A savvy investment strategy for the next decade? Pay down your mortgage faster

By Money Matters Editors

What’s the best investment strategy for the next decade? Well, that varies, depending on your risk tolerance, investment horizon, and investment goals, among other factors, but here’s a good investment tactic if you own a home in the U.S.: pay down your mortgage quicker.

That’s correct: paying down your mortgage quicker will help you achieve your financial goals.

Here’s how:

This decade, the Americans got into a lot of problematic - and in some cases very risky – habits/practices regarding debt. One of them was the now well-publicized teaser-rate mortgage, where borrowers were granted loans at very-low ‘temporary’ rates, even though, in some cases, the loan would become unaffordable for borrowers after the mortgage reset to its regular rate. The result was predictable: an increase in U.S. home foreclosures to record levels.

What’s more, there’s a variant of the above that Americans of conventional, fixed-rate mortgages probably don’t recognize, but it’s also problematic: paying the minimum on your mortgage.

Now don’t misunderstand: if you pay your mortgage on-time each month you’ll be in good graces with your bank/mortgage lender, and your credit score will not be affected.

A way to decrease total interest paid

The problem with above is that paying the minimum due each month on a 30-year, fixed-rate mortgage doesn’t reduce the debt really fast. It’s almost like paying the minimum due on a credit card: not the best way to reduce debt quickly.

With the above in mind, a home owner should try, where possible, to pay more than the minimum each month. The savings can be really substantial: truly eye-opening.

Here’s an example:

On a $200,000 fixed, 30-year mortgage at 6 percent that starts in September, the monthly payment is $1,199.10. You’ll pay $231,676 in interest in 30 years, in 2039.

But if you add just $100 per month to the monthly payment, you’ll pay just $182,537 in interest and the mortgage will be paid-off 6.5 years earlier, in 2034!

Add $200 per month, and you’ll pay just $151,875 – or about $80,000 in interest saved – and the mortgage will be paid-off 9 years earlier, in August 2030!

The advantages of paying more than the minimum on your mortgage may not be obvious to all investors. You’re not only staying in good graces with the bank/lender, you’re building equity much quicker – that’s always a good thing when you own residential real estate. Second, that extra $80,000 in interest saved may not seem like much while you’re making the extra payments, but it will when your mortgage is paid in full, 9 years ahead of time.

Paying more than the minimum is also a statement to the bank/lender that you far exceed the minimum debt servicing requirement. And when you think about it, that’s a good practice for individuals, corporations, and the nation.