For many people, the most highly anticipated time in their lives is the day they finally “own their home”—the day they pay off the mortgage.
While there are many schools of thought about the advisability of paying off such inexpensive money, there is no denying the fact that being mortgage-free has a strong appeal.
Here are some ways to think about accomplishing that, and some strategies to make it happen ahead of schedule.
Know the math behind early mortgage payment
First, you need to know that paying off an amortized loan is simply a matter of math. Your payment is comprised of principal and interest components. With each monthly payment, you are reducing the balance by a small amount, so the proportion of principal to interest changes.
A $300,000 loan at 4.5% has a payment of $1,520. In the first month, the payment contains $1,125 interest and $395 principal. By the time you have made 12 payments, the principal is down to $295,160. At that point, the payment has $1,107 interest and $413 principal.
I know what you’re thinking: “I don’t want to owe ANYTHING on my house! How do I get there faster?” That’s an excellent question—one that has several answers.
If you add $100 per month to your regular payment, you’ll shorten the term of your loan, reducing it from 30 years to 26.5. The more you add, the faster you’ll pay off the loan.
Identify your timeline for mortgage repayment
If your goal is to have a debt-free home, the first decision you should make is this: How soon do you want it? Armed with that information, it is just a matter of adding enough to your payment to pay off your loan in that time. Ten years to pay off your 4.5% $300,000 loan? Easy. Just pay $3,109 each month.
Is that a little steep? Let’s look at some alternatives to pay off your home in, say, ten years—but let’s see if there’s a way to accomplish that without living like a monk over that time.
Consider refinancing to get a lower monthly payment
To decide if this will help you reach your goal faster, you should find out how much you can shorten your term without having to eat beans six nights a week. Again, it’s about the math: dropping your rate to 3.375% for a 15-year loan would take your 10-year payment down to $2,950.
You can also find the money to afford a higher payment
If you are carrying any debt with a higher rate than your mortgage, you should divert all available money into retiring those balances before you even think about paying down your mortgage.
Paying off debt is actually an investment. It is, in fact, the only risk-free investment that exists. By paying off a credit card that has a 9% rate, you are getting a 9% return on those funds. By contrast, every dollar paid toward your mortgage gives you a return equal to the net cost of your mortgage (after your tax write-offs).
If you have, for example, $10,000 in credit card debt, your minimum monthly payment would be around $300. Once you’ve paid off that account, you will have freed up $300 to apply to your mortgage. By attacking the consumer debt first, you’ll be able to start making your accelerated mortgage payment with far less impact on your family cash flow.
The most important part…
In the 25 years since we started Sammamish Mortgage, we have seen many clients who have thrown a little extra money toward their mortgage each month; sometimes $25, sometimes $50. It’s better, however, to have a specific, measurable plan.
To put it simply: The most important part is to have a plan. Set your goal, write it down, and commit to it. Don’t be discouraged if you have to depart from your plan occasionally because life gets in the way; the important thing is to know—and be able to see—what the prize is, and how close you are to attaining it.