How to Pay Your Mortgage Off Early

 

Mortgages are Massive Debt

For most people, their mortgage is the largest debt they will ever have. It takes up the majority of their income each month, and a lot of that money is spent directly on interest. Mortgages are large loans, which accrue compound interest each day. They are set up so that for many years, most of the payment you make goes to that interest first, before it ever touches the principal. The principal is the original amount you paid for the house. Most also include payments for property taxes and home insurance, and sometimes mortgage insurance as well. This is why you can make payments that amount to thousands of dollars a month, but your principal balance may go down only slightly. Seems like treading water, doesn’t it?

Mortgages are Good Debt

The good news is that mortgage debt is considered “good debt,” meaning it builds credit, rather than hurting it. The value of your house most likely will go up over time, so the amount you owe will become proportionally less than the house is worth. This is where the idea of having equity comes in. Equity is that difference between value and debt. If you wanted to, you could refinance based on the new higher value of your house and use the extra money for things such as home improvement or paying off “bad” debts, such as credit cards and cars. Many people do this in order to save on interest if the new interest rate is lower, and only have one monthly payment. Mind you, they are only saving on short term interest, as the interest they will pay over a 30-year mortgage after refinancing could end up being substantially more than they would have paid if they paid off their credit cards on their own. As a house builds equity, there are other options, such as taking out a home equity loan, otherwise known as a 2nd mortgage, to pay for those things mentioned above. This gives you a second payment every month. If you don’t want a specific amount of money, a home equity line of credit that works similarly to a credit card with a rolling balance could also be used. So, mortgages have some advantages, due to the fact that they are secured by real property that builds value. This is why it is important to make sure when you buy a house that you are getting a good deal. If you pay too much, and the house actually becomes worth less (as has happened before with housing market crashes), you will not have access to these loans and lines of credit, and the mortgage will become negative debt (referred to as upside down). This is unusual, but can happen if you buy at the peak of the market, when prices are highest.

Conventional Advice

Given those advantages, most finance advisors and coaches will tell you not to prioritize paying off your mortgage over paying other debts. The idea is that if your house is valued higher than your mortgage, you could theoretically sell it at any time and not have that debt. This is true.

How to Payoff Your Mortgage Early: If you are like me and can’t stand compound interest (unless it is building it for myself)

This article is for those that have decided that they want to pay off their mortgage early anyway. I am one of those people. For me, the idea of owing so much money causes me a great deal of stress. I don’t like the idea that as long as I owe that money, I don’t really own the house. Plus, it represents a lot of my monthly income. I also despise the idea of compound interest when it is compounding my debt and not building my portfolio, like it does in the stock market. I feel that it just is not fair to charge people interest over and over on the same money, and then make them pay the interest before the loan balance. It really makes the cost of the house astronomical, even when you think you are getting a good deal. My own house cost around $200,000, but if I pay that over 30 years, I will pay another $200,000 in interest. In my mind, that is like paying 100% interest! Even though the bank calls it 3.75%, the way it is compounded and paid sure adds up. A straight 3.75% on $200,000 would only be $7500. Now, that would be fair! However, it isn’t the way the banking system does it. Fair or not, if I pay my mortgage over 30 years, I will effectively pay double for my house.

I don’t want to pay $400,000 for a house worth $200,000. Even now that the value of the house has risen, I don’t want to pay that much extra in interest. The value doesn’t matter that much to me because I am not planning on selling the house. It is just a number on paper. This is why I have made it a priority to pay my mortgage off early.

Specific Ways to Accomplish Your Goal

There are a few different ways to do that. The first and simplest way to shave years off your mortgage is to split your mortgage payment so that you pay half of it every 2 weeks instead of paying it all once per month. Because of the way interest compounds and the number of weeks in a year, you will actually end up making an extra payment per year and saving yourself a lot of interest. When I switched, my mortgage was reduced by a whopping 6 years! All it took was a call to my mortgage company to change how I made the payments. Now they come out every time I get paid, which is pretty convenient.

Another way to pay your mortgage off early is to send any extra money you have directly to the mortgage principal. You have to be sure that you specify that the extra money goes to principal, or the mortgage company could just send it toward your next payment or interest, or escrow and it wouldn’t help your balance decrease. By sending money directly to your principal, the amount of your loan that is earning interest is reduced, and so is the amount of interest you will pay. You will find as you do this that more and more of your regular payments will start going toward principal as well. It is a good idea to talk to your mortgage company first, to find out if there are any limits on how many extra payments you can send, or instructions on how to make sure the money goes to principal before sending any extra payments.

I tend to send my extra payments at the end of the month, when all my money budgeted for the month is accounted for. I can plainly see what I have left over and send it straightaway. In the past, I have also sent extra payments on payday, if I got more in my check than I had budgeted for in the first place. I also sent any bonuses or pay raise money. These days, because of the COVID pandemic, I am only sending the extra money I make each check, and not leftover money at the end of the month. I am putting that money into savings, until things seem a little more stable. Eventually, the pandemic will be over and I can send a large lump sum to the mortgage, which will still reduce my interest and the amount of years I have to pay. In the meantime, I have the money if I need it. It is also in a savings account that is earning a little interest, as a bonus.

There are other strategies out there to payoff your mortgage early using home equity lines of credit and other such things, but I am not an expert on those, and so I will not address that. What I do know is that if you send any extra money you have to your mortgage principal as often as you can, your balance will go down, you will pay less interest, and you will pay your mortgage off sooner. If you are like me, knowing that someday I won’t have a massive mortgage payment gives me a lot of peace of mind. I will always have to pay taxes and insurance, but it will still be a substantially lower payment each month than I pay now, and it won’t be just giving the bank free money in the way of outrageous amounts of interest.

As a side note, this strategy is almost the same as the one I used to pay off my astronomical student loan debt. See my blog post on Paying off Student Loans for more information.

Take Aways

Mortgage debt, though considered “good debt” is a very large one. It is possible to pay less interest and pay your mortgage off early by sending any extra money you have directly to principal each month. Even splitting your payments so you pay every 2 weeks instead of once a month will save you a lot of money in interest. Every little bit counts, so send what you can when you can if paying off your mortgage early is your goal.

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