“So you want to payoff your mortgage faster?”
I wish I had read this before paying off my mortgage!
Some banks or other financial institutions offer a mortgage accelerator program. It’s usually some type of program that helps you payoff your mortgage faster. The deal is, they charge you for this. It could be anywhere from a few hundred bucks to several thousands dollars.
Do not use these programs. They are a total rip-off. You can use any of the methods below to payoff your mortgage faster without spending a penny.
Paying off your mortgage faster is something most homeowners consider at some point. There are practical and psychological reasons for doing so. We’ll hit the pros and cons after discussing the 5 top strategies to payoff your mortgage fast.
Make sure that your loan doesn’t have a prepayment penalty built in. They are uncommon, but out there. Be sure you understand how much it will cost and if it makes sense to pay this fee.
By the way, when you get a loan, make sure there isn’t a prepayment penalty!
In my case, I bought a townhouse in 2003 in Alexandria, Virginia for $280,000. I put 10% down, financed 10% of the loan at a 7% interest rate, and then rest was a mortgage at 5.5% on a 30-year fixed rate loan.
While reading Dave Ramsey’s Total Money Makeover book one day, I saw the section in there where he suggests paying off your mortgage after paying off debt and funding retirement accounts.
I thought, wow, that’s a crazy idea!
But the idea of paying it off intrigued me. I liked the idea of having no debt!
I threw everything I could at that loan over the next six years and paid it off.
And I LOVE the feeling of it being gone.
Let’s go over five top strategies for paying off your mortgage early.
We need to have an example loan to compare payoff times to. Our example will be:
$250,000 mortgage 30-year fixed at 4.0%
1. PACK A LUNCH
This assumes you’ve been eating lunches out on a regular basis at work, and you’ve decided to pack all lunches, take that savings, and apply it to paying off your mortgage faster.
Let’s assume that the savings of not eating any lunches out is $150 a month.
The remaining balance is $250,000.00. By paying extra $150.00 per month, the loan will be paid off in 24 years and 3 months. It is 5 years and 9 months earlier. This results in savings of $38,759.54 in interest.
If Pay Extra $150.00 per month
The Original Payoff Schedule
Packing lunches knocks off almost six years, and saves you almost $40,000.
That’s huge. Anybody can do that!
Let’s take this a step further, what about no lunches, and no coffee from Starbucks. I’ll estimate the savings from making coffee at home instead to be $100 a month. Now you can put the $150 for bringing a lunch and $100 from making coffee all toward your loan
The remaining balance is $250,000.00. By paying extra $250.00 per month, the loan will be paid off in 21 years and 7 months. It is 8 years and 5 months earlier. This results in savings of $56,161.27 in interest.
If Pay Extra $250.00 per month
The Original Payoff Schedule
You almost knocked 3 more years and almost $20,000 more dollars saved by giving up Starbucks. Again, that’s easy, but HUGE!
You can see it is very easy to payoff your mortgage much faster by finding small places to save and adding it to the loan principal. Let’s try something else.
2. BI-WEEKLY MORTGAGE PAYMENTS
This is a simple concept. You make half of your monthly payment every two weeks. By the end of the year, this will results in 26 half-payments, or 13 full monthly payments. Essentially, we are sneaking in an extra house payment each year.
Let’s see how much this helps.
The remaining balance is $250,000.00. By paying $596.77 bi-weekly, the loan will be paid off in 26 years. It is 4 years earlier. This results in savings of $27,380.69 in interest.
If Pay $596.77 Biweekly.
The Original Payoff Schedule
That’s pretty helpful. Four years earlier for just one extra payment a year. Almost $30,000 saved.
Let’s see how much better we do with paying off our mortgage by adding more house payments per year.
3. EXTRA HOUSE PAYMENT PER QUARTER
Making an extra house payment once per quarter works out to an extra $397.85 per month. This will probably pay things off quite a bit faster. Let’s take a look.
The remaining balance is $250,000.00. By paying extra $397.85 per month, the loan will be paid off in 18 years and 7 months. It is 11 years and 5 months earlier. This results in savings of $75,028.65 in interest.
