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Should You Payoff Your Mortgage Early? Yep! Here Are 6 Strategies to Pull It Off!

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Should You Payoff Your Mortgage Early?

My wife and I are 38 and 43, respectively, and we just paid off our home mortgage – a home we purchased seven years ago. It feels great to own our home outright and not have the risk of that big debt in our life.

Making the decision to pay off our mortgage early is a decision we’ve gone back and forth on. We’ve wrestled with it. But, ultimately, our financial successes and inertia pushed us to go forward with the payoff.

If you’re reading this post you’re probably wrestling with the decision too.

Let’s stop right here and recognize how amazing it is that you are even considering this question. No doubt things are going well for you financially and you’ve made some smart decisions with your money. Congrats!

If you’re contemplating this decision and you have the means to pay off your mortgage early – either with a lump sum or through routine prepayments – I think you should, even though the long-term math says you shouldn’t.

In this article, I’ll share in more detail why I think you should pay off your mortgage early, how I thought through this decision, some of the pros and cons, and, finally, I’ll share the actual process we took to pay off our mortgage early (PLUS, 5 more strategies).

Things to Do Before You Consider Paying Off the Mortgage Early

A few caveats before we look at this question. I’ll assume you are living within your means and have all the basics taken care of. Here are some more things you should probably have taken care of before you go about paying off your mortgage early.

  • Have a well-established emergency savings fund. This is personal finance 101. Have enough emergency savings stashed away so that in case of an emergency you can cover it with these funds.
  • Have no other debts. In most cases, the home mortgage should be the last debt that you tackle. Get rid of those student loans, car loans, personal loans, medical debts, and certainly any credit card debt before you dive into the mortgage prepayment process.
  • Be getting your employer match. If your company 401k offers a matching savings program, you should definitely be getting that, and you should be able to maintain that level of savings while you are paying off your mortgage early.
  • Be mostly settled. Life changes all the time, but those who want to tackle their mortgage head on should have their life in order and be somewhat settled. Is your income stable and growing? Are you done with family planning? Are you rooted in your community? If you aren’t settled in life, frankly, you shouldn’t be buying homes to live in.

Related: The Lame 25% Rule and How Much House You Can (Responsibly) Afford

Pay Off Mortgage Early or Invest?

The argument around paying off your mortgage early mostly revolves around whether you should instead be investing the money.

The math actually supports investing in most cases, especially as the term becomes longer. I’m not going to get too deep into it, but here’s a couple of short, crude examples:

  • Let’s say you have a $200,000 mortgage at a 30-year fixed 4% interest rate.
  • Let’s also assume you have an extra $1,000 each month to either invest in taxable investment accounts or apply to your mortgage.

Example 1 (Invest): If you spend the next 30 years paying that off with the minimum payments, you will have paid a total of $343,739.21 in combined principal and interest payments. If you invested the $1,000 each month into a taxable investing account at a projected 6% annual return, your investment alone would be worth around $950,000 at the 30-year mark.

Example 2 (Debt Payoff): If instead, you apply the extra $1,000 to your monthly payments, at the end of 10.5 years you will have paid off your mortgage. You will have paid a total of $245,007.71 in combined principal and interest payments. If you then started investing the $1,000 each month into a taxable investing account at a projected 6% annual return, your investment would grow over the next 19.5 years and be worth around $440,000 at the 30-year mark.

So, even though you will save around $100,000 in interest payments, you are giving up over $500,000 in potential investment gains.

Over 10 or 15 years the difference isn’t as drastic AND stock market returns do vary. But it’s important to understand what you are giving up over the long-haul, and I think this example shows just that.

Before we leave this section, you should know: you can do both! You can fast track your mortgage and still aggressively invest. It’s not an either-or proposition.

You’ll likely make more money in the future. You’ll get a raise. Your business will take off. You’ll create that second or third stream of income. Pretending that you can only do one or the other only limits your mindset.

