Should I make additional payments every month to pay off my mortgage early?
Troy Sharpe: I’ve always heard that I should make an extra monthly payment to pay off my mortgage, but should you really do that?
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Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, CERTIFIED FINANCIAL PLANNER™ Professional (CFP®), and host of the Retirement Income Show. What we have here is a mortgage repayment calculator. We’re looking at a $200,000 mortgage with an additional principal payment each month of $300, with an annual interest rate of 4.5%. That creates total savings over the life of the mortgage of $67,000, and we’re going to pay it off 11 years and 1 month sooner than if we kept that entire 30-year mortgage.
Let’s say you took that same $300 a month or $3,600, and instead of putting it towards your mortgage, let’s say you invested in the stock market. Historically, the stock market has returned somewhere between 7% to 11% per year on average. If we compound that money over a 19-year period, because 30 years for the mortgage minus 11 years you paid it off leaves you with about 19, if you compounded that $3,600 a year over a 19-year period at a 7% interest rate, you would have $134,000.
Now, if we went back and compared that to our mortgage, in year 19, this is an amortization table, in year 19, our balance, if we made zero extra principal payments, would be $105,000. Instead of putting it towards the mortgage, if we invested the money and made an average of 7%, we’d be left with $134. We could take that money, pay off our mortgage right here, $105,000 in year 19, and still be left with about $30,000 in our pocket.
Now, of course, the stock market isn’t guaranteed. There’s no certainty that you will make 7% per year. This is historically what the market has done. The thing to know is that no, it is not always right for all of you to simply make that extra mortgage payment because you could be using money in an inefficient way based on what’s best for you. Now, on the flip side, paying that mortgage off early is essentially like guaranteeing you’re going to invest and make 4.5% on your money. Are you a conservative investor? Are you willing to take a little bit more risk for the potential for higher rewards? That’s a question for you and your family to decide.
I wanted to go through the alternatives of paying off your mortgage, what that could mean for your family, and more money in your pocket. Make sure to hit the Like button if you liked this video. Of course, subscribe to the channel, hit that bell icon, and share this video with a friend or a family member, especially if you know they just bought a home.
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