What no one has told you about paying off your mortgage early!
Have you ever wondered if it would be worth it to consider paying off your mortgage early? Well, when I saw the year-to-date interest we’d paid on our most recent mortgage statement, I was finally ready to do some research!
The sad truth is that we are not taught in school to understand the math behind these sorts of things. Sure, we learn algebra, geometry, and pre-calculus (sometimes even actual calculus if you’re a math person like me!), but no one teaches us the math behind finance!
And it’s a very different thing!
Well, I decided to use my degree in applied mathematics to get to the bottom of actually understanding what’s behind the ridiculous amount of interest we’ve been paying… and see what could be done about it.
And I was so happy at my findings, I couldn’t help but to share them with you guys! Spoiler alert: Our current plan to repay our mortgage will mean it’s paid off in 10 years from when we got it and it will save us around $180k in interest!
All this said, please do keep in mind I’m certainly not an expert at finance or mortgages, but I wanted to pass on this info because I really think most people don’t actually understand how it all works. Even a math girl like me didn’t!
Let’s dive in and I’ll show you guys everything I learned!
How interest is calculated each month
In order to understand the benefits of paying off your mortgage early, we first need to understand how interest is calculated each month.
Generally speaking, when you owe money, each month you are paying interest to continue borrowing that money. Think of it as a fee the bank charges you to loan you the money in the first place.
That means that the less you owe, the less interest you pay. The two are directly related!
The actual interest rate you have is the amount of yearly interest you pay on that money. That means if you owe $100,000 at a 4% interest rate, you’re paying $4,000 a year in interest on that money you’re borrowing.
To find the amount you’re paying monthly, divide $4,000 by 12 and get $333 owed in interest per month.
This is a rough understanding of it, because the interest payment does change each month (since the principal balance also goes down each month), but this is a close approximation.
I want you guys to think of interest sort of like rent. You’re basically renting the money you borrowed by paying interest!
As a new homeowner, this is of course very discouraging, because the biggest benefit (financially) of owning a home is actually building equity, not paying interest! And the unfortunate truth is that with a 30-year mortgage, equity gets built extremely slowly at the beginning.
Let’s take a closer look.
Building equity: Interest vs. Principal in your monthly payment
Excluding property taxes and home insurance, a mortgage payment is broken into two parts: interest and principal payments.
And at the beginning of a 30-year mortgage, almost all of this payment goes towards interest.
Let me show you why that is a problem!
Imagine you owe $206,000 at the beginning of your loan, at a 6.25% interest rate. The monthly payment of interest and principal is $1273. (Remember, this doesn’t include property taxes or insurance!)
Let’s just take a look at the very first month’s payment. Yearly interest at this rate for a $206,000 loan will be $12,875. Divide that by 12 and you’re at roughly $1073 for monthly interest.
To get the amount of the $1273 going toward principal, we subtract the interest of $1073 and get $200.
This means that, each month, you’re paying off your loan by only $200!
Here’s the problem: This means the total amount you owe takes forever to go down, and thus you’re stuck paying a ton of interest for a super long time.
Think about it: By the end of the third year of this loan, your principal balance will only have gone down to $199k from $206k ($7k total), but the total amount of payments made up to that point is around $45k! That means a whopping $38k went to interest in the first three years, and only $7k to principal!
And this will continue for years, since you’re only chipping away at the principal balance ever so slowly.
Which brings us to a better option…
Using a mortgage calculator to figure out the best way forward
What really helped me understand all of this was using an online mortgage calculator.
This one has been the best, because it allows me to put in a one-time lump sum payment as well as additional consistent monthly payments.
It also shows the total amount of interest paid over the life of the loan for the different repayment options.
I highly recommend plugging in your mortgage’s information and playing around with different repayment scenarios. If you click “view amortization table” below the stats that come up, you can also see a monthly comparative breakdown of how much faster your loan will get paid off!
When I put in our loan’s information, it said that we would pay around $251k in interest over the life of our loan! This is almost $50k more than we borrowed to begin with!
As I fiddled with different repayment options, it very quickly became clear to me that even super tiny extra payments per month make a HUGE difference in the amount of interest paid over the life of the loan, thus also shortening it drastically!
