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When Should You Begin to Aggressively Pay Down Your Mortgage?

The clear advantages of paying off your mortgage as quickly as possible have changed quite a bit over the past few years. The urgency to pay it off has somewhat diminished, as interest rates have plummeted to historical lows. It's no longer the black and white decision it was back when interest rates hovered between 6% and 9%, and even the 11% to 13% we saw a couple of decades ago.

I am a big proponent of paying down that ugly mortgage beast as soon as is practical. But, before you go cutting a check to the bank, there is a pecking order of financial priorities you need to address before you consider tackling your mortgage.

In order of importance, here are the places you need to put your financial attention first:

  • Take The Cards Off The Table: Pay off all credit cards with high interest rates. Consider the huge discrepancy between credit cards with interest rates of 13% – 23%, and a 4% mortgage interest rate.
  • In Case Of Emergency: You need to build an emergency fund, ideally 8-12 months of living expenses. Yes, today's job market is improving, but if you suddenly find yourself facing a layoff, you need to be prepared to sustain up to one year of living expenses.
  • Build Up For Retirement: Are you able to make the maximum yearly contributions to your retirement accounts, 401K, IRA or an equivalent?  Ask your accountant what the maximum allowable is for you and go for it!
  • Get The Kids To School: Ah yes, the kids and college funds.  Depending on how many children you have, how old they are, and what type of college enrollment expectation they have, you need to be making adequate contributions to those 529 plans or other college savings accounts.
  • You May Live A Long Time: My mom is 97 this year, and my aunt just turned 100.  So I am keenly aware that my money could run out before my health runs down.  Another priority investment you need to be making each year is toward long-term health care insurance. It is not as costly when you start it in your 30's or 40's.  But, if you didn't get around to it till your 50's, it will take a hit out of your budget each month.

Once you have paid out and paid off all of the are ready to begin to slay the mortgage dragon with the remaining funds you have available.

Next consideration is age.  I believe that you should make efforts to pay off that mortgage by the time you plan to retire.  There is something very freeing about the release of that last mortgage payment when you switch to a fixed income.  Plus, chances are you will not need the mortgage interest deduction.

One important note that many people don't realize is that when you are into years 20 through 30 of your mortgage payment, you are paying very little actual interest compared to what you paid in the early years.  The banks have very cunningly structured mortgages so that they get a large portion of their money early on via interest sooner than later over the 30 years.

But How Fast & How Much Should I Pay Down?

I always suggest making that decision by counting backwards. If you want to retire and be mortgage free by age 65, then calculate how much extra you will have to pay monthly or yearly to pay it off by that date.  There are numerous calculators online that will help you do this – Bankrate has a great one you can access here.

Here's an example:  You bought your home at age 45 with a 30 year loan at 5%.  You are now 55 years old and you still owe $300,000 but plan to retire at 65. You are going to need to up your current payment of approximately $1,650 a month to approximately $2,650 a month till age 65. Not only will you get your mortgage paid off ten years sooner, you will have saved almost $78,000 in interest!

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 10, 2014, at 3:50 PM, greatbritton100 wrote:

    Watch out for the Long Term Care insurance. I started it in my late 50's at $86 a month. By the time I reached my early 70's, the premium advanced to $196/month. I fear it will be $500/month in my early 80's. That happens even if the contract says no increases in premium payments unless the entire "class" is increased!

  • Report this Comment On March 10, 2014, at 7:18 PM, garysund wrote:

    When I turned 50 I refinanced my mortgage for 15 years. My current P & I is just about $ 20,000 a year. When I retire at 65 it will be paid in full. If you factor in what you have to earn to net $20,000 after taxes it means that is just about $27,000 of income I won't need when I retire to have the same money I have to live on today.

  • Report this Comment On March 10, 2014, at 8:15 PM, nobodysfool99 wrote:

    I couldn't disagree more with this strategically or mathematically. The interest rate might be higher on some other loan, but which one are you paying more in interest too overall? That's the bottom line. The mortgage is the much larger balance.

    Restructure the mortgage by paying more every month. The amount should be calced with a mtg calculator around amt needed to turn a 30 into a 20 year. So $150/mo more on the balance can save 10's of 1000's of $s and the earlier in the loan you start the more $ saved overall. Also, VERY IMPORTANT to note that after paying down for 10 years, refinancing to another 30yr can lower the minimum payment substantially while still having the option to continue prepay amounts. Tell me this doesn't help in retirement or to retire earlier!! But use the other financial tools in this article too, just not at the expense of the mtg prepay strategy. It should the foremost consideration, not the last.

  • Report this Comment On March 11, 2014, at 10:50 AM, sabebrush6 wrote:

    You should pay some extra on the principle every month regardless. Your interest is calculated daily so it you add some every month you will pay less interest.

    Make it a comfortable amount and do all the rest of the things you normally do. I paid an extra $100. a month and paid my mortgage off 9 1/2 years early and saved $60K on interest. Never missed a penny of that extra amount.

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