Is Paying Down Your Mortgage Faster A Good Investment Strategy?

The idea of paying down your home mortgage balance faster is not new, however, it can be a very good investment strategy and you will be getting to see how that that works in this article.

The approach of paying down your mortgage faster is suitable for individuals that are looking for a conservative and less risky way to invest some extra cash flow or funds. Paying off your mortgage early involves the idea of paying some cash in order to earn 4% (or whatever your exact home mortgage interest rate may be). Furthermore, the idea of paying down your mortgage faster is good when you intend to continue pumping the monthly accelerated mortgage pay down amount into a retirement account after your mortgage has been paid off.

Below is an example to make simple how the accelerated mortgage payment strategy works:

I am in a good financial shape with both cash at hand and a positive monthly cash flow and I hope to remain in such a position for a very long period of time. I have a $400,000 balance on a recently refinanced 30-year first mortgage that has an interest rate of 4%. My monthly payment ( principal and interest rate inclusive) sums up to $1910, which would take a whole 35 years before the mortgage will be completely paid off. Assuming I am 35 years, the mortgage will be finally paid off when I am 75; which is not so not cool having to keep paying mortgage at such age.

Getting a guaranteed, risk-free 4% return by paying down mortgages early is a solid investment idea. If I adopt the accelerated mortgage pay down strategy and make a payment of $3500 per month instead of the stipulated $1910 monthly payment, I would pay off the $400,000 mortgage balance in about 12 years; and at 57 years instead of 75 years. I would earn a guaranteed 4% rate of return because that is the interest rate I avoid on the accelerated principal payment method, which is quite cool.

Pros of accelerated mortgage pay down

Continuing the program after your mortgage has been completely paid off is beneficial as interest charges are avoided and debt is eliminated from personal balance sheet. Another advantage is that the program can be stopped or started at will.

Cons of accelerated mortgage pay down

The program is often criticized because there is a tendency to lose tax deductions as interest charges will go down more rapidly than if you stick to the stipulated monthly payments.

The program can be impacted by inflation or deflation in the future. Though this strategy yields results, it is not totally guaranteed. In periods of inflation, paying down a mortgage with a relatively low interest rate earlier than normal may not be sensible, rather it is advisable to stop the program, allowing the mortgage term to stretch out, then pay the balance with cheap inflated dollars. The accelerated program is good in periods of deflation, as the mortgage is being paid down sooner when dollars are cheap rather than when they become expensive.