We saved up and bought our first home in March 2020, quite literally as soon the pandemic hit. It was an interesting time to purchase a home (to say the least) and because this was our first home purchase, we were new to whole process.
Like most people, we got a traditional 30-year mortgage and when interest rates went to an all-time low, we refinanced at the end of 2020 to lock in that low rate.
However when I looked at the payoff schedule, it pained me to think about carrying this debt for over 30 years. Even though our interest rates are extremely low, we still have a desire to pay down our mortgage earlier.
So I looked into different scenarios to pay down the mortgage faster and save on interest paid.
Traditional Monthly Payment
With the traditional approach of paying our regular mortgage amount on a monthly basis over the next 30 years, the total amount in interest that we will pay over the life of the loan is $155,780. That is in interest alone!
Bi-Weekly Payment
If, however, we made a small tweak and simply paid our regular mortgage amount on a bi-weekly basis, we would save over $20,000 in interest and pay off our mortgage 3.5 years early!
How Does It Work?
If you change your payment to bi-weekly, you will pay half of your monthly amount every 2 weeks.
There are usually two months per year where you’ll make an additional half payment (just given the amount of weeks that fall within that particular month). These two extra half payments are applied to your principal, adding up to one full extra payment each year.
This helps you pay your loan down quicker and pay less interest.
One important thing to note. Some mortgage companies may not accept biweekly payments, so you should definitely ask before signing up. We use Chase and at the time of this writing they allow it.
Impact of Extra Payments
We decided to take it a step further to see what impact it would make if in addition to the bi-weekly payments, we added a small extra payment.
We set it up to add an extra $75 to each payment since we figured it would likely be money we wouldn’t miss. Adding those extra payments combined with the bi-weekly payment schedule, we will be able to pay our mortgage off 7.5 years earlier and save $43,000 in interest.
Deciding What is Right For You
Deciding on whether to pay down a mortgage earlier or simply pay the minimum and invest is a personal choice.
In most scenarios, if you pay the minimum on your mortgage and instead take the money that you were considering using to payoff your mortgage earlier to invest into the market, you would likely make more money having those funds invested.
However, the key to that scenario is taking the difference and actually investing it. Oftentimes, life gets in the way and the things we say we will do don’t necessarily happen. Expenses rise, unexpected costs come up and that money can quickly be used for every day life instead of what we he had hoped for it (investing it).
Since we are already aggressively investing in the market, I like the idea of simultaneously working to reduce the biggest expense we will have in the future (housing).
I am not someone who loves risk and I typically play it pretty safe when it comes to money. The idea of getting to a point earlier in retirement where we can essentially eliminate our housing expense, makes me feel more at ease.
Of course, you need to decide what the right approach is for you.
If you want to run the numbers for yourself and see what impact the payment schedule or adding extra payments would do to your mortgage, click on the link below.
I would love to hear from you! Are you paying off your mortgage earlier? Paying the minimum and investing elsewhere? Let me know what approach works best for you.
