A 4% interest rate may seem low — especially when I have 7 to 8% student loans to pay off — but here’s why I choose to pay off my mortgage just as aggressively.
I own an apartment that’s pulling in more rent every month than its expenses — including mortgage, insurance, taxes, and maintenance.
After I put enough cash in the business checking account to cover three months’ worth of those expenses — think of it as an emergency fund for the rental property — I started using the extra money to pay off the mortgage.
Still, with high-interest rate student loans and a growing retirement portfolio, I’ve started to wonder if there’s a better way.
The temptation to pay extra on a mortgage
As with any loan, once you start to look at the break-down, the temptation to pay extra on your mortgage is huge.
As an example, suppose that I was toward the beginning of a mortgage which had the following very reasonable terms:
- Amount: $100,000
- Interest rate: 4.125%
- Term: 15 years
- Monthly payment: $746
I thought I had a low interest rate, but then I got that first statement in the mail telling me that $344 of my first $746 payment — almost half! — was going to pay for interest. Moreover, that statement would also tell me that I would pay $34,000 in interest over the life of my loan, meaning my once reasonable $100,000 mortgage would cost me a stifling $134,000 in total! That is, it would cost me that much… if I didn’t start paying extra.
These are big, scary numbers!
And so, despite the low interest rate, my pay-off mentality took over: after a year or so of putting that extra $300 a month into a rainy day account, I shifted to using it to pay off the mortgage and have been doing so ever since.
But money isn’t everything; what about the intangibles?!
Sure, trying my hardest to avoid $34,000 in total interest might save me a little bit of money, but is that the only reason?
Having a home paid off could also mean I’d have less of a chance of losing it in bankruptcy.
But the main reason to pay off a mortgage early is the emotional benefit. Just think how much better I’ll be able to sleep at night knowing that I have a mortgage completely paid off.
I bet there’s no feeling like it!