On Monday, I shared the exciting news that we paid off our mortgage early. We’re finally, totally, 100%, debt free!!! So today, I wanted to share twelve tips to help YOU pay off your mortgage early.
Paying off a mortgage early isn’t a goal of everyone’s, and that’s OK. Maybe you rent, or maybe you’re happy earning more money in the market. If so, great!
But if you, like me, want to pursue debt freedom – whether for security, for increased cash flow, or to lower your fixed monthly living expenses – read on for twelve tips to help you pay off your mortgage early.
Put 20% Down – Avoid Or Get Rid Of PMI
Not paying PMI is powerful. We were fortunate to be able to put 20% down by selling the condo I had purchased at 20 and using the money we made from that sale to put down on the house. If you’re not selling appreciated real estate, you’ll need to save for your down payment.
There are also other options to avoid PMI. Military members and veterans can get a VA loan without PMI. A “piggyback” mortgage, where you get a second mortgage/home equity loan to avoid PMI, is another option. For my doctor friends, there are physician loans. Lender paid mortgage insurance, where you pay a higher rate to waive PMI, might be a good option too (just run the long term numbers!).
Why avoid PMI? Because that payment, which can be hundreds of dollars a month, doesn’t go to reduce your principal. It doesn’t go towards paying your interest, or your taxes. It’s an insurance policy for the lender in case you don’t pay your mortgage. Essentially, it’s money down the drain in terms of building your equity. Take that money and put it towards your goals instead.
If you did pay PMI when you bought your home, make sure to track when you’re at 80% or less loan to value (the loan amount divided by the value of your home). This can happen through appreciation, principal pay down over time, or a combination of both. Then you can request PMI be removed, potentially giving you a few hundred extra dollars a month to put towards other goals.
Buy A Home You Can Afford, Not The One The Bank Will Let You Buy
Back in 2006, when we bought this house, the bank was willing to lend us at least $100k more than we bought for. When buying a home, you want to buy what you can afford. Stretching yourself too far will not only make you “house poor”, where your house costs so much you can’t do much
When we first bought in 2006, we wouldn’t have foreseen that my husband would lose his job when his factory closed in 2009. We didn’t know he would almost lose his life in 2012. We wouldn’t have known that we would have to live most of this time on one income, or that we would have two more kids (with their own expenses). Life often changes slowly in the day to day, but those changes compound over the years until life now is unrecognizable from what it was when you started.
So buy at a level you’re comfortable with, leaving yourself plenty of room to deal with life’s emergencies and unexpected circumstances.
Get A Low Rate Fixed Mortgage (Or, If You’re On the Aggressive Pay Down Plan, an ARM)
One key to our eventual success in paying off the mortgage was a 2.75%, 15
A fixed interest rate is especially appealing in our current low rate environment. My first mortgage was 8.375%! In 2000! Locking in a low rate means that even if rates go up over time, your payment won’t. It’s a great hedge against inflation.
An ARM, or adjustable rate mortgage, can also be a great weapon if you’re on the aggressive pay down plan. You can potentially lock in a low rate in a 5/1 or 7/1 ARM, and take advantage of the low fixed rate the first 5 or 7 years to pay it off faster. But remember, your rate will adjust after the fixed period, so make sure you stay on track if you go down this path. Check here for more about the types of ARMs available.
Don’t Settle For A 30 Year
I get it-a fifteen year mortgage can seem unaffordable. It certainly seemed that way when I bought this home. But a 15 year (or 10 year) mortgage is a powerful tool. And just because you can’t afford it today, doesn’t mean you cant afford it forever.
In our case, we bought our home on a 30 year in 2006 and refinanced into a 15 year in 2013-seven years later. Rates had come down, and even though our income hadn’t really changed much (by then it was just my income and not ours, though) the payment was suddenly affordable. It was essentially the same as our old 30 year payment.
Put Aside Your Windfalls
Extra paychecks. Tax refunds. Bonuses. Stock. Overtime. If you come into “extra” money, use it to buy yourself freedom instead of stuff.
Does this mean not to treat yourself occasionally? Of course not! One method I’ve used before is to commit ahead of time how much of a windfall will go to something special, and how much to goals. Back when my windfalls were modest, I might take 10% for fun and 90% for my goals. Nowadays I might do $50 or $100-and honestly, the past few years I’ve done none. My goal became more important than a treat.
So if you come into a windfall, and you’re prioritizing debt freedom, don’t let it slip through your fingers. Either send it to the mortgage company right away as an extra payment, or put it aside in an account to use to pay off the mortgage in one fell swoop.
Track Your Progress
Since July 2013, when I refinanced into my 15 year mortgage, I had a graph hanging up in my kitchen cabinet to track progress. I tracked principal pay down and payoff fund increase. Whenever we needed encouragement, or to see progress, we would look at the chart.
On Monday night I
Tracking your progress can be as simple as what we did, which was to color in a piece of graph paper over time. Or you can download a number of cool trackers online for free. Just track your progress, because even if it seems slow at first, those little results will add up big over time.
