Debt Free

That sounds like something we'd all like to do. $100,000, maybe even $200,000, the more, the better. You'll also end up 100% debt free, if you'd like to. The best part is that it's basically guaranteed. It will cost you nothing in the long term to make it happen either. Sure, you may have to shell out a little bit extra every month now, but in the end, you'll be kissing yourself for it. It's so simple a child could do it, and it's pure math. You know what they say about math; it has to work.

What is this mystery that will enrich you and your bank or investment accounts? It's the magic of paying down the principle on your mortgage. Just one extra payment every year can work wonders. Take your mortgage payment schedule and look at how much mortgage interest you'll be paying during the life of the loan. Maybe you should sit down first. If you've never looked before, take note of how little principle you actually retire for the first half of the mortgage. It's kind of sickening, isn't it?

As an example, let's assume (you know what happens when you assume) that you have a $250,000 mortgage at 6%. Did you know that every month, when you pay roughly $1,500 in P&I, that only about $250 of your payment is actually paying down your loan balance? The rest goes purely toward interest for your lender. At the end of your 30 year mortgage, you'll have paid that lender almost $290,000 in interest alone.

What it all means is that, if you were to pay only $250 extra each month, you'd be saving yourself $1,250 in future interest payments, and paying off the loan an month sooner. Paying 250 to get a guaranteed $1,250 return is pretty good math, no matter how you slice it. In addition, you'd pay off your mortgage in 251 payments instead of 360. You don't have to be a math wiz to see that adds up to substantial savings. The extra 251 payments of only $250 equal $62,750. The 109 payments of $1,250 you didn't have to make come out to $136,250. Ignoring the time value of money for a second, you saved $73,500 and rid yourself of your mortgage debt 109 (9 years) months earlier. Pay an extra $350 every month, and you'd be mortgage debt free 134 months earlier!

Now, there are two sides to this coin. You can pay off your mortgage early using the strategy discussed above, and after your mortgage debt is retired use the extra money to invest every month. The other strategy is to make the minimum mortgage payment and invest the extra money every month. There are two problems with that investing strategy.

1. You would need to make a pretty good rate of return to make it pay off if you were to use that strategy, and that rate of return would need to be consistent over the long term. If you invested that same $250 per month from the example above at a pretty stellar 12.5%, in 20 years you'd have grown it to $850 at the end of the 21 years. Money invested later will give a lower figure. So, even the first extra payment you make will beat any investment you're likely to make.

2. You actually have to invest the extra money you would have paid on the mortgage principle. It's pretty to use that money for other expenses or frivolity instead of investing it.

If you can generate a high, consistent return, and you have the discipline to do so, you can make the second strategy pay off. If you're like most people, however, the second strategy is easier, and it's guaranteed to work.