My wife and I began thinking about the possibility of paying off our mortgage in 5 years after we heard of other people doing it. I know in my immediate family, no one managed to pay off their mortgage when they were young, but did that mean we couldn’t do it?
Was Paying Off Our Mortgage Actually Possible?
When we first started thinking about it, we had a traditional 30-year mortgage, and the monthly mortgage payment was reasonable. We really had no trouble making the mortgage payment, but we certainly didn’t have a ton of extra money lying around.
I was big into finance years ago, and I read about how much money you could save if you were to refinance your mortgage to a 15 year fixed rate. That would mean our mortgage would go up to possibly more than we would like to pay, but much more money would be going to principal rather than interest.
Well, about five years ago we did just that. We refinanced to a 15-year fixed-rate mortgage and decided we would do everything in our power to pay off our mortgage in 5 years or less. We decided to take on this lofty goal and eliminate our mortgage to pay for things that added value to our lives – like more vacations!
We also made sure to keep track of every penny spent so we wouldn’t spend any unnecessary cash. It wasn’t easy at times because there are some expenses that aren’t necessarily “necessary”, but they add value to life.
Ruban Selvanayagam of UK sell house quickly company Property Solvers comments: “it’s also worth remembering that inflation gradually erodes the value of the mortgage debt you have against your house, which is an added bonus!”
We Did It! We Paid Off Our Home!
I’m proud to say that just before our five-year refinance anniversary, we were able to pay our house off at 36 years old! We did this as a family of five on a single income. We were able to do it by living a frugal lifestyle, buying used instead of new, and keeping our mortgage payoff in the front of our minds.
In this article, I will give you some tips on how we were able to achieve this goal, and how you can also!
Should I Pay Off My Mortgage Early? Pros And Cons
Many financial planners have clients that ask, “Should I focus on paying off my mortgage early?” The reason many people hang on to their mortgage and make the monthly payment for thirty years is they think they need the mortgage interest deduction as a write-off (unfortunately, these tax writeoffs are no longer beneficial – check out this related article).
The other reason they give is that they cannot possibly squeeze another dime out of their budget to pay it off early, even if they wanted to. If you think about it, these “reasons” are actually excuses. Mathematically, wouldn’t you be better off with no mortgage rather than a tax write-off of the interest-only? The more years you pay, the less interest there is, so the smaller your deduction.
Also, EVERYONE, including me, can squeeze a few extra dollars out of their budget, and every little bit helps.
Deciding If It’s Right For You
When my wife and I sat down and discussed if we should try to pay off our mortgage early, the answer was a resounding “YES!” First, the more debt we have, the more risk we have.
Suppose you lost your job. You would first worry you could not pay the mortgage, right? If you had no mortgage, you would be in a much better position for years to come.
Second, a 30-year mortgage is just depressing. We didn’t like the thought of making significant payments to a lender for most of our adult life.
Suppose you purchased a home the day after you graduated from high school, and you took out a 30-year mortgage. You pay the bill dutifully for the length of the loan. You would be nearly 50 years old when you make the last payment.
That is a LOT of years in between!
Why You Should Pay Off Your Mortgage Last
Although we wanted to focus on paying our mortgage off early, we also realized we should start paying down our mortgage after everything else was paid off. Luckily, we started our debt-free journey years ago and were able to move on to our mortgage goal.
If you are like most Americans, you may have credit card debt, student loan debt, and car debt. You should pay these off before you begin throwing extra money at your mortgage.
Suppose you do the opposite – start paying more on your mortgage, every extra cent you can find. Then you have some type of emergency that causes you to be out of work for eight weeks. Your income is radically cut in the short term, and even though you will be back to work in two months, how will you pay your bills in the meantime?
Do This Before You Pay Extra
After you have an emergency fund, begin by paying off your non-mortgage debts, so you will have your income “freed up” to apply to your mortgage.
Suppose you have paid all of your debts except your mortgage. Time to throw every dollar that way, right? Not so fast. You should also be investing money for retirement at a rate of 18% of your income. You do not want to get to retirement age years down the road and have a paid-off house but no nest egg on which to live.
So, after you begin investing at a rate of 18% of your income into retirement accounts, THEN start throwing every extra dollar at the mortgage.
The type of mortgage loan matters
If you are paying on an adjustable-rate mortgage, then it will adjust every year. The interest rates may go up or down depending on how well the economy does over time. So, even though you might think that you are getting a good deal now, there is always something else coming along later.
