Imagine that you have a mortgage you obtained years ago and are finally getting close to paying it off. It's been a long journey, and you're tempted to complete it with one final payment and become debt-free at last—or, at the very least, accelerate your payments a little to end it sooner.

Pay off your Mortgage First

Although it could be tempting to begin your mortgage repayment at the finish, it is better to do so at the beginning. Even if you make the same amount every month, most of it is spent on interest in the first few years and does little to reduce the loan's principle (assuming you have a conventional 30-year fixed-rate mortgage).

Therefore, by making extra payments at the beginning—and decreasing the principal on which interest is being charged—you may pay much less in interest throughout the loan. Since the same rules of compound interest that apply to your investments also apply to your debts, the savings you make from paying down more of your principal early on your loans are compounded over time.

Calculate Your Monthly Payments

The price of your home, your down payment, the length of the loan, your property taxes, your homeowner's insurance, and the loan's interest rate all play a role in determining your monthly mortgage payment (which is highly dependent on your credit score). Use the variables below to estimate your possible monthly mortgage payment.

An Example of Mortgage Reduction

Therefore, let's pretend that your mortgage is still in its first ten-year period. If you make 12 monthly payments on a loan for $200,000 with a 30-year fixed rate of 4.38%, the total lifetime interest will be $159,485. However, you will ultimately save $27,216 in interest if you manage to make 13 payments in a row each year. In addition to paying off your mortgage, if you contributed an extra $200 each month, you could save $6,000 in ten years and $50,745 in two and a half.

Other Mortgage-Related Factors

Saving money on interest isn't the worst idea in the world. However, mortgage interest is distinct from other forms of debt. It is tax deductible if you itemize deductions on your income tax return. In 2021, you can deduct the first $750,000 of a mortgage on your home (or $375k if you're married and filing separately) from your taxes.

The first $1 million in debt (or $500,000 if you're married and filing separately) incurred before December 16, 2017, can be deducted from your income as interest on a home mortgage. If you need to do something to reduce the amount you owe Uncle Sam, keeping the mortgage can be helpful.

The Tax Cuts and Jobs Act (TCJA) of 2017 nearly increased the minimum deductions allowed. As a result, many taxpayers were no longer compelled to itemize their deductions, and many homeowners decided to forgo the mortgage interest tax deduction.

Finance Your Retirement First

Unfortunately, while paying off or reducing a mortgage faster is preferable, starting to save for retirement earlier is also advantageous. Thanks to compound interest, a dollar invested now is worth more than a dollar invested five or ten years from now.

Because it will generate income for a longer period and the interest will also continue earning interest, this is the case. Every year you delay investing for retirement, you will consequently suffer disproportionately.

As a result, it frequently makes more sense to start saving for retirement when you are younger than to pay off your home sooner. You may estimate your retirement savings using the U.S. Social Security Administration's calculator.

Extra Mortgage Payments Versus Investing

Assume you had a $150,000 mortgage with a fixed 4.5% interest rate and a 30-year term. If you only pay the minimum payment of $760 each month, you will pay a total of $123,609 in interest. $948 a month, or $188 extra, would pay off the mortgage in 20 years and save $46,000 in interest.

What tax implications should you be aware of when paying off your mortgage?

If you need to do something to reduce the amount you owe Uncle Sam, keeping the mortgage can be helpful. It is tax deductible if you itemize deductions on your income tax return.

Conclusion

Great skill is paying off or lowering a mortgage early. Your financial status and overall welfare will benefit from starting your retirement savings early. The rate of growth of your investments in an IRA or index fund will beat the interest rate on your mortgage even though your mortgage payment won't be compounding.