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I read articles all the time by financial planners who you want you pay off your mortgage early. That's all well and good but then they make suggestions such as paying extra each month on your mortgage.

There is not benefit to paying extra on your mortgage. The principal and interest are fixed, no matter how much money you throw at them.

You'll pay the same amount every month regardless. If you want to pay off your mortgage early, just put the extra money into savings until you have enough to pay off the mortgage. This way, the money is locked up in your home.

Am I missing something?

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    For the three homes we've bought, it was far better to add a few extra dollars each month to paying down mortgage principal rather than putting into savings for eventual lump-sum payoff. Interest earned in savings was always less than matching mortgage interest payout for those extra dollars.
    – user2338816
    Commented Oct 4, 2017 at 7:38
  • The OP is describing a totally closed mortgage, without even the possibility of paying a penalty for extra payments. Is such common or even legal in most jurisdictions?
    – DJohnM
    Commented Oct 4, 2017 at 11:50
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    "The principal and interest are fixed, no matter how much money you throw at them." This statement is not correct. Interest is calculated on principal remaining at the beginning of the month [more or less]. If you reduce the principal by making extra payments, then the interest charged for that month is less. When you pay off the final $ of principal, there is no more mortgage remaining. Some banks / jurisdictions make have you pay a penalty for paying early, but if no penalty exists, the system works as your financial planners have described.
    – Grade 'Eh' Bacon
    Commented Oct 4, 2017 at 12:48
  • If your circumstances cause you to value liquidity over a certain total return, that is fair; but if you haven't accurately determined the total return opportunity cost, you do yourself a disservice. The financial planner advice is attempting to show the total return opportunity cost. But overall, there's nothing wrong with this question. On topic, with a slightly contrarian angle to engage readers. +1.
    – user662852
    Commented Oct 4, 2017 at 13:10

3 Answers 3

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The principal and interest are fixed, no matter how much money you throw at them.

This is not correct.

If I pay an extra $1000 in principal this month, then my mortgage balance is decreased. So slightly less interest accrues before my next payment. That means my next payment will be slightly more toward principal and slightly less toward interest than it would have been if I hadn't made an extra principal payment.

This means that my principal will eventually drop to zero earlier than it would have if I had not made the extra payment, and I will end up making fewer total payments than I would have without the extra principal payments. Of course, the effect is even stronger if I make regular extra payments rather than a single one.

Like paying off any debt, you can consider this payment essentially a risk free investment paying whatever is the interest rate on that debt. You know that by making this payment, you reduce your interest payments over the coming years by the interest rate on that amount.

Edit:

In comments you said,

you will pay your mortgage off earlier but you won't drop the amount required to pay each month. Look at a mortgage amortization table to see this.

This isn't because of the amortization table, it's because of the contract terms between you and the lender.

After you make an extra principal payment, a new amortization schedule has to be calculated one way or another. It would be possible to re-calculate a new reduced monthly payment keeping the number of payments remaining fixed. Or you can calculate a new repayment schedule keeping the total monthly payment fixed and reducing the number of payments.

It happens the banks prefer to do the 2nd of these rather than the first, so that's the terms they offer when lending. Perhaps someone more knowledgeable can comment on why they prefer that.

In any case, by reducing your principal you improve your personal balance sheet and build equity in the mortgaged property so that, for example, if you sell you'll keep more of the proceeds and use less to pay off your loan.

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  • It isn't incorrect. The escrow account setup by the title company or insurance company ensures your monthly note is always exactly the same. If you pay $1000/mo, you will still have to pay at least $1000 month even if you are paying $1000/mo extra. Yes - you will pay your mortgage off earlier but you won't drop the amount required to pay each month. Look at a mortgage amortization table to see this.
    – 4thSpace
    Commented Oct 4, 2017 at 4:23
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    @4thSpace, the monthly payment is fixed. The fraction of it that goes to interest depends on the balance. If you reduce the balance, you pay less interest and therefore (because the total is fixed) more principal. Which means 1. less interest paid 2. the number of payments is reduced.
    – The Photon
    Commented Oct 4, 2017 at 4:37
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    Yes, if you reduce your mortgage balance, then sell before the mortgage is payed off, it means you keep more of the sales proceeds and use less on paying off the mortgage.
    – The Photon
    Commented Oct 4, 2017 at 4:52
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    @4thSpace say I have a $100k mortgage at 3.5% and $100/mo I can put to either the mortgage or a savings account earning 1%. If I put it to the mortgage, I pay it off in 262 months (21y10m). If I put it in the savings account, I have enough in the savings account to pay off the remainder of the mortgage in 282 months (23y6m), and over that term I would pay over $15,000 more in interest. Why would you want to hold the money in a savings account?
    – Kevin
    Commented Oct 4, 2017 at 6:41
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    What could make sense, depending on your situation and market outlook, is investing the extra money in something that is likely to make more than your interest rate (an index fund being the best bet). There are other questions on this site about that.
    – Kevin
    Commented Oct 4, 2017 at 6:43
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but then they make suggestions such as paying extra each month on your mortgage.