The best way to avoid this problem is with a fixed-rate mortgage. With a fixed-rate mortgage, you lock into a set amount each month.
Why You Mathematically Should NOT Pay Off Your Mortgage Early
Mathematically, it doesn’t make sense to pay off your mortgage early. With historically low-interest rates (hovering around 3%), it seems almost foolish to spend extra money to pay off your home early.
Think about it – you could invest your money in an S&P Index Fund in the stock market and make an average of 8% each year. That’s a 5% difference between spending the money to get rid of a 3% interest rate on a mortgage versus investing it and making 8%.
Figuring In Financial Independence And Financial Security
However, the above scenario focuses entirely on a mathematical perspective. The calculations make sense mathematically if you ignore the curveballs life throws at us. If you invest your extra money but lose your job and can no longer afford your mortgage, the mathematical formula goes out the window.
My wife and I chose financial security rather than increasing our net worth. We did this by maxing out our retirement fund first and then spending every extra cent on paying off the mortgage.
I would never advise you to pay off your mortgage before investing for retirement.
By going this route, we wasted five years of extra returns – but now we have no mortgage and can delegate even more money into investments.
To top it off, if I suddenly lost my job, I could get a minimum wage job and still not have to worry about moving or affording our house payment. To us, this financial security is worth its weight in gold.
Understand Your “Why” And What A Mortgage-Free Life Would Look Like
Dream for a minute. What would your life look like if you were not making a mortgage payment every month for the next several years or decades? A mortgage is typically the most substantial bill in anyone’s budget, and it can be difficult to imagine what life would be like if you kept that extra money rather than sending it to a mortgage lender.
But think for a minute: What could you and your family DO with all that money? List as many things as you can think of. I bet that list would be a mile long.
Now, which of those things are most important to you? Giving generously to others? Leaving a financial legacy to your grandchildren? Retiring early? Traveling the world with your spouse?
Select two or three of the possibilities that are the most meaningful things for which you would sacrifice. These are your “why.” If, for example, being able to travel whenever you wanted and leaving enough money for grandchildren to have a “jump-start” in adulthood, that is the WHY – your reason for eliminating your mortgage so you can build wealth quickly.
How To Pay Off Your Mortgage In 5 Years (or less!)
Suppose that in your mail today, you received an invitation to a class reunion. It is three months from now and you would love to go. But one of your first thoughts is: I really need to lose 15 pounds before then. So, what do you do?
You set a goal. You select a date (3 months from now) as your “finish line” for reaching your goal.
The same is true for anything that you want to do financially, such as paying off your mortgage early, years in advance. Set a date for five years in the future and display that date prominently – on your bathroom mirror or your refrigerator door, somewhere you will see if every day. This will help you stay focused on the goal and motivated to reach it.
1. Create A Monthly Budget
Do you have too much month at the end of your money? Do you ever look into your wallet and wonder where that money has gone? We have all had this experience at some time or another, and we don’t ever want to again!
The best way to ensure that you know where your money is going is to create a budget. Most people think of the word “budget” as a restriction – someplace to list all of your debts and bills that have to be paid with no regard for having a life. The best debt advice I ever received was to create a budget to see where my money was going each month.
It helps instead to view a budget as a spending plan. In a spending plan, you PLAN how you will allocate your take-home pay. Do you HAVE to spend $200 per month on ballroom dancing lessons? If the answer is yes, put that in your budget and find other places to trim down if you need to.
Creating a thoughtful, complete spending plan allows you to know exactly where your money is going each month so you can tackle that mortgage faster.
2. Purchase A Home You Can Afford
Suppose that you decide to buy a home. You cleverly go to a mortgage company to obtain pre-approval for a mortgage, so that you know the “ballpark” you can spend. You are absolutely amazed when the mortgage broker comes to you with a number approximately double what you expected.
“What?” you think, “I can buy a $450,000 house with an income of $40,000?” It shouldn’t be surprising that mortgage lenders will provide you with a very large pre-approval amount in the hope that you will take out a $450,000 loan with them rather than a $200,000 loan. That’s how they make their money!
While I suggest using a real estate agent for property purchases, realize that their commission is tied directly to the final price you pay for the home.
Although we would ALL love to have a giant house on the lake, it simply is not realistic to think that we can all afford it.
So how much house CAN you afford?
