However, the table above illustrates the point that, if you’re contributing extra funds to your mortgage instead of maxing out retirement accounts, you may be missing out on higher long-term returns. This has the potential to be compounded even further for younger homeowners in a Roth IRA or 401(k). Also keep in mind that the lower your mortgage rate, the less the investment return needs to be to make this an attractive strategy.
The Case for Paying Extra Principal
1. Interest savings over time
Again, the primary benefit of making extra payments on a high-interest mortgage is the potential for substantial interest savings. When you pay down principal early, you reduce the balance on which interest accrues. Over the life of the loan, this can lead to substantial savings if you have a high interest rate.
For example, a $500,000 loan at 7% interest over 30 years will cost you $697,546.97 in total interest.
But by adding just $300 extra per month toward the principal, you could shave off almost 7 years of payments and reduce interest paid by over $180,000.
2. Faster path to “Financial Freedom” and peace of mind.
Aggressively paying down your mortgage builds equity faster and accelerates the day when you’ll be free from your mortgage. This can be appealing to people that are nearing retirement as, for many, owning your home outright offers peace of mind. No longer having a mortgage payment lowers your monthly expenses in retirement, which can be an advantage when living on a fixed income.
3. Guaranteed return equal to your mortgage rate
Paying down your high interest mortgage essentially offers a risk-free return equal to the interest rate on the loan. Following our above example, if your mortgage interest rate is 7%, every dollar towards the principal of the loan you pay early essentially earns you a 7% return without taking any market risk. In an uncertain market environment where even moderate-risk investments may not yield such returns, this can be a compelling reason to make extra principal payments.
A Hybrid Approach
Like most things in life, the best approach often lies somewhere in between. After you ensure you’re on track with retirement contributions, have a fully funded emergency fund, and are not carrying any high-interest debt (like credit cards or personal loans), you can consider making additional payments toward your mortgage. Even rounding up your monthly payment can yield substantial savings over time.
Every homeowner’s financial situation is unique. At Comprehensive Wealth Management, we emphasize the importance of aligning mortgage decisions with broader financial goals. Paying down a high-interest mortgage can be a smart move, especially if you value peace of mind and long-term savings. However, it should never come at the cost of liquidity or retirement readiness.
If you are considering making extra principal payments and would like to see how that will impact your long-term goals, please call the office at (425) 778-6160 or click HERE to schedule an appointment with a CWM advisor.
