Look around your home, in your garage, out your backdoor. Imagine the feeling of owning it all, free and clear. Many people assume they will always have a house payment and don’t realize how much interest they’re paying on their loans.
Let’s say you buy a house for $150,000. You make a down payment of $30,000 so you take out a 30-year mortgage for $120,000 with a 5% interest rate. Your monthly payment would be $644.
To find out the true cost of this $150,000 house we’ll do some math. Paying $644/month adds up to $7,728 each year ($644 x 12). Take that $7,728 and multiply it by 30 years to get $231,840. Add your $30,000 down payment to this amount and your $150,000 house will cost you $261,840 when all is said and done!
I feel that it is a great idea to pay-off your mortgage early once you have an emergency fund in place, have paid-off your other debts and starting saving for your retirement and kids’ college (if applicable).
How You Can Pay Off Your Mortgage Early
Pay Extra Each Month
You can promise yourself that you will pay extra each month towards this loan and sign up for a 30-year loan. If you’re serious about paying your home off early, this is probably not the best option.
Most of us make promises that we cannot keep. We might have the best intentions to pay extra each month but then something comes up—Valentine’s Day in February, summer vacation in July, Christmas in December—and we find we need this “extra” money.
Make Bi-Weekly Payments
If you do have a 30-year loan, you could sign up to make biweekly payments instead of a monthly payment. These biweekly payments will be half of what your monthly payment is but you’ll actually be making an “extra” payment each year.
Here is how this works. Let’s say your monthly payment is $1,000. You will pay $12,000 each year towards your mortgage: 12 (months in a year) times $1,000 (monthly payment) = $12,000. If you used the biweekly approach, you’ll pay $500 (half of the monthly $1,000 payment) every two weeks. There are 52 weeks in a year so you’ll make 26 half payments. $500 times 26 equals $13,000; thus, you will make one extra $1,000 payment each year. Doing this can trim anywhere from five to seven years off your 30-year loan depending on the terms.
One warning about this approach—be careful that your mortgage company doesn’t charge a fee for this. Some of them try to slip this in so just make sure yours does not do this to you.
The easiest way to pay off your loan might be to refinance. As I write this, interest rates are very low. My family moved from Florida to Georgia in the summer of 2006. We ended up going with a 30-year loan. Two years later, interest rates dropped and we refinanced. We were able to lower our rate by a full two points and reduced our term from 30 years to 15 years. We pay around $150 more each month compared to our original loan but will own our house free and clear much earlier and save almost $100,000. Not everyone is eligible to refinance but it’s something definitely worth looking into.
Stay tuned! In the next post I’ll discuss some common arguments against paying off your mortgage. In the meantime, what do you think about paying off your mortgage early?