How else does one pay off his mortgage early other than by paying extra each month?

The principal and interest are fixed, no matter how much money you throw at them.

The interest rate is fixed.

The total interest paid varies depending on how much extra you pay towards the principal.

You'll pay the same amount every month regardless.

That's factually incorrect.

just put the extra money into savings

At 1.2%, if you're smart enough to put it in an on-line savings account.

until you have enough to pay off the mortgage

Which costs you 3.5%.

This way, the money is locked up in your home.

Who says that all of your money must be locked up in your home? (I'm sure that there are financial advisors who recommend that you throw every single spare dime into extra mortgage payments, but they're rare.)

Am I missing something?

Yes: the mathematical sense to see that a 3.5% loan costs more than than 1.2% savings earns you

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  • Let's say whatever you are paying extra will shave off 5 years on your mortgage. You are just starting out so that will be 25 years later. Instead of paying extra on the mortgage, you put that money into savings for 25 years. Then pull it out at year 25 and pay off the mortgage. What's the difference? The money wasn't locked up in your house and available if needed for 25 years.
    – 4thSpace
    Commented Oct 4, 2017 at 4:22
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    @4thSpace, if the bank pays the same rate on savings accounts (or CDs) that it collects for mortgages, then the bank never makes any money.
    – The Photon
    Commented Oct 4, 2017 at 4:36
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By rounding my house payments up to the nearest $50.00, my 30 year mortgage was paid off in 7 years. Initially, my mortgage payment was roughly $600, $50 going to principal and $550 going to interest (banker's profits). By paying $650, I was actually doubling the amount I was paying on principal. Since interest is computed as a function (percentage) of the outstanding principal balance, the amount of my fixed payment that went to interest decreased each month, and the amount that went to principal increased.

In 7 years I owned my home free and clear, and started putting the money I had been putting into the mortgage payments into investments. A rule of thumb I have discovered is that it takes half the time to save money to meet a goal that it takes to pay off the same debt.

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    The outstanding balance on the mortgage is costing you more than you will ever earn in a savings account (or the bank would go bust).
    – pojo-guy
    Commented Oct 4, 2017 at 4:22
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    At 4%, it takes over 50% higher payment to drop the term from 30 to 15 years. Your rounding up, or even a full $50 extra would not come close to reducing the payoff from 30 to 7 years. Would you like to review your numbers and edit your answer?
    – JTP - Apologise to Monica ♦
    Commented Oct 4, 2017 at 10:41
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    @pojo-guy Your numbers still don't add up. I've tried calculating a way that a $600 payment on a 75k mortgage would move from 30 years to 7 years by increasing to $650, and it never works out. Note that while your principal payment is 'double' for the first year, by the last year it is "only" ~10% higher, because under a regular payment plan, more of the payment goes to principal at the end of the mortgage.
    – Grade 'Eh' Bacon
    Commented Oct 4, 2017 at 12:53
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    Here's something that kind of works - with a 9% rate of annual interest, a $600 monthly payment on a 75k mortgage equates to 30 years. Moving that to $650 equates to ~23 years. So in a high-interest environment (where we would indeed expect extra principal payments to have a greater impact), you could accelerate the payment period by 7 years, but you couldn't reduce it down to 7 years.
    – Grade 'Eh' Bacon
    Commented Oct 4, 2017 at 12:56
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    @pojo-guy: You can probably make more in an index fund than paying on the mortgage. However, 1) Paying a bit extra on the mortgage is diversification at a guaranteed rate; 2) Reducing the principal may allow you to save on other costs, such as PMI or required flood insurance (which, for me at least, is based on the outstanding mortgage balance, not replacement cost); and 3) It's easy to subtract a nice round number from your checking account balance.
    – jamesqf
    Commented Oct 5, 2017 at 4:17

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