There are a couple of things missing though.

At some point you still need to calculate in your interest deductions for taxes which will be slightly less due to the principal being paid down. This might not be enough to add up, but I’m not sure.

Then you have to assume you beat the rate of of return of your mortgage interest rate. I am an investor who is spread across the markets, but year in and year out being able to say that $1000 or so will gain after taxes 6%+ is not a given.

I can only think that since the article addresses only 40% of the people who pay off their mortgage early, that they must be referring to people who have a high interest rate or a variable rate that fluctuates.

At least your know by paying off your mortgage earlier you know how much you are savings. If you save more, you are not guaranteed those savings and you will also pay taxes on those gains.

I’d love to see some numbers from the article to see how they arrived at the referenced numbers.

(1) how much, after tax, you could make by investing your next $1000 over the next year. My experience suggests that 6-9% might be a realistic assumption. Strictly speaking, a risk-free, after-tax rate of return would be in the 3-4% range.
(2) how much, after tax, you’d save in interest with an early mortgage or LOC payment.

Many mortgages are in the 3-7% range — clearly an early payoff makes no sense here, based on current interest rates. However, many LOC’s (and some mortgages) are in the 8-12% (or worse) range — here an effort towards payoff can make sense.

Personal aversions to debt may take you in a different direction, but at least you know the cost of your decision.

Good luck!

WRONG CHOICE:
“Nearly 40% of U.S. Households that speed up mortgage payments to pay off their debt early would save more—$400 per year, on average—by investing the extra cash in a 401(k) or 403(b) plan, reports the University of Michigan.”

Now after reading that, I am going to need to reevalutate what’s more beneficial, paying excess payments toward principal on my mortgage or investing even more in savings.

I always assumed that paying more towards the principal was the thing to do, as I saved tens of thousands in interest. Just think a $150K house with normal payments will basically cost you $300K over 30 years with the normal payment schedule.

So the tidbit is saying take that extra money and invest it and you will reap more. The hard part is to try and find the break even point. If you were to pay extra on your mortgage towards principal you would not pay off a 30 year mortgage in 30 years. Depending on your interest rate and the extra amount you pay towards principal could change the number by as much as 5 to 20 years or even more or less than that.

So maybe I should sit down and see if I can find out if I’m doing the right thing. If anyone has a formula or calculator for trying to figure this out, I’d be very interested. My brain hurts from just thinking about how to figure this one out.