Prioritize Debt Freedom
Debt freedom fiend doesn’t happen by accident. Unfortunately, you don’t just wake up one day with your mortgage paid off. Unless, of course, you’re at the end of a 15 or 30-year mortgage term, in which case I suppose you do. It takes years of payments, savings, and delayed gratification.
If something is important to you, don’t sacrifice what you want most for what you want now. You’ll need to make debt pay down a priority in your life, something you actively work towards. Depending on how aggressive you want to be, you might need to give up parts of your current lifestyle to make it work.
Just keep in mind your true priorities, and it will help you to keep after those big, hairy, audacious goals.
Don’t Get Discouraged
Life will happen, especially over a period of many years. Heck, about five years ago my husband went back to work part time. Hooray! Extra income! Then four years ago he had to leave as his abdominal wall failed and he required extensive reconstructive surgery. Which he had six months after the birth of our youngest son.
Our lives have changed a lot the past seven years. So I hear you.
Also, when you’re at the start of this journey (or even in the middle), the end can seem so. Far. Away.
You have to not get discouraged by the bumps in the road, even when you feel like it’s one step forward and two steps back. Just keep going, and know that all the small steps you’re taking will add up over time.
Don’t Let Others Distract You
“You should have some fun!”
“Why pay off a low rate loan?”
“If I had that rate, I’d be in debt forever!”
Over the years, lots of people will try to distract you from your goals and dreams. There’s the “crabs in a bucket” mentality, where people don’t want to see you succeed because they want you to stay in the same circumstance as them. If YOU succeed, it challenges their personal belief that they aren’t succeeding because it’s impossible. It’s obviously possible because you’re doing it-and so they (consciously or unconsciously) try to bring you down to their level.
Then of course there’s people who are totally math based, and believe emotion has no place with money. They’ll tell you how much more money you’ll have if you invested instead. And they’re right!
Becoming mortgage free can’t be about having the absolute most money. It has to be about other things. Security. Cash flow. Decreasing fixed costs. But it’s not about having the most money possible at the end of the proverbial rainbow.
So don’t let people distract you from your goals.
Buy For The Long Run
This is a powerful tip. Buying and selling real estate is expensive! Moving is expensive. When you buy, you should be buying for the long run. At least five years, but ideally forever.
When we first bought this home, we were 25 and 31. We had a two year old son. And yet we were very intentional about the home we bought-insisting on a two car garage, a good amount of land for kids to play, and four bedrooms. We also wanted an older house with character, and one that was big enough for a larger family but not McMansion sized. We had to look for a long time at a lot of terrible houses to find one matching our criteria in our price range.
But it was worth it, because we haven’t felt the need to move. In fact, we fee like we can stay here until our kids are grown, and can either stay here or downsize.
Pay What You Can, When You Can
There are so many ways to pay a bit extra on your mortgage at a time. Little payments really do add up big over the years! Here’s a few options for paying a bit more over time:
- Round up your mortgage payment to the nearest hundred. So if your payment is $1,659 send in $1700 every month. The extra $41 per month may not seem big, but it can shave off a huge amount of time at the end of your loan.
- Consider bi-weekly payments. If you, like me, are paid every two weeks, then you get the equivalent of an extra paycheck each year. If you pay for half your mortgage every two weeks, then each year you’ll have made a full extra payment. Don’t pay your mortgage company hundreds of dollars to set this up, though. You can hack this yourself by having half a mortgage payment drafted automatically into a savings account, and then use that account to pay the mortgage. If you do this, then not only do you earn some interest on the money, but you’ll be able to send the equivalent of an entire extra payment to principal every year.
- Snowflake it away. Have an extra $56 in the grocery budget this month? Was entertainment $10 less than budgeted? Do you have $16 leftover from your electric bill budget? Put it on the mortgage. Take those little “snowflakes” of extra money and use them to buy yourself freedom.
Have A Big Reward At The End Of The Mortgage Rainbow
The high of reaching a long-held goal will soon fade. Yes, it’s great! It’s a day you’ll remember forever. But soon it will become a new normal. Being mortgage free years down the line can be motivating, but how much more motivating if you have a big reward waiting for you at the end of it?
A reward you can dream about. Something you and your spouse, and your kids, can talk about when you’re discussing why you’re not spending as much money as you could. A big, hairy, audacious reward waiting for the achievement of a big, hairy, audacious goal. Something to keep you encouraged when the going gets tough, when it seems like you’re not making progress, or when you’ve taken one step forward and two steps back.
In our case, we’ve planned for the past eighteen years for a specific goal, and decided to save it for once we achieved mortgage freedom. More on that next week!
Reader Tips – Chime In!
What tips do you have to pay off a mortgage – or perhaps a mortgage-sized debt, like a student loan – early? Let me know in the comments!
Pin this for later on your dream board, to come back to the tips and stay inspired on the long journey!