Every few years it is worth evaluating the costs and benefits of paying off your mortgage early. We'll discuss four scenarios with a home purchased for $450,000, 20% down and 2.75% interest on a 30 year fixed rate mortgage. For the purposes of this exercise we will be calculating principal and interest payments and not including mortgage insurance or escrow payments for taxes and insurance. To see our math you can refer to the embedded Mortgage Payment Calculator at the end of the blog. Each scenario has a tab at the bottom so you can switch back and forth for comparisons. Let's proceed.
In this scenario you pay your mortgage just as it appears on your bill. Over the course of 360 months (30 years) your entire mortgage is paid off.
Maximum Principal and Interest (P&I) payment: $1,469.67
Payoff time: 30 years
Total Interest Paid: $169,080.57
Scenario 1: Double your monthly principal payment
In this situation you simply mail your mortgage payment with twice the amount of the principal payment. In our hypothetical, the first payment would therefore include $644.67 more than the standard $1,469.67, or $2,114.34. This amount would slowly increase each month as your principal payment increases.
Max P&I Payment: $2,931.26
Payoff time: 15.1 years
Total Interest Paid: $84,843.26
Scenario 2: Add an extra $500 to each principal payment
Here you simply pay $500 more to pay down your principal each month.
Max P&I Payment: $1,969.67
Payoff time: 19.8 years
Total Interest Paid: $107,023.83
Scenario 3: Annual bulk payment of $10,000 to your principal
Imagine that you save up all year and pay down a large chunk of the principal in December, we hypothesize $10k.
Max P&I Payment: $11,469.67 ($1,469.67 max standard month)
Payoff time: 16.4
Total Interest Paid: $88,772.70
Scenario 4: Double principal and $20k annual payment
This situation may not be feasible for many people, but we included it to illustrate a point. Here we combined strategy #2 and #3 but increased the annual payment to $20k. Using this strategy the payoff time can be brought down to just over 8 years with only about $46k in total interest
Max P&I Payment: $22,865.24 ($2,930.77 max standard month)
Payoff time: 8.3
Total Interest Paid: $45,906.64
Synopsis: Which is best for me?
There is no one correct solution here. Each homeowner has a different financial situation, and these may change over time anyway. Consider simply that paying down your principal results in fewer payments and less interest charged overall, but there is a reason that a standard mortgage is paid over 30 years.
As always contact us to discuss what buying or selling looks like in today's market.