There are many theories about whether or not you should pay off your home mortgage early, or even make extra payments on it. One group, which my brother falls into, says pay as much extra as you can afford every month in order to own the house outright as soon as possible. Another group, which my father tends to agree with, says never pay a dime more than you have to, and always finance/refinance for the longest term possible to keep monthly costs low. There are some merits to both sides.

First off, almost every home in this country is an investment. And if the home itself isn't, the land it sits on probably is. Realestate appreciates over time, which generally makes your mortgage "good debt."

There is a lot to be said for paying as much as you can to pay off your home as quickly as possible. The most notable is the freedom you'll have from your mortgage, think about how your standard of living, savings, and about everything else in your life could improve if you didn't make a mortgage payment every month. My brother sees it as his first goal to financial freedom, he thinks all his problems will go away once his house is paid off. He recently refinanced his 30 year fixed loan into a 13 year (he was about 6 years into the 30 years so he really only dropped 11 years off). His payment went up a bit, the interest rate went way down, and he will have his house paid off in roughly 11 years. Couple that with the near 6% increase in value homes are getting in his area and he'll have a great deal of equity.

That sounds good in theory, but in practice simply doesn't hold true. If you can be disciplined enough to take the extra that you would have paid to the mortgage, and instead invest it in an index mutual fund, you will almost surely come out ahead. Of course, this is more true the lower your mortgage rate is. In my case I have a fixed rate of 5.75% for 30 years, and we are just under a year into it. We can't forget the tax deduction for mortgage interest, which gives me back about 28% of that, or about 1.5%. So in reality I'm paying an interest rate of about 4.25% for my mortgage. Take any 29 year period in history, and almost every sector of investing (Bonds, CDs, Stocks) will beat a 4.25% return. In fact the stock market has grown an average of around 9% over the last 29 years, even after the 5 year's recession. I'm better off taking what I would pay extra on my mortgage and putting it in an index fund that will closely match the market returns.

Now, granted, there are some exceptions. Like I said before, for my theory (it's not really mine, a great many others thought of it long before me) to hold true, you have to have the discipline to actually invest the overage instead of spend it, and also not touch the money in the fund while it's growing. If you spend the money every month or raid the index fund to pay for your vacation every year, this won't put you ahead.

Another caveat is PMI. I would support paying as much extra on the mortgage as you can until you own 20% equity so you can avoid paying PMI. Once you get past this hump though, start you index fund and watch your wealth grow!mortgage calculator