First, consider your take-home pay. If your mortgage took up half of that amount, how would you pay for other essential things like food, clothing, and keeping gasoline in the car? A good rule of thumb to help you get a “ballpark” idea of how much you can spend on a mortgage is to look for one in which the monthly payment is no more than 25% of your take-home pay.
So, let’s say that your take-home pay is $3,600 per month. One-fourth (25%) of that amount is $900. So, for your finances to remain manageable, you should purchase a house for which the mortgage is no more than $900 per month. That way, you can still afford to eat, go on a vacation from time to time, and purchase braces for your youngest child.
3. Put Down A Large Down Payment
Some mortgage companies draw people in by promising mortgage approval with a very low down payment, sometimes as low as 3-5% of the purchase price of the residence.
Although this may seem attractive initially (and allow you to get much more house – see the warning above!), it really is a poor financial decision to obtain a mortgage in which you put down a small amount. In reality, you should scrape together as much as you possibly can to make the payments smaller and get you closer to paying off your home faster.
If you were to offer a 20% down payment, you can avoid PMI – private mortgage insurance. PMI is a type of insurance that protects the mortgage lender if a homeowner defaults on the mortgage. So, with PMI, a portion of your mortgage payment goes towards an insurance premium that is put aside to give the beneficiary (the lender) protection if you should default on your loan.
If you put down 20%, you avoid PMI altogether, which results in major savings for you. You could use that PMI amount to pay down your mortgage even faster.
4. Downsize To A Smaller Home
We have talked about the lure of buying a large home. It isn’t unusual to see an empty-nester couple in a 3,500 square foot home or singles in a 2,200 square foot townhome. It is human nature to want to buy a larger home than we need; either we want “room to spread out,” or we want to “keep up with the Joneses.”
However, one of the challenges we often fail to consider is the added expenses we incur with larger homes. For example, how much do you think it costs those empty-nesters in the large house to heat and cool such a big space? If they have a large yard and need to have landscaping done regularly, that is also a significant expense that adds to their housing cost.
In reality, if they could manage to live in a home half the size, they could save significantly by downsizing. There are many positives to downsizing, including being able to minimize the large number of items that we have collected through the years, in addition to the savings we could realize by living in a smaller home.
5. Pay Off Your Other Debts First
The main key to paying off your mortgage quickly is to make big payments on it. Have you ever looked at your credit card statement and noticed that if you simply pay the minimum and don’t charge anything else to add to the balance, it will take you approximately 17 years to pay it off?
Just like a credit card, if you simply make the minimum payment on your mortgage, you will be paying on loan for many years, if not decades.
To be able to make hefty principal payments on your mortgage, you should eliminate all of your other debt first. Can you imagine how much you would be able to throw at your mortgage if you had no credit card debt? No student loan debt? No car loan? If you are like most Americans, the amounts of those other debts will allow you to pay off your mortgage faster than you thought possible.
So get busy paying off your other debt. Noted financial guru Dave Ramsey suggests listing your debts smallest to largest and paying extra on the smallest one until it is done. Then take the money you were paying on the smallest one and add that amount to what you are paying on the next smallest one.
This “snowball” approach allows you to keep constant momentum. As you attack the larger debts, you have a larger amount to pay toward it.
6. Live Off Less Than You Make (live on 50% of income)
The biggest personal finance challenges that we face tend to be attitudes characterized by two acronyms: YOLO and FOMO (Fear Of Missing Out). YOLO, or “You Only Live Once,” allows us to permit ourselves to be a little reckless with our finances. Do you want to buy that Porsche? Well, go for it! You only live once!
FOMO, the “Fear of Missing Out” is similar. All your friends are going on a cruise for your bestie’s 50th birthday? Well, you HAVE to go – you don’t want to miss out!
Unfortunately, although these feelings are human nature, they certainly do not help our financial situation. We may think that we work hard, and we deserve to spend all the money that we have left after the bills are paid.
However, if your goal is to pay off your mortgage in five years, you may need to make some choices that allow you to live off less than you earn. WAY less than you make – for a short amount of time. The best-case scenario is to live on 50% of what you bring home. Then you could use the other 50% for the extra principal.
You could either be “super broke” for a short amount of time to pay off your mortgage, or you could just be plain “broke” for the rest of your life. It certainly won’t be painless, but you can live off much less than you think.
7. Decide If A Refinance Is Right For You
Many owners opted for a 30-year mortgage when they purchased their home. However, if you calculate the monthly payments on a 15-year-mortgage, you may find that it is do-able for you.
