Should you pay off my mortgage early?
The short answer?
In fact, we STRONGLY suggest paying off your mortgage early.
Because it saves you a boatload of money!!!
Plus, you will be out from under that hefty mortgage payment years early, which will allow you to put your money toward other things.
We get it, buying a house is a huge expense and putting even a little extra toward your mortgage payments often just doesn’t seem feasible.
But the fact is that if you don’t pay your mortgage off early you are leaving a ton of money on the table in the form of interest paid to the lender.
You don’t really want to give the lender more money, do you?
We thought not.
Plus, paying off your mortgage early is completely doable, and even easy, especially when you begin shifting your mindset from consumerism to frugalism.
A little goes a long way with a mortgage, so any money you can divert from other things to put toward the mortgage will end up making a huge difference.
Still not sure?
Let’s take a look at some things that might be keeping you from paying off your mortgage early, as well as a few strategies that will make paying your mortgage off early a doable venture.
What’s Stopping You: Things Keeping You From Paying off Your Mortgage Early
The Bought It and Forgot It Mentality
This is the biggest roadblock to paying off your mortgage early, whether you’re a new homeowner or one with years of payments under your belt.
After closing the deal you start enjoying your new home. You get busy with all those little extras (which are pretty expensive) to make the house pretty. You’ll likely need to buy furniture, décor, finishes, appliances, and who knows what else. You also need to start doing regular maintenance, both inside and out.
These are all good and necessary, and you should invest time and effort into them. If you’re a new homeowner you have likely bought a house at the top of your monthly price point and may not be able to afford much, if anything, extra going toward the mortgage. Even if you’re a seasoned mortgage payer who can comfortably afford your monthly payment, you’ve likely been spending any increased income you’ve had on other things.
Whichever category you fall into, new or seasoned, you’ve likely forgotten all about revisiting your mortgage.
You bought the house, you automated the payment, life goes on, and you simply forgot about it.
It’s now on the shelf for 30 years as the payment becomes a staple of your budget, and you end up paying the entire 30 years.
If you allow this to happen, know that lenders are reaping interest from you.
Do you know how much of your monthly payment is actually going toward paying off your house in the first 10 years?
How about still owing around 80% of the loan after making payments for 10 years?
Yeah, most of those payments have been going to interest.
The higher the balance the more interest you’ll pay, and longer. This is why it’s so important to try and pay down your balance as quickly as possible
How About That Tax Deduction?
This is a common benefit of homeownership talked-up by lenders (and realtors for that matter) to try and ease the pain of paying so much in interest.
Any mortgage interest you pay can be written off in your taxes.
And if you’re a relatively new homeowner that write-off benefit can total a $5,000 – $10,000 (or more depending on the loan) write-off per year in your first 10 years.
Being able to write-off mortgage interest on your taxes is a great benefit, but it’s not worth paying thousands more in interest to the lender if you don’t have to.
Failing to make extra principal payments in order to get a bigger tax break is nothing more than taking an aspirin for temporary relief when you really should be taking a narcotic for a broken bone.
Drawing attention to the mortgage interest tax break is nothing more than a trick lenders use to mitigate the sick feeling of paying $233,139 in interest on a $250,000 loan!
Don’t fall for it.
Take my (Sebastian) story. My mortgage was established in 1991, and I got the same aspirin advice from my lender.
“Think about the tax break,” they said.
Being a numbers guy and knowing how the tax rates work, it just did not make sense to me. If I pay $6,000 in interest it only lowers my taxable income by $6,000, not my taxes!
How much would I actually save in taxes?
If my tax rate was 20% I would save $1,200, which is only 20% of the interest I would have paid.
Wait a minute, what happened to the other $4,800 dollars of interest I paid?
Oh right, it went to the lender.
Now don’t get us wrong, this tax break is definitely a benefit of being a homeowner, but the fact of the matter is it doesn’t make up for the interest you pay. Yes, sometimes that write-off will drop your tax bracket from 20% to 15%, which would lower your overall taxable income.
But not by much.
You are waaaay better off trying to pay less interest on your mortgage than buying a $1,200 tax break with a $6,000 tax expense!
4 Ways To Pay Off Your Mortgage Early Without Breaking the Bank
Hopefully you’re now on board and have made it a goal to pay off your mortgage early, but how do you do it?
Luckily, paying off your mortgage early is easy to do, and relatively painless. Focusing on a little bit at a time is all you need.
1. Shorten Your Loan Term
Most people don’t know this, but you can actually set your loan term for any number of years you want.
In reality, 30 years is most common because the loan term needs to be stretched out that long to be able to afford the payments. A 15-year mortgage term is also somewhat common, and it’s a nice round number. However, you can set your loan term for any number of years as long as you can make the payment (but not all lenders may be willing to go for it).
One thing we want to get straight before we go any further is that a 15-year loan term DOES NOT mean you’ll make double the payment.
For example, the monthly payment for a $250,000 mortgage with a 30-year term at 5% will be around $1,342. If you shorten the term to 15 years, the payment will go up to around $1,972. That’s an increase of $600 a month, nowhere near close to double.
