Typical Mortgage Amounts and Baby Step 6
According to Zillow.com, the average 15 year mortgage is $1159 and 30 year mortage is $1747. There is nothing wrong with having a mortage as most people do not have $200,000+ to purchase a home out right. But what comes with keeping the mortgage during the length of that loan? Most people believe that you pay the interest all up front so it makes no difference if you pay it off early. But the fact is that the interest you pay each month depends on the balance you have. Baby Step 6 is the process of paying off your home early. But you have a friend that says “with interest rates this low you can just invest extra money and be better off”. But is that true?
Paying Off Early vs Keeping a Loan
The average home value in Florida of a home is over $350,000 in 2021. Below you can see just the loan’s total toll on your wallet as this $350,000 home over 30 years is going to cost you an extra $277,870 in interest!
So now that we know the cost of the loan lets break the myth that the interest is paid all up front and there is no reason to pay it early. Below you can see that the interest paid each year below does go down, but that is due to the balance going down as well. Now if we zero in on year one, the top line of the annual amortization schedule you can see that the interest paid in that year is $14,661.89 and the balance only goes down by just under $4000.
The goal here is to pay off more of the principle early so we have less money we owe the lender. That will reduce our interest by a huge amount. Let’s say a couple bought a $350,000 home with a $70,000 down payment and moved in. The very next day the couple received an inheritance of $30,000. The couple talk it over and weigh their options on how to use this money. If they pay it all towards principle it would drop their balance to $250,000 which would eliminate the interest they would have to pay from year 1 to year 6 and would save them over $70,000 in interest payments alone! They move right down the amortization schedule with each extra payment they make. Now granted this is not a common event but how do you eat an elephant? One bite at a time of course. Paying off extra each month may be just putting $200-400 at a time when you have the money in your budget. That is great! It does not have to be sent in large chunks, but you should always make sure when submitting your payment to your lender they know it is to principle and not a prepayment for the next month.
The Physical Benefits
So, it would be obvious that saving the interest makes room for other budgetary needs by paying off the mortage early. Once the house is paid off early you can use the money that would have typically gone towards the principal and interest in other ways. Completing baby step 6 by paying off your home now allows you to either invest that money, save that money or give. The sky is the limit with the mortgage no longer on the books.
The Psychological Benefits
Not having a mortgage payment or other debts can free your soul and lighten your life. The air may smell different without owing anyone anything. But now we reduce our monthly expenses and allow the 3–6-month emergency fund to expand in size with this new reduction in monthly cost. How nice would it be to help someone in need as you now have more money in your pocket? Or if your job is giving you a hard time you can just make a switch without feeling you cannot leave. This can change everything in your life.
People Pay Off Their Mortgages Early Every Day
Couples and individuals often do a debt free scream and share their journey. See how Alex paid off her home early in the video below. You can do this too! If you need help, feel free to reach out in the link below and see how coaching could be right for you. Complimentary Coaching Session