Go after both! When you do both, the math always works out in your favor.

Related: What’s Keeping You From a Radical Financial Life?

The Benefits of Paying Off Your Mortgage Early

  • Reduce the amount of interest paid on debt. By reducing the amount of time it takes to pay off the loan, you are reducing the amount of interest you’ll pay. In the example above, you’re saving around $100,000.
  • Reduce monthly outflows. Once you pay off the mortgage, you’ll no longer have a mortgage payment. Now your monthly expenses are lower and you’ll have more money in your monthly budget to do other things with: invest, spend, give, etc.
  • More freedom. By eliminating the mortgage early, you bring more freedom into your life. Maybe you or your spouse can now stay at home with your children? If you’re a budding entrepreneur like me, think about how much easier it would be for you to leave your full-time job to pursue a business idea full time. No mortgage = freedom!
  • Security and peace of mind for your family. With one less expense, you’re creating more security for your family in case of future emergencies. You’ll always have your home to go to regardless of the economy or the bank’s issues. This is big for my wife. It’s the main reason she wanted this debt gone. She’s much more secure in our overall financial position without the home debt.
  • Simplify your finances and life. The older I get, the less I want to think about my finances. Removing the mortgage means I don’t have to think about the mortgage payment, my lender, or fuss with online payments.

My House Should We Pay Off the Mortgage

The Disadvantages of Paying Off Your Mortgage Early

  • Reduced liquidity. When you pay off your mortgage early you’re likely taking money off the table that could be implemented quickly to help you in your life. Paying off your mortgage early could leave you “house rich”, cash poor for a while.
  • Overall less diverse portfolio. By paying off your mortgage you may be putting many of your eggs in one big basket. This makes you really dependent upon the local real estate market (some of which are actually going down in value) and dependent on the overall economy.
  • Loss of tax deduction (although the new tax law changes this for some). One of the nicest benefits of having a home mortgage when it comes time to pay your taxes is the home mortgage interest deduction, which you can claim if you itemize your deductions. The new tax law increased the standard deduction, however, and so many folks are going to be losing the ability to take this deduction anyway.
  • Lost potential investment returns. This is the biggie. By saying yes to paying off your mortgage, you are saying no to investing in the stock market, rental properties, your business, and other investments. The opportunity cost can be huge as we showed in the example above.
  • You’ll still have payments (property taxes, insurance, HOA dues, maintenance, etc.). Just because you got rid of the mortgage it doesn’t mean you still don’t have to pay for your house. In fact, there are still likely at least three major expenses you’ll have: taxes, insurance, and maintenance. That’s a bummer. On top of that, you’ll have to start saving for and making your own insurance and tax payments yourself if you previously escrowed them.
  • Possible prepayment fees and negative credit consequences. Watch out for prepayment fees. They could make your early payoff plan a terrible idea. Lastly, know that if you pay off your mortgage – your primary installment credit line – you’re likely going to reduce your attractiveness to future lenders who’d rather see a more diverse credit mix. Albeit, you probably don’t need credit once you pay off your home.

6 Different Strategies to Pay Off Your Mortgage Early

Okay, so you’ve decided to do this. Let’s actually get into some ways in which you could go about paying off your mortgage early. There are quite a few:

1. Making Routine (Extra) Prepayments on Your Mortgage.

The most common way would be to simply start making additional principal payments each month.

Ideally, you can automate this function with your lender. Just make sure that when you start making extra payments they get applied to your actual principal vs both principal and interest.

An extra $250 per month on a 200,000 loan at 4% interest would knock 10 years off your loan – taking it from a 30-year mortgage to a 20 year.

2. Setup Biweekly Payments

Instead of paying your mortgage each month, you could switch to bi-weekly payments. This would give you 26 half payments each year vs the 12 full payments.

This strategy will help you speed up your mortgage payoff and will help you save on interest without actually changing much of your cash outlay.

