Early Mortgage Payoff - a whopper in terms of savings
An early mortgage payoff is something that many of us dream of, but few of us really do. Few of us ever pay off the mortgage, and even fewer pay it off early. The whole idea is to pay it off early, not simply get it paid off.
When you pay off the mortgage early, you can save unbelievable amounts of money. Let's look at a simple comparison between a 30 year loan and a 15 year loan to get a feel for the money savings we can realize with an early mortgage payoff.
Say you took out a $300,000 loan for 30 years at 6% interest. That's approximately $1,800 a month for a mortgage payment and nearly $350,000 in interest paid to the lender over the life of the loan.
If you took out the same loan amount with the same interest for only half as long (15 years), you'd pay about $2,500 a month, and you'd pay about $155,000 in interest to the lender over the life of the loan.
So, the price of paying off the loan in half the time is an additional $700 a month for 15 years, and you save about $192,000 in interest payments.
Here's another way to look at this; you're paying about 40% more each month, and you wind up with almost a 55% savings in interest payments.
What drives these numbers is the front-loading of the interest payments. Your payments during the first year of the 30 year loan are about 80% interest and 20% towards paying back what you borrowed. Your payments during the last year are about 3% interest and 97% towards paying back what you borrowed.
For the 15 year loan, your payments are about 58% interest during the first year because you're borrowing the same amount of money at the same interest rate, but you're not borrowing it for nearly as long. In the last year of the loan, you're paying about 3% interest, the same as you would for the 30 year loan.
It may seem impossible to pay off your home in half the time, but if you are a two income family, it isn't far fetched at all. If you think it's completely out of the question, then you're likely not practicing frugal living, and you're not living well within your means.
An early mortgage payoff, say 15 years instead of 30 years, will save you about $192,000 in interest, and you're debt free at that point. No housing expenses except insurance, taxes and upkeep.
What you're trading is more money upfront each month, for a huge longer term savings that you realize in half the time. On the flip side, you would be spending less each month for twice as long, and you pay the lender much more in interest than what you borrowed - all for the privilege of extending your payment period out another 15 years.
Like other money saving ideas, this one should get us thinking about our approach to spending and investment. Instead of determining what kind of house we can afford based on monthly payments on a 30 year loan, many of us would be better off figuring out what we can afford based on monthly payments on a 15 year loan.
If we do this, our $1,800 a month payment only allows us to borrow $220,000. Perhaps that means we'll have to settle for less house or make a larger down payment on a larger home. As they say, everything has its price.
To me, this is one of the "no brainer" money saving ideas. Get focused on an early mortgage payoff, and keep all that interest savings in your pocket instead of giving it to the lenders.
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