Mortgage Pay Off, Is It Worth It? Pros and Cons
If you own a home and have a mortgage, you probably have a 30-year mortgage payment. So the question is, should you make an effort to make extra payments to pay the mortgage off early and save on some interest payments? Or should you not pay and just pay a regular monthly payment what it is? So that’s a great question. Some people believe it’s advantageous to pay earlier and some don’t. I’m going to talk about the pros and cons of paying your mortgage off earlier. Hi, I’m Mike Patel with first team real estate right here in Anaheim Hills, California.
Personally, I would like to pay off my mortgage earlier. In fact, I refinanced my house five years ago on a 15-year mortgage payment and then I’m paying extra. So I can pay it off in about ten years or twelve years. But that’s my personal choice. So let’s talk about how you can make early payments or how you can save money on your mortgage payments. I won’t talk too much in detail about it, but the fastest way to save money on your interest rate because remember, you are paying a 30-year mortgage payment and your interest charge is very high if you have the mortgage for 30 years, especially if you refinance it once or twice, because you’re paying a lot and lots of interest. So by paying extra payments every month or paying your mortgage earlier than before and applying those extra payments towards your principal, you can cut off five to six to seven years off your mortgage payments. But is that advantageous? By the way, at the end of this video I have a video link that shows you eight ways how you can pay off your mortgage early, should you decide to do that. So please make sure you watch that video if you’re into paying off early.
So let’s talk about the pros and cons. Should you pay it off or should you not? The first factor for you to pay it off or not to pay off depends on your financial situation. Can you afford to make $100, $200, or $500 extra payments? Or are you retiring soon and you want your house paid off? So you need to make an effort to pay it off. Or you might be a youngster, just bought a house and you are thinking about buying a house later on a second house. In this case, it may not be important for you to pay off the house, but to understand how the mortgage works, let me just give you an example. When you buy a house, the first four, five, or six years of your payments, more than 60% to 70% of your payment goes towards your interest only. So every month you make a payment. Let’s say you make a payment of $1,500 a month, you just bought a house. Then almost $1,200 to $1,300 of that payment. The first month will probably go to just interest and only the $200 or $300 will go towards your principal. So to pay off your principal in 30 years you’re paying lots and lots of mortgage and I’ll give you an example how that works.
So in this example, I’m going to give you, let’s assume you bought a house for $300,000 and you put 20% down so your mortgage amount is $240,000 and if you take a 3% fixed rate, of course, there’s no 3% right now but this is just an example. So if you take a 3% fixed rate for 30 years your mortgage payment will be $1,012 and out of that $1,012 the first payment. Let’s go to this chart so I can show you where your payments go on the first month and on your 30th month. So let’s look at this chart. So in this chart, if you can see on the first month, if you make your payment, $412 goes towards the principal and $600 goes towards your interest. On the 88th month, your loan balance will be $199,518 and your interest will go $512 towards your interest and $500 will go toward your principal. Now keep in mind that this is a fixed rate payment so every month that you’re paying $1,012 the amount changes every month from principal to the interest or principal and interest amounts change.
In the beginning, the interest is high, but towards the end your principal is higher. So if you look over here at the 180th month, almost 15 years, your balance is about $146,521 and the principal is $644 and the interest is $368. And then in the 360th payment your loan balance is zero, your principal is $1,009 and only $3 goes towards your interest. So after 30 years of monthly payments, you’d pay a cumulative total of $124,666 in interest and the amount that you borrowed. So that’s a lot of interest that you pay throughout the 30 years. That’s why sometimes it helps to pay extra payments instead of $125,000 you can drop it down to $100,000 or even $80,000 if you want to save it. So to explain to you what happens on a $1,000 and twelve mortgages, let’s say you pay $100 more every month from the get-go. So if you pay $100 every month and of course, check with your lender if they allow it. And if they do allow it, make sure you tell the min writing or go to the bank and let them know that you are paying $1,112 instead of $1,012 and that you want that $100 every month to go towards your principal. So that’s very important.
