Running the Mortgage Payoff Numbers
Photo via StockMonkeys.com
One would think it would be pretty cut and dry with deciding to pay off the mortgage or not. As I’ve looked at the numbers over and over again since declaring our goal, and as we’ve run into extra expenditures that weren’t factored into our 4-5 year off payoff plan, I’m starting to see the direction that would be best for us to go. The light at the end of the tunnel is getting clearer…
There are two concerns I have about paying off our mortgage so quickly.
One is that it limits our ability to put away extra money for retirement or other investing. We probably will sell this home as we approach retirement and downsize (and we’ll easily have it paid off by then either way). I don’t want to lose out on compounding interest over time by taking what we’d be investing and limiting it for several years.
The second concern I have is that nothing ever goes as planned. There could be an illness, an emergency, or a job loss in the coming years ahead and we’ll be quite strapped if we throw all we’ve got to the mortgage. Four years is a long time for anything to happen.
We realized that this month with different expenses that popped up not normally in our budget. The only way to get that money back, if truly needed, would be an equity loan or selling our home. That’s a lot to tie up for a lower interest mortgage and save only a few thousand in interest in the process of extending our plan a few additional years.
I’ve run the numbers on our different options and found what will work best for us:
If we paid our mortgage off in less than 4 additional years (6 years total):
- Mortgage Interest Paid: $40,400
- Freed up monthly after payoff: roughly $1,000 / $12,000 per year
- $12,000 per year over 24 years = $288,000 (uninvested capital)
If we paid our mortgage off in the estimate 30 years total:
- Mortgage Interest Paid: $177,487
- No extra savings per month or over the life of the loan
Since we’ve paid 1 extra year already, if we stopped paying extra now (29 years total):
- Mortgage Interest Paid: $172,133
- No extra savings until the last year we’ve prepaid, so only $12,000 saved
Our final goal for paying it off (+1 mortgage payment per month / 7 years total):
- Mortgage Interest Paid: $50,138
- Freed up monthly after payoff: $1,000 / $12,000 per year
- $12,000 per year over 23 years = $276,000
If we even just decide to pay one additional payment per month, we can still reach my debt-free by 40 goal while having backup savings in the bank. It would extend our payoff plan by a year or two and cost us about $10,000 extra in interest for that peace of mind.
We still are living well below our means so that we can make this savings and payoff happen. This option just gives us a slight wiggle ability if something were to happen and we needed to shift income to a new situation.
With the plan we are going with, we’ll reach a balance payoff point at 7 years with the money we’ll be able to keep in savings and invest while still putting aside income for retirement. Or we can hold on to that and pay if off a year later, 8 years total for the mortgage and 6 years from today. It adds about 1-2 years onto our total plan but gives us a bit of wiggle room for any emergencies.
So, we’re going to go with a more middle of the road and modern family approach. We’ll continue as we have been, paying a bit more each month, but also saving in the process for those rainy days, weeks, or months. We’ve been doing this at a more minimal level the past year, and it feels more achievable than hopping into an extreme plan, ditching retirement savings, and the like.
I have found others have not gotten rid of their mortgages, instead diversifying their investments or opportunities by keeping their cash with them. Mr. 1500 even built his mortgage payoff into his financial freedom plan, and the Frugalwoods just took on a mortgage for their beautiful homestead.
I liked Holly’s approach to split the plan up, so you’re still paying it down, but not losing out on other opportunities in the process. Should You Pay Off Your Mortgage Early?
For now, we’re going to keep living frugally to allow us this opportunity to pay off our debts, but we’ve learned we’re just unable to sustain an extreme living frugal plan with two kiddos and life events. This doesn’t mean our thermostat is going to change, or our frugal habits will explode into spendy levels, but I can sleep at night knowing we’re going to be “ok” in the process.
And hey, if we can bring in more income, then we’ll throw that extra to the mortgage. Nothing says we have to lock in our payment monthly and stick with it for years to come. Luckily, our mortgage company gives us the opportunity to send them money whenever we feel like it (aside from our regular payment due every month). How kind of them 😉
I still don’t like debt, but this is a good compromise in our situation and what works for us. More frugal living stories to come…
Would you pay off your mortgage early or invest the difference?