We paid off our mortgage about two years ago, leaving us mortgage free with a about six years to go before the first child heads off to college. I can’t express how wonderful it feels and how much easier it makes it to do things like save for college, pay cash for quality used cars, and pay cash for vacations and other luxuries. We took our first cruise last spring and paid for the whole thing up front. As a result, there were no credit card bills or home equity line of credit to come home to after the vacation was done.
There were a few things that we did that allowed up to pay off our home early that anyone can do. The first thing we did was buy a home that was well within our budget, meaning that the loan payments were less than 25% of our take-home pay. The second thing we did was refinance the home into a 15-year fixed rate mortgage after a couple of years instead of staying with the original 30-year mortgage we started with. This forced us to pay the mortgage down faster, meaning it would have been paid off before our first child went to college no matter what. Looking back I would have started with the 15-year mortgage and save the closing costs we paid when refinancing, but I’ve learned a few things about mortgages since then. The third thing was to make extra payments to the mortgage when we were able until it got down to the point where would could just write a check and finish it off. (The funny thing was that the mortgage company required a certified check to pay off the loan. They did not want to make it easy for us.)
Certainly the price of your home is a big factor in your ability to pay it off quickly and how much money you’ll end up paying in interest. If you buy a smaller house and take out a smaller loan, you’ll owe a lot less in interest. You can then trade up in home after you pay the first one off, maybe buying the second home for cash with the money you saved on interest. Saving up a big down-payment also helps because then you won’t need to pay for mortgage insurance, a fee that you pay if you put less than 20% down but that will not prevent you from facing a foreclosure should you end up not being able to pay the payments. (This is insurance that benefits your loan company but not you, the one paying for the insurance!) It also means that the amount of money on which you are paying interest for all of those years is less. If you can put 50% down, you should.
Changing to a 15-year loan saves a tremendous amount of money in interest. We’re talking hundreds of thousands of dollars over the life of many 30-year loans. Certainly enough to pay cash for a vacation condo by the time you pay off your house, just for a few hundred dollars extra in payments each month. This is because you’re paying down the loan faster, meaning your balance is big for a shorter amount of time. It is also to a lessor extent because you’ll get a better interest rate for a shorter loan. The bank is taking less risk if you pay off the loan more quickly.
You can also save big by making some extra payments or partial payments, especially early in the loan. If you make just one extra payment each year, perhaps by making payments every two weeks instead of once a month (due to the extra two-week period that is in a 26 week year), you can pay off your 30-year loan about 10 years sooner. This means ten years of payments you keep in your pocket. For a $1000 per month mortgage, that’s about $120,000 you’ll keep. There are companies that offer formal loans with bi-weekly payments, but you can do the same thing just making an extra half payment on the months where you have three paychecks instead of just two.
A final way to save a lot of money on your mortgage is to increase the amount you pay each month beyond the payment that is due. An easy thing to do is to add an amount equal to the principle being paid that month (which is normally listed on your payment form) plus maybe $10 more to your payment. For example, if you have a $1000 payment and the payment coupon says that $850 of the payment is interest and $150 is principle, pay $1156 instead of $1000. Because the principle you’d be paying the next month would be a little more than $150 (the principle increases by a few dollars each month), you’ll be paying the next month’s payment for only $160 instead of $1000, saving yourself $840. This will shorten your mortgage by one payment each month that you do it. This is easier to do in the beginning of a mortgage, particularly a 30-year mortgage, than it is near the end because you are paying mainly interest at the beginning and mainly principle at the end of the mortgage period.
Now that we’re mortgage free, I can’t imagine having a mortgage payment. There are so many other things I want to do with the money. I would hate having to write that check to the bank instead of our kid’s college accounts or put it towards a vacation. I also like to be able to invest each month so that my wealth can grow and I can generate more and more income from investments. This would be difficult if I were still paying a mortgage. Saving money on your home purchase isn’t difficult and doesn’t require a huge sacrifice. It just takes small sacrifices and some smart choices when it comes to the home you choose, the kind of loans you get, and how you pay them off.
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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.