Deciding whether to pay off your mortgage early or how long to keep it – ultimately it’s a personal choice. In this post, I will share my point of view by drawing on real life experiences and some numbers to frame decisions.
In 2022, my wife and I finally paid off our mortgage on our Lake Tahoe vacation property. This move increased our monthly cash flow by $2,500. We initially took out a 30-year fixed mortgage in 2007, so we ended up holding it for 15 years. It’s impossible for us to pay it off for 30 years.
On the surface, paying off the mortgage with negative real interest rates is not the best financial decision. But the trade-offs make sense for only $50,000 of the client’s remaining money. The 30-year fixed loan rate is 4.25%, higher than the 2.375% mortgage on another leased property we own, but still below the current rate today.
In early 2022, stocks also look expensive. This makes paying off debts more attractive: guaranteed 4.25% annual gains compared to uncertain equity gains.
We used to pay off another mortgage on our leased property in 2015, but this time the difference feels even bigger. The extra cash process stands out in ways that have never been seen before.
The importance of cash flow in a bear market
2022 will be a difficult year for the stock market. When your investment bleeds, your focus will naturally shift to cash flow. After all, it’s cash flow that maintains your lifestyle, not net worth. That’s why paying the bill, covering tuition fees and putting food on the table. this is true.
The stronger your cash flow, the better the chances of riding downturns. In fact, if you have strong enough cash flow, you may not have to adjust your lifestyle at all.
When we paid off our mortgage on our Lake Tahoe vacation property, our monthly cash flow jumped instantly by $2,500, or about $30,000 a year. It’s a meaningful mat and we also feel a relief from a lesser account management.
But the real improvement is even greater. I have Forgotten Since 2020, my wife has automatically paid for additional principals every month.
That was a big sum of money. It can cover health insurance premiums for our families and more.
The difference between paying off old mortgages and new mortgages
If you look at the mortgage amortization schedule, you will notice how payment failures change over time. Early on, most of your monthly payments went to interest. As time goes by, a larger share will be on the principal.
It’s a good visual: On a standard 30-year loan, most of each payment ends up paying principal rather than interest, which takes about 21 years.
This is why the extra principal is paid off on a new mortgage (under 15), which makes so meaningful that it accelerates the shift toward principal returns, making each subsequent recurring payment more efficient.
On the other hand, there isn’t much extra fee to pay for older mortgages (over 15 years old) as most of your payments are already used for principal and the remaining balance is relatively small. It may actually be wise to maintain liquidity rather than prepay the principal during tough economic times.
It’s also worth remembering: No matter how much you pay extra on your loan, the monthly payment you need won’t change until the mortgage disappears completely. The change is simply the ratio of interest to principal in that payment.
The full cash flow benefits can only be unlocked when you fully repay the mortgage, and that’s when you really feel the difference.
When you really want to pay off your mortgage
I have only $50,000 left with a balance of $2,500 per month and I am eager to pay off our Lake Tahoe vacation property mortgage as soon as possible. By then, about $2300 per payment was used for principal and only $200 was used for interest. We decided to eliminate the balance within six months, rather than dragging it out for another 21.8 months.
The monkeys on our backs are getting more and more annoying. Eliminating it feels like lifting a weight.
Ratio between mortgage balance and annual payment
One useful way to consider whether to pay off your mortgage is to look at the ratio between the outstanding balance and the annual mortgage.
The higher the ratio, the more “value” you get from the cash you invest each year. The lower the ratio, the greater the significance of paying off the loan.
In my case, the ratio is:
$50,000 Mortgage Balance ÷$30,000 Yearly Payment = 1.7
At such a low ratio, it is also possible to repay and release $30,000 in cash flow immediately, which is effortless.
Now, let’s flip the example. If the balance is $500,000 and the annual payment is $30,000, the ratio is 16.7. I can control large assets at relatively low prices, which is very valuable. So, I won’t rush to advance payments.
In my experience, the key “motivation” to repay a mortgage tends to arise when the ratio drops to a drop in the ratio. 10, 5 and 3. Below these levels, get rid of the temptation of loans quickly.