Of course, $600 IS a lot more to pay every month, but just think of the interest you’ll save.
For the 30-year mortgage you’ll pay about $233,139 in interest (if you never make an extra payment), while with the 15-year loan you’ll only pay $105,857.
That’s a savings of more than $127,000 in interest!
You know anywhere else that you can save/earn $127,000?
Now, we get it. It’s very difficult for most buyers to pay that much extra a month. Heck, most of us are stretching it to make the monthly payment for a 30-year loan! But remember, you can set the loan term for as many years as you want (if the lender will go along with it).
The reason a 30-year term is the default is so lenders can collect more interest! You won’t hear them making the suggestion for a 20 or 25-year mortgage, even though the payment will not be THAT much higher and you’ll save a bunch of interest. Remember, if you go from a 30-year to a 15-year mortgage, your payment WILL NOT DOUBLE.
Again, lenders make money off of the interest you pay. They want you to pay as much interest as possible.
But once more, we get it. You may be stretching it to make the monthly payment for the 30-year mortgage and absolutely cannot go a penny over at this point. But that doesn’t mean your financial situation will stay the same.
We’ve got some other tricks up our sleeve to pay your mortgage off early and save a bunch of interest.
2. Make Extra Principal Only Payments Whenever You Can
Calling all new homeowners who are maxed out on their monthly payment, this one is for you.
If you’re just starting out and don’t have much to spare on your monthly payment, not to worry. Just make an extra payment whenever you can.
Tax return? Make an extra principal payment. Work bonus? Make an extra payment. Holiday or birthday money? MAKE AN EXTRA PAYMENT.
The value of that money will literally DOUBLE (if not more) if put toward your mortgage because of the interest it will save you.
3. Make Bi-weekly Payments
Okay, so you’ve been making extra payments here and there the first couple years you’ve owned the home. In that time your income has also likely increased.
What should you do?
Why, put more of your income toward your mortgage of course!
One option is to make bi-weekly payments, meaning, you make a payment every two weeks instead of once a month.
In this scenario, you would make half of your monthly mortgage payment every two weeks, which will cut down on your interest in two ways.
First, paying every two weeks will mean each payment has only collected a half month worth of interest (compared to a full month). Second, you will reduce the principal amount every two weeks, so you’ll pay less interest because the principal will be smaller.
Important: If you choose this option make sure your lender is ACTUALLY APPLYING THE PAYMENT EVERY TWO WEEKS. I (Sebastian) got tricked with this because my lender was just holding the payment until the end of the month and then putting the two together, which does not yield the same interest saving benefits. If the lender will not apply payments bi-weekly then this option is not for you.
While it may not seem like much, this simple payment adjustment is actually like adding one extra monthly payment per year. This is because there are more bi-weekly cycles than monthly ones.
For example, let’s say your mortgage is $1,200 a month. In this case, your yearly payments would add up to $14,400. However, if you do bi-weekly payments you’ll wind up making 26 payments of $600. Over the course of the year, this schedule of 26 payments of $600 would add up to $15,600.
The difference is exactly one monthly payment ($15,600 – $14,400 = $1,200), which means you are paying down the balance faster and therefore paying less in interest.
As you can see, bi-weekly payments are a good way to trick yourself into paying a little extra every year, just make sure your lender is actually applying the payments bi-weekly. If they won’t, another thing you can do is take those 2 extra payments and request that the lender apply them directly to the principal only.
4. Add an Extra Monthly Principal Only Payment
While any extra you can pay toward your mortgage will be beneficial, our favorite method is to add a monthly principal only payment.
Typically, when people buy their first house they are younger and just beginning their careers. As a result, by the time you’ve owned the home for a few years it’s likely that your income will have also increased. If that is the case, a perfect use for that income increase it to make extra payments on a monthly basis.
Most lenders will allow you to automatically add an extra principal only payment every month on top of your regular PITI (principal, interest, taxes, insurance) payment. For example, you might make a PITI payment of $1,200 a month and add $100 extra that goes straight to the principal, which will end up saving you thousands in interest and years off the mortgage.
Remember the bought it and forgot it roadblock we talked about? This is the automate it and forget it method.
Just like your regular monthly payment, adding an extra principal only payment will soon become a part of your monthly budget and you won’t even know it’s there!
And the best part is you can start and stop these extra payments at any time as your financial situation changes. The main thing is to make the extra payments as often as possible and as much as you can afford.
Moral of the Story
It is always a good idea to pay off your mortgage early because of the huge amount of interest you can save.
In fact, other than investments there is no other financial area in which you will get more money back into your pocket than by making extra principal only mortgage payments. Plus, we’ve never heard of anyone who regretted paying off their mortgage early.
Even if you’re a newer homeowner, it is in your best interest to make extra payments whenever you can, and for whatever amount you can afford. Even a couple hundred dollars a year goes a long way over the course of a 30-year loan.
Pay whenever you can, bi-weekly, or a little extra on a monthly basis. Whatever you can afford, start as soon as you’re able. Just make sure your lender is applying your extra payments only toward the principal and not trying to include it as part of your regular monthly payment.
You could literally save thousands of dollars in interest, and shave years off your mortgage.