Whether you realize it or not, it’s very likely that you already know people who own their home free and clear.
Let that sink in for a minute.
In June, we walked you through some of the basics to keep in mind when buying your first home. Today we’re going to consider a related subject: how to pay the whole thing off early!
Despite years of hype and mythology around the impossibility of paying off a mortgage, a 2016 report from the Urban Institute found that 37% of the 73 million owner-occupied housing units in the U.S. have zero associated home debt such as mortgages or equity loans.
Does that sound impossible or crazy? Well, over a third of homeowners have achieved what many said was impossible—they don’t owe anyone a dime on their houses! The truth is, paying your home off is one of the best actions you could take for your family and finances, and it’s absolutely possible. Even better: It doesn’t have to take 30 years, or even 15. You can do it in 10 years or less.
Before we talk about a plan to make it happen for you, let’s review a few of the conditions that must first be in place before pursuing the dream of mortgage-free home ownership.
Going full tilt with extra payments on your home mortgage doesn’t make sense unless you’ve already taken care of the following key steps toward smart financial planning.
The Mortgage Is Your Only Remaining Debt
As much as we want you to pay your mortgage off, it’s also the least urgent kind of debt to get rid of. It’s far more important that you knock out all other kinds of debt such as credit cards, school loans and car notes. Only when you’re free of all consumer debt does it make sense to pour extra dollars into your mortgage.
You Have a Full Emergency Fund
This should be enough to cover all of your living expenses for three to six months in the event you lose your job or have a similar disaster. The last thing you want to do is experience a sudden financial catastrophe only to lose your home as well because you spent your emergency fund trying to pay off your mortgage early. So never tap out your emergency fund for any reason other than a true emergency (and your mortgage doesn’t qualify).
You’re Investing the Right Amount for Retirement and You’ve Made a Plan to Fund College
Even if you’ve checked off the first two conditions, there are two other areas you’ll need to think about before attacking the mortgage head on. First, you’ll need to be sure you’re investing 15% of your gross income in a Roth IRA or 401(k). That’s the right amount to outpace inflation in retirement while also leaving you a substantial amount to put toward paying off the house. Second, you’ll want to be sure you have a plan for helping your children pay for college.
Are you tracking with all of those steps today or at least moving in the right direction with each one? Once you are, you can jump into the quickest route to a home payoff.
If You’re a New Homebuyer, Get a 15-Year Mortgage
It’s a few extra hundred a month but it is worth it, worth it, worth it. By committing to pay it off in 15 years, you will save tens of thousands of dollars in interest that could potentially go toward wealth building and other priorities. Think how fast you could reach your financial goals with no mortgage! If you’re a first-time homebuyer or you’re in the process of purchasing a new home, the 15-year fixed-rate mortgage is by far the smartest move.
Treat Your Existing Mortgage Like a 15-Year Deal (Even if It’s a 30)
The majority of home mortgages are structured to pay off in 30 years. But there’s absolutely no reason you need to let your mortgage hang around that long! In fact, you have a huge motivation to go faster—and it has a dollar sign attached to it and lots of zeroes on the end.
Hopefully you already have a great interest rate on your mortgage. If so, there’s no need to refinance. If not, consider refinancing for a lower rate and a 15-year schedule. By refinancing for a 15-year mortgage (or treating your 30 like a 15 with more aggressive payments), you have the potential to save yourself over six figures in interest payments! Just calculate how much you would owe on a 15-year version of your home mortgage and bump up your monthly payments accordingly. With any extra payments, be sure and specify that the extra amount goes toward the principal, not interest.
Of course this will mean tightening your budget in other areas. But you have every reason in the world to go fast on your mortgage. In some cases the interest paid out on a 30-year versus a 15-year schedule is equal to over half the original purchase price. Let’s see an example.
Purchase Price: $250,000
Down Payment: $25,000
Mortgage Amount: $225,000
At 4% Interest Rate:
Mortgage Term: 30 Years
Monthly Payment: $1,074
Total Paid Over Mortgage: $386,704
Mortgage Term: 15 Years
Monthly Payment: $1,664
Total Paid Over Mortgage: $299,574
In this example, if you can find a way to increase your monthly payment by $590, you can kiss your mortgage goodbye 15 years earlier and save a whopping $87,130! That’s half the price of another home in some markets! That’s money that could be used for college, retirement, etc., all by sticking to the 15-year plan.
And when you get busy accomplishing something big with money, life has a way of giving you boosts along the way. People on the 15-year plan who get serious about paying their home off early are usually able to do so in seven to 10 years.
Who Really Owns Your Home?
With the huge financial downturn of 2008–2009, many people discovered their position as homeowners was far more vulnerable than they realized. Millions lost their homes through variable payment hikes or unemployment.
But since that time, many have decided that life with a mortgage just isn’t good enough or safe enough. They want to own their homes free and clear. After paying off their mortgages, some people even have a burn-the-mortgage party, inviting friends and family to join them as they torch their bank papers to celebrate becoming absolutely debt-free!