After 10 Years Into My Mortgage I Would Like to Start Paying Extra

by Tim Grant, Demand Media
    Paying extra on a mortgage saves you money on interest.

    Paying extra on a mortgage saves you money on interest.

    Congratulations. You are about to save yourself a ton of interest and move much closer to owing your home free and clear. Paying extra on your mortgage will put you on the fast track to financial freedom. You will build more equity at a faster rate and ultimately enjoy the feeling of security that comes from knowing that the bank no longer has a claim on the place you call home. But depending on your circumstances, paying extra on the mortgage might not always be the smartest choice. If you owe more on your house than it's worth or you are paying a low interest rate, you may get a bigger bang for your buck by investing the extra cash in other ways.

    Interest

    Interest on your mortgage is calculated each month on the unpaid balance. The more you pay down the balance, the less interest gets calculated. By paying extra on the mortgage, you will ultimately pay less interest to the bank over the life of the loan. For the past 10 years, you have been buying your house on the bank's amortization schedule. Paying extra on the mortgage reduces the amount of interest you would pay on a regular schedule because your extra payments are instead applied to paying down the principal balance.

    What You'll Save

    Assume you have a mortgage for $90,000 at an interest rate of 6.5 percent. If you have been making regular payments for the past 10 years on a 30-year mortgage, your balance would now be around $76,000. But during that time frame you have actually paid the bank about $54,000 in interest, while your loan balance has gone down only $13,700. If you added an extra $50 a month to the regular mortgage payment of $586, you would shave six years off the mortgage avoid paying $7,100 in interest.

    A 15-year Mortgage

    If you have a 15-year mortgage, you are well on your way to a zero balance. With all the factors being the same as the last example, after 10 years you are down to a balance of $40,000 after having paid roughly $38,700 in interest. By adding an extra $50 a month to your regular mortgage payment of $784, you could pay off the mortgage in three years rather than five and save $1,200 in interest payments to the bank.

    Mortgage Interest Deduction

    Tax law allows homeowners who itemize their deductions to deduct the interest on mortgages, but some financial advisers who advocate a debt-free lifestyle say you are still better off paying off your mortgage. Assuming you are in a 25 percent tax bracket, if you pay $10,000 in interest you get a tax break of $2,500. But if you have no mortgage you would still be $7,500 ahead. On the other hand, a 6 percent interest rate on the mortgage is only costing you about 4.5 percent or less if you itemize. But even without the tax break, mortgages are about the cheapest form of credit there is.

    Cons of Paying Down Your Mortgage

    You may want to reconsider paying extra on your mortgage when interest rates are at historic low levels, as they were as of publication in May 2012. You may be better off refinancing the mortgage if the interest rate you are paying is higher than what banks are currently offering. If you have a low mortgage rate, you could possibly get a better return on the amount you would make in extra payments by investing the money in the stock market, which averaged a return of 7 percent a year from 1950 to 2009, according to Standard & Poor's. Other reasons why it may not be a good idea to pay extra on the mortgage are if you owe more on your mortgage than the house is worth or you feel there is a chance you could lose your job.

    About the Author

    Tim Grant has been a journalist since 1989 and has worked for several daily newspapers, including the Charleston "Post & Courier," the "Savannah News-Press," the "Spartanburg Herald-Journal," the "St. Petersburg Times" and the "Pittsburgh Post-Gazette." He has covered a variety of subjects and beats, including crime, government, education, religion and business. He graduated from The Citadel with a Bachelor of Science in business administration.

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