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When Should You Begin to Aggressively Pay Down Your Mortgage?

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The clear advantages of paying off your mortgage as quickly as possible have changed quite a bit over the past few years. The urgency to pay it off has somewhat diminished, as interest rates have plummeted to historical lows. It's no longer the black and white decision it was back when interest rates hovered between 6 percent and 9 percent, and even the 11 percent to 13 percent we saw a couple of decades ago.

I am a big proponent of paying down that ugly mortgage beast as soon as is practical. But, before you go cutting a check to the bank, there is a pecking order of financial priorities you need to address before you consider tackling your mortgage.

In order of importance, here are the places you need to put your financial attention first:

  • Take the Cards Off the Table: Pay off all credit cards with high interest rates. Consider the huge discrepancy between credit cards with interest rates of 13 percent - 23 percent, and a 4 percent mortgage interest rate.
  • In Case Of Emergency: You need to build an emergency fund, ideally 8-12 months of living expenses. Yes, today's job market is improving, but if you suddenly find yourself facing a layoff, you need to be prepared to sustain up to one year of living expenses.
  • Build Up For Retirement: Are you able to make the maximum yearly contributions to your retirement accounts, 401K, IRA or an equivalent?  Ask your accountant what the maximum allowable is for you and go for it!
  • Get The Kids To School: Ah yes, the kids, their schools and their college funds. Depending on how many children you have, how old they are, and what type of college enrollment expectation they have, you need to be making adequate contributions to those 529 plans or other college savings accounts.
  • You May Live A Long Time: My mom is 97 this year, and my aunt just turned 100.  So I am keenly aware that my money could run out before my health runs down. Another priority investment you need to be making each year is toward long-term health care insurance. It is not as costly when you start it in your 30s or 40s. But, if you didn't get around to it till your 50s, it will take a hit out of your budget each month.

Once you have paid out and paid off all of the above...you are ready to begin to slay the mortgage dragon with the remaining funds you have available.

Next consideration is age. I believe that you should make efforts to pay off that mortgage by the time you plan to retire.  There is something very freeing about the release of that last mortgage payment when you switch to a fixed income.  Plus, chances are you will not need the mortgage interest deduction.

One important note that many people don't realize is that when you are into years 20 through 30 of your mortgage payment, you are paying very little actual interest compared to what you paid in the early years.  The banks have very cunningly structured mortgages so that they get a large portion of their money early on via interest sooner than later over the 30 years.

  • But How Fast and How Much Should I Pay Down?
    I always suggest making that decision by counting backwards. If you want to retire and be mortgage free by age 65, then calculate how much extra you will have to pay monthly or yearly to pay it off by that date. There are numerous calculators online that will help you do this.
  • Here's an example: You bought your home at age 45 with a 30 year loan at 5 percent. You are now 55-years-old and you still owe $300,000 but plan to retire at 65. You are going to need to up your current payment of approximately $1,650 a month to approximately $2,650 a month till age 65. Not only will you get your mortgage paid off ten years sooner, you will have saved almost $78,000 in interest!

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