If Pay Extra $397.85 per month
The Original Payoff Schedule
Yep, that’s pretty fast. You’ve almost changed a 30-year loan into a 15-year loan. In fact, that’s the next method. The pretend refinance.
Let’s see how much more money it takes to payoff the loan twice as fast.
4. THE PRETEND REFINANCE
Let’s pretend our loan has changed from a 30-year fixed to a 15-year. You’ll increase your payments to the new amount, and payoff the loan twice as fast. No, you don’t have to double your payments to pay it off twice as fast, it’s actually quite a bit less than double.
The current monthly payment is $1193.54. If you raise that amount by 54% to $1849.54, you payoff the loan in half the time. Pretty awesome.
The remaining balance is $250,000.00. By paying extra $656.00 per month, the loan will be paid off in 15 years. It is 15 years earlier. This results in savings of $96,835.24 in interest.
If Pay Extra $656.00 per month
The Original Payoff Schedule
Not to mention almost $100,000 saved!
5. PUT YOUR WINDFALLS INTO YOUR MORTGAGE
This is the method I used. I already paid off my other debt, maxed out retirement accounts, and had been saving money in taxable accounts. I got it in my head that I wanted to payoff my mortgage so I went for it.
With this method, you really throw everything you can at your mortgage in the hopes of paying it off fast. Faster than 15 years. Maybe faster than 10.
The kind of “windfalls” that can go towards a mortgage are things like end of year bonuses, tax refunds, inheritances, payouts from insurance claims, money from selling valuable items like jewelry, cars, rare records collections, you name it.
You may also decide to devote all the money from a raise towards paying off your mortgage. You could also use all the money from a side hustle or second job toward this end.
I started flipping houses, and decided to use all that money towards paying off my mortgage. It ended up being a huge help. I also ended up selling my investments which had been doing well for several years to get the last $10,000 I needed to finally pay things off.
For me, I paid off the mortgage in six years. It may take you longer or shorter. Everyone’s situation is different.
That’s the how to pay it off.
But should you pay it off?
It’s time for PROS and CONS
A Guaranteed Risk Free Return: It’s a guaranteed risk-free return at whatever rate the interest is. These will typically beat the returns of bonds, cd’s and treasuries. If your mortgage was 5% interest, you are guaranteed to come out 5% ahead in the future by paying off this loan early. It equates to the savings in interest that were calculated above by paying these off sooner. To be fair, this interest is sometimes worth it when you find other uses for your money, like investments that yield higher than the interest rate you are paying.
Peace of Mind: Another great reason is the peace of mind it brings to not have a mortgage payment that must be made every month. You have an almost-free place to live (still gotta pay taxes, insurance and upkeep), and know that you won’t end up losing your house to foreclosure when you are unable to make the interest payments due to some unforeseen issue regarding future income.
Asset Protection: Several states have special rules that protect home equity in the case of a lawsuit. Homestead rules in many states protect the equity in your home up to certain limits. This is a protection not afforded to most asset classes. Home equity is unique in this sense. Retirees can have home equity protected as an estate planning strategy to make sure something is available for a surviving spouse should the other spouse use up all available assets with medical bills with a prolonged illness.
Reduced Cost of Living: Mortgage payments are usually your biggest expense every month. Eliminating this allows the ability to save more, work less, take the job you’ve always wanted, or prepare for retirement with a limited income.
Get Rid of PMI: In cases where your loan has PMI, when you decide to payoff your mortgage faster, you will more quickly pay it down to a level where PMI will no longer be required. This cuts your monthly mortgage bill even further accelerating loan payoff.
The Mortgage Hedge on Inflation: This is by far the most important, but least understood negative side of paying off your mortgage early. When you spread out a fixed payment over 30 years, that fixed payment becomes cheaper every year because of the effects of inflation. For this reason, a mortgage is actually a hedge against inflation
If you use a present value calculator, you can see what your mortgage payment at the 27-year point would be worth in today’s dollars. Even though it’s still the same payment, because dollars are worth less, you are paying it back with cheaper money. Also, because of inflation, your rent or salary or other income should be much higher by then. At a 3.5% inflation rate, a $2,000 monthly payment 27 years in the future is only $846.29 in today’s dollars.