We have a 6.25% interest rate. The following table shows how paying different amounts extra per month shortens our loan and saves us interest over time:
| Extra principal payment per month | Length of loan | Interest paid over life of loan |
| $0 | 30 years | $251,552.64 |
| $50 | 27 years | $221,543.32 |
| $100 | 24 years, 8 months | $198,660.89 |
| $200 | 21 years, 1 month | $165,632.06 |
| $300 | 18 years, 7 months | $142,645.68 |
| $400 | 16 years, 7 months | $125,574.22 |
| $500 | 15 years | $112,324.42 |
| $1000 | 10 years, 4 months | $74,158.52 |
This is absolutely crazy to me. The fact that an extra $50 a month takes 3 years off a loan and saves $30k is insane! Just an extra $300 takes over 11 years off and saves more than $100k in interest! It seems the sweet spot is the extra $500, as that turns the 30 year loan into a 15 year, which is pretty nice!
However, we’re more ambitious!
Our current mortgage repayment plan
When I first approached the situation, I was thinking to myself: “What would it take to pay off our mortgage in five years?” We were already 2.5 years into our loan.
Unfortunately, repaying in five years is unrealistic for us, but we personally are going to try to dedicate an extra $1k to our loan each month. Additionally, we might throw in a lump sum payment now to get the interest to shoot down immediately and thus pay off the debt faster.
Keep in mind that, while paying more toward principal does lower the monthly interest paid, it does not lower your monthly payment; rather, it simply means more of that payment goes towards the principal balance, making your required monthly payment work harder!
Remember, this is a game of trying to get out of debt ASAP. Every extra little bit you can throw in there compounds on itself to save you money in interest over time!
Why paying off your mortgage early might not be for you
Okay, so I’m looking at those lucky people who either refinanced or bought a home during the historically low interest rates. Yep, we missed that by about two years since we bought our house in 2023!
Most people who got their loan during that time have a super low interest rate of around 3%. We’re more than double that at 6.25%.
While it’s true that putting money into your mortgage will always help repay the debt faster, it’s worth noting that once you put your money into principal, you can no longer access it.
And there are other ways to make money on your money without losing access to it, such as a high yield savings account (HYSA).
Currently, our HYSA gives us around 3% interest on the money in the account. This means if we had a 3% interest rate on our mortgage, those two would equal out. Meaning, any money we put into the mortgage would only save us as much as the HYSA would make for us. But the HYSA is better, because the money is accessible and not tied up in our house.
However, the idea of paying off your mortgage early and thus having a debt-free life is still appealing to many, and I think this is a noble goal! I don’t think we were all meant to be slaves to debt for decades, personally. We all need to figure out what the best path forward is for our own situation!
Check with your bank before doing anything rash!
One of the first things I did when I started researching this topic was reach out to my loan advisor. We were super lucky to get the most helpful guy when we got our mortgage! He’d always call me right away, even on the weekends, if I needed help with something.
And even though it had been over two years since I last spoke with him, when I emailed him about paying down our mortgage faster, he called me within an hour to discuss!
He was able to run the same scenarios through his calculators and confirm that my findings were correct,! He also said that, with our high interest rate, he could see why we might want to proceed with our idea. This was very helpful information!
I have heard that different loans can have different rules about early repayment, so definitely check in with your lender to find out how this might work in your situation if you’re interested in making extra principal payments! Though most loans seem to be like ours, so I wouldn’t worry too much!
To sum it all up…
In short, paying off your loan a LOT quicker than the schedule is totally doable and takes a lot less money than you’d expect! Let’s recap why that is.
With a 30-year mortgage, every month you are paying a ton of interest with your principal balance barely moving. The quicker you pay down that principal, the quicker that interest goes down, which then means more of your monthly payment also goes toward principal. It all compounds on itself!
And while this might not be the wisest financial plan for someone with a low interest rate, for those of us with a higher rate, it can save a HUGE amount of money over the long term! We’re talking hundreds of thousands of dollars!
The downside to this is less available money while you’re paying your mortgage down. We’re planning on pinching pennies as much as possible (we don’t make a ton of money!) to make an extra $1000 payment every month. If we can do this, our mortgage will be paid off in ten years, instead of 28, and we’ll have saved around $150k in interest over the life of the loan.
The real savings will start once we’ve paid off the loan, of course. At that point, we’ll only need to pay property taxes and home insurance (still around $700 a month where we live), and we’ll be able to save like crazy!
Anyway, I really hope this post has helped some of you understand your mortgage better. Again, even a math girl like me didn’t understand how it all worked! Once you get it, it’s much easier to make educated decisions about how much extra you might want to pay. I really do recommend that calculator to compare scenarios!
If any of you have any thoughts, please do leave them in the comments below! Like I said, I’m no expert on this topic – I’m just trying to share useful stuff I’ve learned with you all!