Real Estate Marketing & Beyond
The Urban Institute and other reliable sources say that more than 26.9 million Americans own their homes outright. It’s the second American Dream - the dream that comes after buying a home in the first place. Think about how much your life would change if your home were paid off in the next five years. Imagine living your life free and clear of a mortgage or monthly rent payment. What would you do? One couple in Houston took out a $300,000 15-year mortgage and paid it off in 5 years. Then they quit their corporate jobs, spent a year traveling, and finally settled down to become entrepreneurs working at jobs they love and only working when they want to. Today, they earn much less than they did in 2016 but are comfortably living a life they love.
There are many ways to pay off your mortgage early. It typically requires making financial sacrifices for a few years so that you become free and clear of the mortgage to begin living the rest of your life on your own terms. The Houston couple did it by taking out a 15-year mortgage instead of a 30-year mortgage. They diligently saved enough to make a 10% down payment.
Then they made extra principal payments at every opportunity. Along with their regular monthly payment, they added an additional principal payment every month. This cut their 15-year mortgage to 7 ½ years but they didn’t stop there. Every time they got a bonus from work or came across some extra funds, it was applied to the mortgage principal. Months that had three paydays meant making two extra mortgage principal payments. What they had already cut down to a 7 1/2 -year mortgage was reduced to 5 years to become free and clear. Not only is that monthly nut gone from their lives, they probably saved in the neighborhood of $100,000 in interest payments.
Everyone’s situation is unique and that determines how fast you can become free and clear. The Houston couple makes a good example because that is about as fast as the average person can reasonably pay off their mortgage. Even if you’re locked into a 30-year mortgage and don’t want to refinance to a 15-year, you can start making that extra principal payment to cut it down to a 15-year mortgage. If you make two extra principal payments every month, you cut it down to 7 ½ years.
Pay an extra principal each month. Get a copy of your amortization schedule. Each month, write a separate check for the amount due towards your principal the next month. You don’t borrow the money that month, so you don’t owe the interest on it. Consistently doing this every month from the beginning effectively changes your 30-year loan into a 15-year loan. No refinancing is required.
If you’ve been in your home a few years, your income has probably increased but not your monthly payment. Pay most or all of that additional income towards the principal.
Not everyone can make an extra payment every month but there are other ways you can still pay off your mortgage and save a lot in interest payments. Often these work best if you get an annual bonus once a year or maybe receive a lump sum of cash from an inheritance, a tax return, a court settlement, or other sources of funds. Applying lump sums towards your mortgage will pay it off sooner but not in a linear way that is simple to calculate such as cutting a 30-year mortgage into a 15-year mortgage.
Maybe you struggled to make the monthly payment for the first 5 years but are much more comfortable today. You don’t have to make those extra principal payments starting at month 1 of the mortgage. You can begin at any time. You also don’t have to make exactly a full month additional principal payment. Maybe some months you can only make half of an additional payment. It doesn’t matter. Every extra dollar goes towards paying down the outstanding balance. That means owing less interest each month and paying off the mortgage faster.
There are other ways to pay it off early even if it’s not the fastest way to becoming free and clear….
Regular extra annual payments. Using an example of a $200,000 30-year mortgage at 4.2%, you may be able to begin making an extra $2,500 annual payment after a few years. Around year 5 is when many people find their income outpacing their mortgage payment. That extra $2,500 annual payment results in paying off your loan 6 years and 11 months earlier at an interest savings of $34,449.
Make 13 payments in 12 months. You could put 1/12th of a monthly payment into a special savings account. Or maybe you get paid every 2 weeks that results in an extra paycheck two months out of the year. Making a 13th monthly payment saves you about $26,000 of interest and cuts more than 4 years off the length of the example loan above.
Pay bi-weekly. This is another simple plan to follow. You make half of your mortgage payment every two weeks. That results in 26 half-payments that total 13 full monthly payments each year. That extra payment can knock 8 years off a 30-year mortgage, depending on the loan’s interest rate.
There are many ways to pay off your mortgage early and many online mortgage calculators to show you how much you’ll save. You may want to live debt-free or you may want to pay off the mortgage before retirement. It’s your choice how you handle your biggest financial responsibility.
Certainly, you have thoughts and experiences about paying off a mortgage early. Please share by leaving a comment.
Also, our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions, inquiries, or article ideas to [email protected].
