Paying Down the Principal

Is it a good idea to pay down the principal on your mortgage if you have extra cash? 

I have no doubt that my friends in the financial services industry would tell you that you should invest your money in the market rather than paying down the principal on your mortgage – debt is cheap right now and the stock market has been hitting all-time highs, so if you are comfortable with the risk, investing your excess cash in the market might yield you a higher return than pre-paying your mortgage.

However, possible appreciation is for many only one of several factors that should be considered. For some, eliminating debt provides a feeling of security.  Having little to no debt can be a great comfort if you lose your job, choose a new, lower paying career or simply retire.  For this reason, some choose to pay down their mortgage as quickly as possible so that they have a significantly lower monthly need for cash.

There is also a significant savings to those who pay off their mortgage early.  Simply making one additional payment each year (for a total of 13 payments instead of 12) can make a notable difference in your total cash outlays.  For example, if you add an extra 1/12 payment onto your monthly payment and if you have a $200,000 30 year loan at 4.5%, you will pay your debt off 4 years and 3 months earlier than expected and save yourself $27,000 in interest as well!

Finally, the more you pay down your mortgage principal, the faster you build equity in your home, which will put you in a great position when you want to buy a new home.  In essence, paying down principal early works as a sort of forced savings plan – before you know it you will have amassed an impressive nest egg!