lower the amount of the new mortgage. Again, you’ll want to check with your accountant.

Any of these mortgage paydown plans assume that you have paid off all other outstanding debts, such as credit cards or installment loans, and that you have sufficient funds set aside for emergencies and investments. Paying your mortgage early will not necessarily immediately simplify your life; but it will get you out from under the eternal psychological pressure of monthly mortgage payments.