What Happens

• A conventional 15- or 30-year fixed loan has an amortized repayment schedule. The interest you pay is based on the remaining principal balance each month. Many first-time homebuyers are surprised when they see that the majority of initial payments go toward interest, not principal. When you add a little extra each month toward principal, you more quickly pay down the principal amount. This means the next month, the principal used to determine your interest is lower.
  
  

Benefits

• J.D. Roth argues in his February 2008 Get Rich Slowly article "Mortgage Prepayment Made Easy: Own Your Home in Half the Time" that the psychological motivation of owning your home more quickly justifies homeowners paying extra toward their principal each month, especially in the beginning. Even paying a few dollars extra consistently can shave years off of the life of your mortgage by increasing the rate at which more of your payments go toward principal than interest. Even Weston concedes that with a 6 percent mortgage, you can save $52,000 in total interest and cut about 4.5 years off your mortgage payback.
  
  

Why Not

• On its own merits, paying down your mortgage quickly makes good sense. However, Weston and other financial experts with a bigger picture perspective advise homeowners to consider their homes as investments. Bankrate.com notes a historically low 4.19 percent national average 30-year fixed mortgage rate at the time of publication. When you consider the tax deduction you get for mortgage interest, your real borrowing rate is closer to 3 percent on this loan rate. Weston notes that this is a very low rate of return on your cash. Your decision as to how to use extra cash is especially clear if you have revolving credit card debt with higher rates and no tax benefits.
  
  

Decision

• Neither Weston nor Roth argues about the implications of paying down your mortgage early. They differ on whether financial benefits or psychological benefits have more importance. Getting out from under a mortgage quickly definitely helps with monthly budget restraints. However, Weston notes that many people are still near retirement, even if they shave a few years off. Her advice is to invest more in retirement accounts or consider other investment opportunities with a better rate of return. She cites a federal study that found that Americans lose around $400 per year by paying down mortgage early versus putting more in retirement accounts.