This also means that the number we calculated earlier showing how much money was saved in interest by paying the loan off early is misleading. You would have to correct that for inflation. The payments you avoid in the future are actually in depreciated dollars. This is tricky, but important to understand.
Leverage Tends to Make More Money Over the Long Run:
Let’s take two scenarios. In one scenario, you buy a $50,000 house for cash. In the other, you make a $50,000 downpayment on a $250,000 house.
If things go normally, over the long term, you will have more cash flow and build greater wealth using a 30-year loan with a low interest rate than you would have buying with cash.
This is because of the power of leverage. When the price of your house raises 10% in a given year due to high growth in the area, you gain $5,000 of value in the cash buy, but $25,000 of value in the mortgage buy. You control more money because of leverage.
The same with cash flow. The $50,000 house rents for $500 a month. A 10% increase in rents adds $50 to your cash flow. But a $10% increase on the other house is much better. It rents for $2500, and the increase is $250, or 5 times higher than the cash house.
There is more risk, however, with being leveraged. If things don’t go normal, you could run the risk of losing the property. Loss of a job or real estate bubble burst could cause you to fall behind on payments on the mortgage. With the paid off house, your expenses are far lower, and you could probably scrape the money together to keep it.
Paying off Your Mortgage is Low Return on Investment:
This is true in the era of low interest rates, but won’t be true forever. In this era, a mortgage is some of the cheapest money you will ever borrow. The price of this money is not much higher than the price of inflation (roughly 3% itself), so the savings are not massive, and you may be giving up the ability to use your money in a more profitable location. With the interest being deductible, this brings the cost of borrowing the money down even lower.
The Tax Break: This is an often cited negative point for paying off a loan early, but I’m arguing here that it is widely misunderstood. Mortgage interest is only tax deductible if you itemize your tax return. Many end up not itemizing. Often, if you do try to itemize, you end up taking the standard deduction anyway, because it ends up being higher. Even if you do get the deduction, it’s not pure savings, it just reduces taxable income.
That means that if you spend $10,000 on interest, you may save $3,000 on your taxes. That still means you spent $7,000 on interest that you didn’t need to. I wouldn’t call that a break!
You’re better off not having a loan and paying no taxes.
Talk to a tax professional.
Should I payoff my mortgage early?
Before I give my opinion on this, you need to understand the economic side of the decision to payoff the mortgage.
Two scenarios for purchasing a house:
- Use $250,000 of your savings to purchase a home with cash. Invest the amount each month that would have been your mortgage payment.
- Invest $250,000 in an S&P 500 Index fund (or similar fund), and borrow the same amount on a 30-year mortgage at 5%.
Which scenario has a higher net-worth at the end of 30 years? They’ve modeled this experiment starting in different years going back to the 1940s.
More than 95% of the time, the scenario with the mortgage ends with a higher net worth.
Does this prove anything?
There is a convincing argument in these numbers that leverage helps you build net worth faster by controlling more money. The amount of interest you pay is not enough to detract from this being a much more attractive strategy.
Only in years where interest rates were higher than 15% did this strategy run into problems.
So should you payoff your mortgage quickly?
That’s a personal decision, and I would go back and look at the PROS and CONS again.
I paid mine off, but I did so as someone who has a strong personal aversion to debt.
I also did so knowing that I was retiring soon, and would have more peace of mind and freedom in knowing that I had twenty cash flowing rental properties with no debt on them.
They are just pure money makers!
But if you are playing the numbers, and want to take the strategy that has the highest probability of giving you the best results over the long run, using mortgages to free up money to be invested in the market is the most superior method.
This comes with some risk. If you lose your job, or the housing market tanks again, you may have trouble making your mortgage payments. Depending on how highly leveraged you are, your little real estate empire could come tumbling down fast.
I wouldn’t be highly leveraged without a job or other source of income to help get you through the lean times and bad runs of luck.
Are you for paying off a mortgage sooner, or taking advantage of leverage to make more money?
Leave a comment.
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