I know Quicken Loans allows this type of payment to be automated now. Check with your lender to see if they can set it up for you.

3. Refinancing to a 15 Years vs 30 Year Mortgage

As a way of forcing yourself to pay off your home faster, you could refinance your mortgage down to a 10, 15, or 20-year term.

There might be closing costs to account for here. But a better rate and a shorter term could be just the strategy you need.

We actually did this ourselves after we’d been in our home for three years. We thought we’d be fine just paying it off at the 15-year term. But just three years later we got itchy again and decided to start making big lump sum payments.

Related: Pros and Cons of the 15 vs 30 Year Mortgage

4. Rent Out a Room (aka House Hack) and Apply the Rent Payment

An alternative strategy is to become an Airbnb host and rent out a room in your home to the occasional visitor. This extra income stream could be applied directly to your mortgage balance and help you pay off your home sooner.

5. Mortgage Acceleration Software/HELOC

I’ve looked into the mortgage acceleration software/strategies and I just can’t wrap my head around how they actually work, much less do an actual cost/benefit analysis of the software required to pull it off efficiently.

They feel too complicated and scammy, too. My advice is to stay away from anything that seems weird or that you can’t understand. I don’t understand these things, so I’ll skip it.

6. Paying Off Your Mortgage Early with Lump Sum Payments

This is ultimately the method we chose to use over the past two years to knock out our mortgage. We stashed cash from business successes mainly and used it to make big lump sum payments, concluding with a ~$49k payment this past month.

Whether it’s annual bonuses, tax refunds, stock options, or some side-hustle business boom, think of the lump sums you’ll be getting over the next few years. Make plans to apply those big chunks to your mortgage.

There are no ways to automate this, unfortunately. But if you are in a place where you’re just crushing it financially and you trust yourself to not let your lifestyle creep up, this can be a massively effective strategy.

The Actual Process of Paying Off Your Mortgage (aka Making the Final Payment)

When it’s time to make the final payment using a lump sum approach, you’ll need to request your payoff amount. This amount it going to be slightly different than your actual mortgage balance shown on your statement or on your lender’s website.

You can either call and request it or do like I did and use the lender’s website customer support chat. Here’s my chat thread:

Chat with Quicken Loans About Final Mortgage Payoff

Once we got that payoff number, we went to our personal checking account online account and set up a cashier’s check payment. There was a fee of $20 to overnight it. Here’s a snapshot of our cashier’s check:

Digital Cashiers Check to Payoff Mortgage

Once the lender receives the final payment they will apply it to the loan and send you a letter to inform you that your mortgage loan is paid in full.

More Questions

What if you have two mortgages on your home? Let’s say you have two mortgages on your home: the primary mortgage and a second mortgage or HELOC. In that instance, you should definitely pay off the second mortgage or HELOC first. 99% of the time those second loans will have higher interest rates and be smaller in amount. Knock them out first and then tackle the primary.

What if you have a rental property mortgage like I do? If you have a rental property mortgage, unless it’s some minuscule amount, that debt should come second in priority to your home mortgage. If something happens to your rental property mortgage, the worst that can happen is you can no longer rent it out. But if the bank makes a call on your home mortgage, you’d be out of a home. The smart thing here is to pay off the home mortgage first.

Final Thoughts on Paying Off Your Mortgage Early

If you’re asking this question of whether to pay off the home mortgage early then you are in a great spot. Honestly, what you do here doesn’t matter that much because you’re already making such good financial decisions.

If you’re the type to hyper-focus on the math and you’ve got a home for this investment money, then, by all means, let the numbers lead you.

But if you can shoot to be completely debt free and still maintain some aggressive saving (likely what you’ll do either way) then go for the early mortgage payoff.

What’s your plan? Will you be paying off your home mortgage early?

The post Should You Payoff Your Mortgage Early? Yep! Here Are 6 Strategies to Pull It Off! appeared first on Part-Time Money®.


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