Refinancing can make sense if you can get a lower mortgage interest rate. When that happens, more of your payment is applied to the principal, and you pay thousands and thousands less interest over the life of the loan. You might consider refinancing to a 15-year, fixed-rate mortgage to cut the length of your loan in half like my wife and I did.
Historically Low Interest Rates
With historically low interest rates, refinancing to a lower interest rate and shorter term may be the perfect scenario for you. Depending on your current interest rate, you may be able to cut your loan term down to 15 years without noticing a change in payment.
This means your full monthly payment will put more towards the principal and less towards interest. Keep in mind that refinancing comes with additional fees so be sure to add in the extra fees to see if it makes sense mathematically.
8. Pretend You Refinanced Without Actually Refinancing
You may decide that doing a formal refinance is not appropriate for you. However, that doesn’t mean that you can’t ACT like you refinanced. Simply pretend that your monthly mortgage bill has increased and pay more toward the loan’s principal.
For example, suppose your monthly payment is $1000. Pretend that you refinanced and your payment is now $1400. Applying that extra $400 each month to principal reduction is equivalent to making several more mortgage payments each year.
Because this cash is applied directly to the principal, you are taking big chunks out of the amount that interest is based on.
Pro tip: Make sure that extra $400 goes towards principal and is not counted as an additional payment towards interest and principal.
Understanding Principal Balance
By making extra mortgage payments or by paying extra, this amount is applied to your principal balance. By lowering the principal balance (total payoff amount owed), you in turn lower the amount of interest you will pay over the life of the loan.
Before you start making extra principal payments, contact your lender and identify the terms of your loan. There are a few mortgage companies that will not allow you to pay extra towards the principal whenever you want.
Avoid Prepayment Penalties
Some contracts only allow you to make extra payments at a specific interval. If you make the extra payment outside of the allowed times, you may be charged a prepayment penalty. Be sure your lender will accept extra payments before you write that check.
9. Round-Up Your Mortgage Payments
If refinancing is not an option and pretending you refinanced is not an option because you just can’t squeeze that must out of your budget, simply “round up” and apply that amount to the loan principal. So, if your mortgage is $1135, round up to the next hundred ($1200) and pay that extra $65 each month to the loan’s principal.
You may need to contact your mortgage lender to determine whether you need to make that “round up” payment separately to ensure that it is applied as extra toward the principal and not as a pre-payment of the next month’s interest.
10. Embrace A Frugal Lifestyle (until the home is paid off)
You may be thinking, “Oh sure! I’ll just find an extra grand in my budget each month to pay more on my house! NO PROBLEM.”
For most of us, it actually IS a problem to come up with hundreds of dollars to apply to our mortgage. But it CAN be done if you think of ways to be more frugal. Consider the “round up” example above. If you wanted to round up $65 each month, what could you do to be a little more frugal and “find” that amount of money?
Could you bring your lunch to work once a week rather than eating out every day?
Could you do a family movie night at home each week rather than taking the entire family out to the theater? Could you evaluate your TV package to see if there is any way to free up some money there?
Frugality does not mean that you deny yourself every single thing that pleases you. What it DOES mean is that you have to critically consider what things in your life are needs and what things are wants. Are all of your desires really needed, or could you limit some of those so that you could pay off your house years earlier?
How badly you want to be mortgage-free will determine how drastic you are willing to go.
11. Make A Mortgage Payment Every Two Weeks
Most people pay their mortgage bills once a month. However, a strategy that allows you to apply more money towards the principal each month, save on the interest that accrues, and lessen the term of your mortgage loan is to make biweekly payments that are half the size of your monthly mortgage.
Suppose your mortgage is $1000 per month. With biweekly payments, you would pay $500 every two weeks. What difference does it make to make a half-payment every two weeks rather than one large one? By paying once a month, you make 12 payments a year. By splitting it up every two weeks, you make 13 payments a year.
That often reduces your loan by approximately five years.
12. Put Your Tax Refund Towards Your Principal
While many people face tax season with dread, some people anticipate it excitedly, as they are expecting a tax refund. That refund feels like “found money,” doesn’t it? Many people either use it as “fun money” or to fund a vacation or to go on a shopping spree.
However, applying your tax refund towards the principal of your mortgage loan would be one way to make a long-term and significant difference in paying down your mortgage faster.
