By Shayla M. Sharp
With the market downturn, increasing unemployment rates and a future loaded with higher taxes, many homeowners are reevaluating the question of whether they should work towards paying their mortgage off early or use the money to continue investing.
For many years, financial experts would have advised against putting your extra money towards paying down the mortgage. In fact, even today, some still believe your best use of funds is an investment portfolio of some sort. "Having a mortgage is one of those culturally expected things, along with car payments and credit cards. Most financial gurus fall backwards out of their chair when you mention paying off your mortgage early, instead of plowing more dough into their carefully selected portfolio of investments – most of which are not properly aligned with your risk tolerance, nor your overall investing strategy." (Frugal Dad)
Why would you not want to pay off debt? Reasons usually include the loss of tax deductions from the interest of your mortgage which could swing you into a higher tax bracket and the loss of extra funds for investing. (AARP) While your current tax bracket status might make the first reason non-applicable, most individuals, especially those working to build a retirement fund, will want to stop and carefully consider whether they want to put extra, discretionary income towards paying off the loans on your property, placing it in a savings account or investing it for increased future returns. Much of your decision should be based upon what kind of mortgage loan you currently have, your income, job stability and length of time until retirement. While many books could be devoted to discussing the pros and cons of investing and how best to go about it, for the sake of this article we'll focus on the decision to pay off your mortgage early.
A mortgage is often the largest and most long term debt that an individual or couple will ever agree to, with the typical mortgage being a 30-year loan. Mortgages can vary greatly in interest rate and repayment terms. Some have prepayment penalty clauses or ballon payments at the end and you may find yourself in the position to need refinancing.
Carefully go over the terms of your particular contract--if you aren't very good with legal terms or financial talk, take the time to set up an appointment with your accountant or lending agent. Discuss your goals and long term plans.
There are definite advantages to decreasing your debt burden through early mortgage repayment. According to the AARP, there are four main reasons. First, providing emotional security. Let's face it--owing someone, whether its a person, bank or other institution, puts a lot of stress on us. There is the constant worry of job loss and the inability to pay. The worry of leaving a debt laden home to your inheritors can also cause stress. Owning your home free and clear can leave you feeling secure and a lot less stressed. Second, investing for the future. Money tied up in mortgage payments is money not sitting in your bank account or not being invested for your retirement. By paying off your debt early, not only do you save money which would have been spent on the interest of the loan, but you can use the now available funds to build your retirement savings more quickly. Third, meeting retirement needs. It has often been recommended that you build a retirement savings that gives you at least 70% of your working income. That can be difficult to accumulate while still trying to live daily, especially while raising a family. One way to extend the savings that you do accumulate is to pay off your mortgage early thus freeing funds that would otherwise be spent on house payments to be used on other monthly living expenses. Finally, reducing loan stress. If your loan includes a variable interest rate, you could be in for high payments when the rates climb. Also, we've all heard the saying of "owing more than you own". Houses gain and lose value depending upon the current real estate market. By paying off your mortgage you are no longer susceptible to this problem because while the value may fall, you won't have to worry about getting a selling price that's higher than the current value just to pay off the debt on the property. (AARP)
Assuming you have no prepayment penalties or other terms that would prevent you from paying your mortgage off in advance, let's look at a few methods that others have successfully employed to decrease the amount and length of their debt. You will have to decide which method, or combination, works best for your current financial situation--remember, it won't be a benefit to try paying the mortgage off early if you get yourself into a bind financially now by doing so!
The quickest way to change what you owe is to refinance. Perhaps interest rates are significantly lower now. Refinancing would allow you to apply more money towards the actual principal of the loan. You could also refinance for a shorter loan, say 15 years instead of 30. Be aware that this will increase your monthly payment as you are paying off the same amount owed in half the time. The benefit is that not only will your loan be paid off quicker, but you will have spent less on interest than with the extended loan. This method requires careful budgeting and planning, not everyone's income allows them to add a significant amount to their monthly bills.
The next few methods involve making extra payments each year, they just differ in the manner they go about it. Check the terms of your loan to see if there are any fees attached to such repayment methods. Also, make sure your lending company is very clear that the extra amounts are to be applied towards the principal of the loan.
The first is a biweekly mortgage payment plan which involves sending in half of your mortgage payment every two weeks. By the end of the year, you have paid the equivalent of an extra payment. 
Another method is to overpay a fixed amount each month, say 10%. A small increase such as this results in the equivalent of 1.2 payments extra each year and usually does not have the fees involved with methods such as the biweekly plan. Another plan is to pay the next month's principal in addition to the current month's payment (your loan statement should break this down for you or just double this month's principal). Over time the amount you pay towards the principal increases and you pay down the mortgage faster and faster. This method requires preplanning as over time it can become more difficult to keep up with the overpayment rate as the interest portion of the payment shrinks. A method which is more haphazard is to simply send in extra money for a principal payment whenever you get some, such as your tax refund money or a summer garage sale. This method is less effective than the others obviously due to the irregularity of the extra payments. (Five Cent Nickel) Finally there is the extra monthly money method in which you take any extra money at the end of the month and put it toward either an immediate principal payment or into a savings account specifically for lump sum payments. (No Debt Plan) Obviously the immediate payment gives better results by reducing your long term interest immediately. However, the savings account option has the benefit of acting as an emergency fund. In the event of job loss, you could still make your monthly payments. Also, if your extra income is small or your accumulate spending money here and there from gifts, eBay sales, etc. then stashing it until you have enough for a larger payment can be a good plan--especially if your loan terms involve a large balloon payment down the road. Maintaining this savings takes discipline as it is easy to see a sum of money accumulating and be tempted to spend it elsewhere.
Whatever your debt level is, it is time to think seriously about getting rid of the burden by paying it off. Careful planning, a little creativity and sacrifice, and lots of discipline will allow you to pay your mortgage off early, reduce your stress and free up your income. Start your mortgage payoff today!
Article first published at NWAbode.com in December 2009.
Shayla M. Sharp, a freelance writer, photographer and designer, enjoys living in the Pacific Northwest with her best pal Stars, a border collie mix. Shayla spends her free time gardening, quilting and reading, during which Stars is always by her side.