There are so many variables to consider, that there is no hard and fast rule. It depends on the interest rate you are paying on the mortgage, how long you have left to pay, what rate can you receive for investments, and what your spending habits are. For the average person, the best approach is to pay a little extra towards your mortgage each month. Over the long haul this will reduce the length of your mortgage, since you will be paying more on the principal and less in interest. If you have extra cash, pay a little extra on your mortgage. It can’t hurt, but it does tie up the cash.
If you are thinking about paying off the balance of your mortgage early in a lump sum there are many factors to consider. If you have a lot of cash sitting around and no place to invest it, paying off the mortgage can save you a bundle in interest, especially if you have a high mortgage interest rate. For example, if you are paying 6 percent on your mortgage but only getting 2 percent on your investments, why not pay off the mortgage and save the 4 percent difference. This assumes you have no immediate need for the cash. It works the other way as well. If you get 6 percent at the bank but only pay 4 percent on your mortgage, why pay it off early? If you are the kind of person who spends all his available cash, maybe it would be a good idea to put some of it into your house so you don’t spend it.
If you pay an extra $100 each month on your mortgage, it is a safe, conservative way to pay it off. You gradually tip the scales in your favor as your equity increases and the interest portion of the mortgage payment decreases. Pretty soon, you are paying more in principal than interest and you are rushing toward the point of mortgage freedom. Or if you sell the house, your equity will be that much greater.
Mortgage interest is deductible on your federal income tax, so if you are paying less interest, your deduction becomes smaller. Your tax bill will be a little higher if you itemize your deductions.