13. Pick Up A Side Hustle To Increase Income
Thousands of Americans supplement their income with a side hustle. Although we often think of an extra job as dull and something to dread, it can actually be rewarding, and in many cases, very lucrative. The very best side hustles involve the intersection of two things: they fill a need, and they are something that you enjoy.
Do you have a hobby or skill that you are really good at and that you could use to bring in more money? Do you make jewelry? Open an Etsy store and sell your creations online. Are you a long-time golfer? Teach beginning golf skills through the local recreation department. Are you a math whiz? Tutor kids who are struggling with math in school.
You could even tutor virtually, as there are lots of tutoring websites. Working as a tutor can easily net you $20-$30 an hour or more. Not a bad side hustle to supplement your cash flow.
14. Commit To Make An Extra Loan Payment Each Quarter
If your budget is too tight to “round up” each mortgage payment or to pretend that you refinanced and pay a considerably higher amount each time, commit to making an extra payment each quarter.
That means that you should save a little each week so that at the end of every three months (for example, in March, June, September, and December), you can make an extra payment. So, in each quarter, you have approximately 12 weeks to find enough money either in your existing budget or through a side hustle to make an additional house payment.
15. Create Visual Motivators
When it comes to personal finance, we often navigate on “automatic pilot.” We have our bills automatically deducted from our checking account, and because it is so convenient, we don’t give it a second thought. However, if you take on that gigantic goal of paying off your mortgage in five years, you may need to keep that goal more “on the front burner” so that you remain motivated and aware of your progress.
One strategy is to use a marble jar. In the jar, put 1 marble for each $1,000 you owe on your home. For every $1,000 you pay off your mortgage, take a marble out of the jar. In this way, you can actually see the balance getting lower, rather than just looking at the numbers on a budget spreadsheet.
16. Celebrate Your Wins And Milestones
The goal of paying off your mortgage early is a big, serious commitment, and one that you should stay focused on consistently. However, there will be times that you just don’t want to think about it one more minute.
In that case, take a short break from it. You still have to live your life in a way that is manageable and doesn’t drive you crazy, right? In addition, it is really difficult to stay motivated without any sort of “attaboys” or “attagirls” along the way.
Schedule a celebration (one for which you have budgeted) at different milestones along the way. Perhaps after you pay off $5,000 or $10,000 of principal, you will go out for a nice dinner at a favorite restaurant. Maybe after you have paid off $25,000 of the principal, you decide to take a long weekend away, an adventure in a place you have never been. Celebrate these wins, even when they are small ones because small wins add up to the BIG win later.
17. Use My Free Mortgage Payoff Calculator
Head over to my free mortgage payoff calculator and enter your current loan information. The mortgage calculator will show you how many years you have left to pay off your mortgage, and how it changes if you adjust your payment.
In addition to analyzing extra payments, my early payoff calculator will also allow you to adjust the different payment schedules between a 15-year and 30-year loan.
Understanding Your Amortization Schedule
An amortization schedule shows your payment schedule for your current loan. It will show how much money is going towards the principal and how much is going towards interest at each given payment.
You may be surprised to see how much of your hard-earned money goes towards interest at the beginning of your loan. My early mortgage payoff calculator will also break down your amortization schedule to make these payments painfully obvious.
Reaching Financial Independence Through Compound Interest
Now that we have paid off our loan, the bankers and brokers are no longer profiting off me through compound interest on my home loan. By freeing up my monthly mortgage payment, I’m now able to grow my wealth much faster with the help of compound interest working for me rather than against me.
My wife and I are now chasing financial independence. This means we are focusing on creating passive streams of income that will replace my full-time job.
Our next goal is to purchase a rental property so we can begin to diversify our retirement portfolio with real estate.
Wrapping It Up
Homeownership is the American dream and owning a home adds to your net worth considerably, so the quicker you can pay off your mortgage and own your home outright, the better. After all, the longer that you have a mortgage, the more you pay in interest to the bank, and can’t you think of other things you would rather do with all that money? Retire early? Start a new business?
Owning your home provides financial security for you and your family; it is an appreciating asset and will be worth more and more as time goes on.
All you need to do to change your financial future by paying off your mortgage early is to decide that you are going to do it and commit to it. Anyone can do THAT, right? Make small changes and find ways to squirrel away a little extra money here and there so that you can make additional payments toward your mortgage.
Think of the tortoise and the hare – be the tortoise! Consistent, steady, small steps get you to the finish line, and it won’t take you 30 years to get there! So are you ready to pay your mortgage off in 5 years or less?