There is a debate on whether you should use excess funds to pay off your mortgage or invest the money into something else. If your mortgage interest rate is less than 5%, the thought is you should utilize excess funds to invest because the average return-on-investment (ROI) is 7-10%. This number may vary depending on who you talk to. There is also the mortgage interest tax deduction aspect, which can be favorable. Most finance people will tell you the investment path is most favorable, but what happens if the ROI is less than 7-10%? What happens if your investment actually produces a negative ROI? At the end of the day, you may have nothing to show for your efforts and this is a risk I am not willing to live with. Again, most finance experts will not agree with me. BUT there are finance experts that do steer middle-class citizens in the wrong direction and might not even feel bad about it. There have been plenty of cases where good people have lost everything due to poor investments. Do you think those people thought the investments were bad ones?
When I say excess funds, I am talking about extra money after all your bills are paid. You should also put 10% of your paycheck into your 401k and hopefully your company matches at least 4% of your personal contributions. The more money you can add to your principal payment each month on your mortgage, the quicker you will pay off your mortgage. The hope is to reduce your mortgage loan quickly, so you pay less and less interest year over year. For example, having a $300,000 mortgage with 5% APR means you are paying $15,000 per year just on interest for as long as your mortgage is $300,000. If you can reduce your mortgage quickly, to lets say $250,000. Your interest for that year will be $12,500. The idea is that as you pay down your mortgage, the less interest you will pay each year.
Imagine… you have no mortgage payment. What would you do with the extra money? Most people have a 30-year mortgage. If you buy your first house at 30-years old and pay minimum payments, you will pay your house off at the age of 60. Will you have enough time to save for retirement? Do you want to keep working for another 5 or 10 years? If you paid your mortgage off in 10 or 15 years, you would be 40 or 45 years when you paid off your mortgage. If your payment was $2,000 per month and you had 20 to 25 years more until you hit 60 years old, you will save $480,000 to $600,000 just in mortgage payments. This does not include your 401k or any other savings you put aside.
When you are preparing for retirement, you need to think about risk versus reward. You would want to understand whether the reward is worth the risk. It is very difficult to predict whether the stock market is going to provide an acceptable ROI. But if you do pay your mortgage off in a timely fashion, you can be certain you own a home and nobody can take that away from you. Once you have your home paid off, you can feel more stable and will not to move out if you lose your job. Depending on how much property tax you have, you could potentially take a job with significantly less pay and still live in the home you love. These are things I think about to stay focused on paying my mortgage off.