Out of the $100 that you pay every month, every month that you pay $100, you’re taking away 30 hours of interest on that $100 because now you have $100 less. So every month that you pay $100 or $200, you’re cutting your interest and at the same time accelerating your principal and equity in your home. That’s how this works. The faster you pay, the more you pay, the less interest you pay. As I showed you in the example, if you just pay your mortgage for 30 years, you are going to pay almost $125,000 in just interest only. So by you paying $100, you’re actually paying more because you’re not paying interest on it every month that you pay. So it accelerates your equity payments further. Give you the numbers. According to Freddie Mac’s Extra Mortgage Payment Calculator, if you would have paid $100 more from the get-go. So if you paid $1,112 a month instead of $1,012 a month, in this example, you would have saved $18,828 through the life of that loan, and at the same time, you would have paid off the mortgage four years sooner. That means you would have paid it off in 26 years of your monthly payment. Imagine if you paid $150 or $200 every month. You could have knocked out almost eight years. So this really works, and it’s very advantageous if you want it to be. So let’s talk about the pros of paying off early. By the way, I’m Mike Patel with First Team. Like I mentioned earlier, I would really appreciate it if you can subscribe to my channel and also share or make comments.
So the pro number one is that over the life of the terms of 30 years, if you pay $100 or $200 or lump sum payments of principal, then you save a lot of interest on the total loan payment. So there’s several ways you can pay off early, and I won’t talk about it in too much detail. There’s eight ways to pay off early, and like I said, at the end of this video, there is a link, please watch that. It shows you eleven ways to pay off your mortgage early. But I’ll give you two examples right now how to pay off early. One is you can make $100 or $200 or whatever your loan amount is, pay extra payments every month, and make sure the lender allows it and let them know that it goes towards the principal. The other way to do it is, let’s say in this case if you have a $1,000 mortgage payment. So instead of paying $1,000 on the first of the month, or $1,000 at the end of the month, you pay $500 at the first and then another $500 on the 15th. So what you’re doing is you’re making semi-monthly payments. And this alone will also knock out almost three, four, or five years out of your payments. And you could save 10 to 15 to $20,000 in just in interest payments.
The other way is if you have a lump sum payment or if you work part-time. Anytime you have extra payments, just throw it into the principal anytime you can, and that’ll help as well. So the biggest advantage of paying early is that your total interest payment will be a lot less and you will cut down from 30 years to 24 years, or 26 years, or even 20 years, and you save a lot on interest. The second advantage to paying off early is let’s say you paid off your mortgage. You’re 25 or 30 years old and you paid off your mortgage in 25 years. So now you’re 50 or 55 years old. So at that time, when the house is paid off and you intend to stay in the house, you have that extra $1,000 a month that you can invest in something and you don’t have the headache of making that mortgage payment. And you can buy another property and start making payments, assuming you have a down payment already reserved for another payment.
So the second advantage is, once the payments are over, you can start buying stocks or mutual funds or invest in a real estate investment trust. You can do a lot of things, so it gives you the cash flow of $1,000 or whatever your payment is once your payment are over. But the biggest advantage is peace of mind. I myself have a few more years to go on the payment and I’m waiting for that peace of mind because I have to work hard to pay off those loans, amongst other payments. As you know, we have so many other payments. Car payments, property tax, mortgage payments, utilities, internet, travel, dinner, it goes on and on and on. And one of the biggest payments in our lifetime is the mortgage payments. And it’s also the longest payment for 30 years. And a lot of people refinance, so when they refinance, your loan payment is actually 35 years, 40 years, 45 years. So it’s great to pay it off.
