Early Mortgage Pay off or not?
I will have paid off my student loan at the end of July 2019. My next major financial action is an early mortgage pay off.
Early Mortgage Pay off Strategy
Early Mortgage Pay off using HELOC
Surveying the inter-web there are many options and strategies in which to to pay off my mortgage early.
The first option I stumbled upon is using the HELOC strategy to accelerate my mortgage.
HELOC is shortened for the home equity line of credit. Essentially, lenders will give you a HELOC if you have equities in your mortgage.
For example, if you bought a house with a mortgage of $150,000, and you paid off $50,000. You then can apply for a HELOC, which allows you to get a line of credit around 80% of your equities.
In my example, you’ll qualify for a HELOC of $40,000.
You will then take out a lump sum payment toward the principal of your mortgage while leaving yourself a cushion for expenses.
You’ll use your HELOC like a credit card, charging all your expenses to your HELOC. You’ll slowly pay off your HELOC over time and then repeat the cycle.
Using this strategy it is claimed that you can pay off your mortgage in 5 to 7 years.
You can get a better explanation from this popular Youtube video that I watched a few months ago.
Sound too good to be true? I read this post from the Dough Roller and he basically recommended against using this strategy. You can read his post for more details.
I just finished listening to Listen Money Matters podcast on this topic and their advice is also to skip the HELOC strategy.
Both Dough Roller and Listen Money Matters reasoned against using HELOC strategy because it is overly complicated and over-reliance on more debt to pay off debt.
Early Mortgage Pay off or Invest?
On the other hand, there’s the argument of investing your extra money in index funds such as Vanguard’s ubiquitous VTSAX.
While looking into this type I saw that Choose FI had a podcast on this exact topic.
To summarize, this podcast is about using Vanguard’s index fund to invest $500 and assuming a 6% return.
After a certain amount of time, the investor can pay a lump sum toward his/her mortgage and can still save money.
This proposal is interesting indeed and it’s probably a good counter argument to paying off mortgage early.
To Invest or Not Invest?
Why not invest your money instead of throwing it away toward your mortgage? The returns of your investment is much greater etc. are common arguments against a mortgage early pay off.
A few weeks ago, I saw this Twitter thread regarding why you should pay off your mortgage early. I didn’t read the whole thread, only bits, and pieces.
Read this thread to point you to pros and cons of why you should pay off your mortgage early and vice versa.
If you’re interested in this debate, you can check the Twitter thread above for arguments for and against early mortgage pay off.
After discussions with my wife multiple times, we are firm on paying off our mortgage early. We decided against using the HELOC strategy.
How will I pay off my mortgage in 5 years?
Let’s recap on my mortgage situation. I borrowed $172,000 in 2012 at 4.4% for a loan period of 30 years.
I used a mortgage calculator to mimic my amortization schedule. If I stay on course and paid the mortgage off in 30 years I am looking at $138,071.16 in interest.
When accounting for principal plus interest, my mortgage totaled $310,070.68.
My plan is simple, I will make additional principal payments of $1,600 per month to accelerate my mortgage payments. This bi-weekly payment will take approximately 6 years to complete.
In 6 years, our interest payments is only $27,077.05. In other words, our new total payments with principal plus interest is $244,327.10.
Using another calculator from Dave Ramsey, the amount of interest I saved is $65,743.58 and 17 years of time.
In addition to these extra payments per month, we plan on using our annual tax return and pay a lump sum principal payment. Hopefully, instead of taking 6 years, we can reduce it to 5 years give or take.
What about investing?
I never mentioned that I will stop focusing on my investments. I still plan on investing a large portion of my savings in index funds.
So I will do both at the same time. Paying off my mortgage and investing.
I wanted to make it clear that paying off my mortgage early is not the best or the smartest strategy. Investing that money will probably yield a better return due to the power of compounding interest.
For example, if I put $1,600 monthly and invest it in Vanguard Index Funds-conservatively putting the interest at 6% will give you an amount of $133,926.12 in 6 years.
If I change the return of investment to 8% then that value ballooned to $140,849.84.
Compared to approximately $66,000 of interest savings from paying off the mortgage early, investing the same amount of money could have netted me twice the amount in profit.
Reasons for paying off the mortgage early
- Peace of mind
- Debt free (for those who hates debt)
- More money for savings and investing
- One less expense to think about when things go awry
Reasons for prolonging mortgage payments
- Prepayment charge from the mortgage company?
- Investing give better returns
- Forgoing interest deductions during tax filing
- Hurting credit score
Final Thoughts
Based on the Twitter thread that I saw, there can be hundreds of reasons for and against paying off your mortgage early. This is a personal decision since there are both pros and cons to each argument.
As a person who hates debt, paying off my mortgage as early as possible is my logical choice. It may not be yours, and that is totally fine.
My two main reasons for wanting to pay off my mortgage is the peace of mind and the elimination of debt.
After two of the biggest ticket items are done with I feel like I can focus more on the next phase of my financial life which is saving and investing my money and earning passive income at the same time.
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