Distribution of mortgage payment between principal and interest
Another psychological trigger when your mortgage payment percentage is finally handed over to the principal More than 50%.
Crossing that line feels like overcoming a hump. You are now downhill and it’s easier to pedal faster.
The speed at which you get to this depends on your loan:
- Without additional payments, you usually have to wait 15 years or later to exceed 50% of the score.
- With a stable extra payment, you can get there early.
- If you lock in low rates, you may unexpectedly see 50% crossover points.
The dual benefits of low mortgage rates
With a 5% loan of $572,000. Monthly payments are about $3,071, starting with only $687 (22.3%) Moving towards the principal. According to the amortization schedule, you can’t reach a score of 50% until Grade 15.
But the rate is low and the mathematical changes. From the start, your payment involves principal and you will benefit from cheap debt and faster equity accumulation.
Here is an example of the same $572,000 mortgage, but this time, it was amortized by 2.25% over 30 years. Now, the difference is obvious: monthly payments drop to $2,186, $3,071 5%. better, $1,114, or 51% of the payment, is immediately used for principal.
At first glance, this setup may trick you into throwing more money in principle. But in reality, you probably won’t – shouldn’t. At such a low speed, the urgency is very small. When your mortgage rate is below inflation or even 10-year fiscal yield, you are essentially a free loan that you actually hold, which is a negative real-rate mortgage.
Ideal time to pay off the mortgage
In most cases, the urge to repay a mortgage does not really work until two things happen:
- More than 50% of your monthly payments are finally involved in the principal.
- It has been 10 years or more for you to balance.
From my experience, once you go over the 10-year standard and see most payments to address the principal, the motivation accelerates. By then, you may also earn more income, which makes additional repayment easier.
Remember: Once your mortgage disappears, your motivation to be busy may drop. This is why when another natural turning point of yours is happening Prepare to retire. If you plan to stop working, it usually makes sense to have no retirement debt. Estimate when you want to retire and then go back to how much extra principal you need to pay each year to fully repay the mortgage by that date.
Beware of your return on your larger cash flow mortgage
One underrated benefit of carrying a mortgage is the discipline of IT forces. Each payment reduces debt and establishes equity. You can’t easily blow this money onto trivial things. In this way, the mortgage can serve as a mandatory savings plan for the spender with discipline reduction.
Once gone, you have something powerful: a valuable asset that can generate rental income or permanently save you from rising rents. You will also suddenly have more cash flows per month that can guide you what you want, and freedom is both a blessing and a temptation.
For us, the release of $2,500 per month has been liberating. We plan to use it for experiences, higher quality items to improve our lives, invest in the future of our children and donate more to charities. The additional free cash flow also provides greater peace of mind during the next inevitable recession.
A mortgage allows you to live in a better home, and you only need to pay cash. But at some point, the appeal of total debt is greater than the financial arbitrage invested elsewhere. Even if you can squeeze out higher returns in the market, peace of mind without a mortgage wins often.
Final review
The decision to pay off the mortgage is both financial and emotional. Ratio, interest rates, and amortization schedules provide useful guides, but ultimately depends on how much you value peace of mind and potential returns elsewhere.
If you are not sure what to do, start by running the following three numbers:
- Your mortgage balance ÷ annual payment ratio -When this ratio is low (thinking: 10, 5, 3), paying off the mortgage becomes more and more eye-catching.
- Your target retirement date – Work backwards to see how much extra principal you need each year to be free of debt when you stop working.
- Mainly shared cross-border – Check when More than 50% of each mortgage Go to the principal. Crossing this trademark is a psychological turning point: you will see faster equity construction and often feel more motivated to get the job done.
Run these three quick checks and you will have a clearer, practical picture – maybe it’s a better feeling for you to recover the reward or peace of mind.
Reader, how long do you think is the ideal time to hold a mortgage? What other factors do you weigh in when deciding whether to speed up the principal and repay it completely? For example, will job stability, timing at a children’s college, investment opportunities or tax considerations affect your decision?
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