Another advantage, as I mentioned earlier, is the peace of mind. And here’s a quote I came up with. It says that “When you pay off the mortgage, it changes the way you operate the rest of your money because you’re standing on such a more solid foundation to live your life.” That’s a great quote. So let’s talk about the drawbacks of paying your mortgage earlier or paying your loan earlier than 30 years. So the first disadvantage is, let’s say after 20 years you pay off your mortgage. And all this time, if you do deductions, of course, talk to your accountant. Interest rates are deductible, just like your property tax are deductible. So when your mortgage stops, and hopefully by the time you turn 50, 55, or 60, your income has grown a lot from 20 years ago. So at that stage, all of a sudden, when your house is paid off, you will not have those interest deductions. So that could be a disadvantage. But check with your accountant how that works, depending if you itemize deductions or not. So there’s some tricks to that. The second disadvantage of paying off early is that if you’re making extra payments and let’s say you have other debts, and I’m sure you do, most of us have car payments, furniture payments, or appliance payments, or credit card payments. So in the example earlier, I said that if you have a 3% mortgage rate and your payment is $1,000, and if you’re paying $100 or $200 extra every month now if you have a credit card and right now the rates have gone up, they’re almost 16% to 25% on credit cards. So if you have a credit card debt, then it’s better to pay off that credit card and pay $100 extra per month or $200 per month on any lump sum than paying your 3%. So instead of paying the $200 on your house, it’s better to pay off your credit card bill extra payments. Or if you have a car loan and let’s say it’s 6% or 7%, then it’s better to pay off your higher debt loans than if you have your house mortgage payment lower than that debt. So always compare your mortgage interest rate.
Right now they’re 6%, six and a half percent. So if you have mortgage payments of 6% and your credit card is 20% or 15%, make the extra payments on the credit card. You’ll save more than by paying less interest, by paying more payments on your mortgage loan. The third disadvantage of paying extra every month is depending on your scenario. In the example that I gave earlier, if you’re paying $100 extra on a $1,000 payment, or if your mortgage is $5,000 or $6,000 a month and you’re paying $500 to $607 extra, because let’s say I’m in California and the homes are in Orange County, the medium home price is a million dollars. So if you put 20% down automatically with the interest rate of today’s, you’re going to have a $4,000 a month payment. So if you’re paying $500, $600, $700 extra, then instead of making those payments on your mortgage payments and exhilarating that some people say it may be better to save that money and maybe put that money of $500 a month or $1,000 a month extra, or even $200 a month extra. And buy mutual funds where you get, on average, 30-year average, 10-year average, 8% to 10%. Return or buy stocks and hold on to it. Of course, talk to your accountant or your stock broker or your attorney how to do it or whatever you do. But I’m just giving an example or you can save that money $500 a month, save it so that in five or six or seven years you have a down payment to buy another rental property. So the thought is, and the disadvantage is, instead of paying extra payment, whether it’s $100 a month or $500 a month, save that and invest it every month someplace else, or save it to buy another rental property, et cetera. So that’s a disadvantage.
The other disadvantage of not paying sooner or faster is that the slower you pay, or if you just pay your normal payments versus if you pay $100 or finals extra every month, you are building equity faster in your home. Remember, every time you make a payment, you pay a certain amount into principal and a certain amount into interest. So the faster you make your principal payments, the more equity you grow. So let’s say you have an emergency and you need to borrow money. So the more equity you have, the more you can borrow from the house if you need to. Lenders only give you 70% – 75% of your equity in the house that’s remaining. So if you need extra cash and if you did not pay extra, you’re limited to how much you can borrow. There are loans you can borrow where it’s called the home equity line of credit, where if you have a first mortgage and you need extra money, you can borrow from the HELOC or you just do a write-out refi. So the more you paid off and when the rates are better, you can refinance and pull out the money. But if you have not paid off enough, then you don’t have enough equity to use it for emergency funds or medical reasons, or for college reasons, or for whatever reasons you need some money right away. So you’re limited on your equity build-up. The slower you make your payments of principal, the slower you build your equity over time. The other disadvantages and this depends on your lender if you pay your mortgage payment too soon, in the first one to five years, a lot of the banks or lenders have pre-payment penalties.
One, they don’t want you to pay off early, the whole loan. And this is usually done when you refinance, so they don’t want you to do that. And also they have a limit on how much more you can pay. So let’s say you inherited some money, or you got a big refund from a tax, or you won a bonus from work or whatever, $10, $15, $20,000 and you decide to make that extra payment. Some lenders will not allow that. So there’s a limit on how much you can pay every year or at least the first five years, what we call a pre-payment penalty. So that’s another disadvantage. If you decide to pay off your home mortgage earlier, faster. I have eight tips. Please watch this video.