Real Estate Archives | Middle Class Dad

Wondering How to Pay Off a Mortgage Faster? We all know (or should know) that a 30-year mortgage costs us a lot of money! If you don't know that, let's do the math real quick so you can see just how costly it is. Let's say you buy a $200,000 house and put down 5%. If you finance the remaining $190,000 at 4% with a 30-year mortgage (fixed rate loan) that has you paying a total amount of $326,552. In other words, for the benefit of a 30-year mortgage, the mortgage company is charging you $136,552 in interest! But there's a better way! If you can afford the payment, a 15-year mortgage could literally save you tens (or hundreds) of thousands of dollars depending on the amount of your loan. Can't afford those payments? Talk to your lender about a 20 year or even 25-year loan. Already locked into a 30-year mortgage? No problem. There are simple strategies that don't require a paid program you can implement to shave years off your loan and put thousands back in your pocket. Don't worry. In this post, we're diving deep into the world of mortgages, buying and refinancings homes and we're demystifying it so even a beginner can understand. We'll show you exactly how to pay off a mortgage faster and, more importantly, why you should and how much money you can save. Why the 30-year mortgage is a bad idea The 30-year mortgage with a fixed rate is the standard loan given to most people. You buy a home, finance it over 30 years and if you stay in that home that long, at the end of the 30 years you own it free and clear. The biggest downsides to this, aside from how much interest you pay are: Most folks stay in their home an average of 15 years (source: National Association of Home Builders), hence most folks never get out of their home debt Many folks refinance their homes and in that process start the 30-year cycle over (and again, never get out of debt) Still more people take out home equity loans, which is a secondary way of borrowing money on your home. These loans too make it harder to reach the end goal of being debt free on your home If the idea of being debt free is new to you or sounds crazy, check out exactly how and why you can be debt-free even on a low income! The preference for the 30-year mortgage has been in place for decades and many people aren't even aware they have options. Most of us aren't taught about pay off a mortgage faster. Those who are aware of options often opt for BAD options like interest-only loans or adjustable rate mortgages. (HINT: stay away from those!) Want to see how much you can save? If you're in the European Union, check out this great mortgage calculator and see just how much you could save by a shorter loan term! If you have an adjustable rate mortgage, it's TIME TO REFINANCE. NMLS1988, MB2217. Call 603 595 7699 pic.twitter.com/fT6gFRmqDC — Alpha Mortgages- NH (@AlphaMortgages) December 31, 2016 How can I pay my loan off faster? In an ideal world, instead of taking out a 30-year mortgage, you would take out a 15-year mortgage. If you can afford the payments, a 10 year or 7-year fixed rate mortgage is even better! You see, the shorter the loan length, the less interest you will pay. In some ways that sounds simplistic but in other ways not. Why? It's called compound interest. When you invest in things like mutual funds, compound interest is your friend. It builds interest for you the same way a 30-year mortgage does for the loan company. So when you pay off a mortgage faster, you could take all that money you AREN'T paying to the mortgage company and invest it in mutual funds and have compound interest work for you instead of against you. Compound interest. The reason why you need to start saving for retirement as early as possible. Here's why: https://t.co/JLKHy2HhNR pic.twitter.com/oWrigHghYS — Life Happens (@lifehappens) January 3, 2017 What happens when you pay off your mortgage? If you didn't have a mortgage payment then the total cost of home ownership would simply be your property tax bill each year and your annual home owner's insurance. Those costs vary a lot from state to state. They will also both be based on the assumed value of your home. Thus a $500,000 home will have much higher costs than a $150,000 home. In my case, my home is currently worth about $200,000. My mortgage payment (including taxes and insurance) is about $1,300/month. If I paid off my house, that monthly payment would drop to about $525. Thus, paying off my home would save my family about $800/month! What could your family do with an extra $800/month? How compounding interest works against you! MoneyChimp has an excellent page on breaking down the concept of compounding interest. If the interest wasn't compounding, you could simply multiply 4% times $190,000 (using my original example) and arrive at interest of $7,600. If you could get a 30-year mortgage for $7,600, that would be fantastic! Instead, they basically charge you 4% a year for how much you still owe on the loan amount (called principal). Spread that out over the 30 years of a 30-year mortgage and wa-la! You will have paid $136,552 for the glory of borrowing money. If you took even a 1/3 of that $136,552 you are giving to the mortgage company ($45,000) and invested it over 30 years in mutual funds averaging 10% interest, you'd grow that to over $785,000! Wouldn't you rather have 3/4 of a million dollars instead of a 30-year mortgage?? I certainly would! How can you pay off your mortgage in half the time? If you follow my posts at all, you know I LOVE Dave Ramsey's take on all things personal finance. Listen to Dave here on the concepts of paying off a mortgage faster. So now we understand the math. And why a 30-year mortgage is not a great idea for anyone other than loan officers. Many of us, myself included, already have a 30-year mortgage. Sure I could refinance my 30-year mortgage and go with a shorter loan. However, a traditional refinance costs between 3-6% of the loan value. On my home, I owe about $145,000. Thus a refi would cost me between $4,000 and $8,000! Having done a few refis in my day, I can tell you it usually ends up on the high end of that range. If I am not also able to get an interest rate that's at least 1/2 percent lower than what I have now, then that doesn't make sense financially to refinance. In addition to my post on home buying I mentioned above, I also have one on refinancing. That post goes into more specifics on when and if a refi makes sense for you. If these terms are confusing or if you have a 30-year mortgage, that would be well worth reading too! That post is about the pros and cons of refinancing your home. So are we stuck in a 30-year mortgage? I have bought and/or sold a total of 7 houses. I've had a 30-year mortgage on all of those. I've also done home refinances at least 5 times. Thus I'm not completely without experience. I've made plenty of mistakes in that process and thus, I'm blogging about many of those today! I started writing this post after seeing the question of HOW do you pay off a mortgage faster posted on Clark Howard's Facebook page. I've listened to Clark for at least 20 years and love his stuff. I noticed that the woman who posted the question had no answers. Thus I Googled the topic to see if I could give her some quick help. In doing so, I realized that there were a number of posts on the subject. However, none of them answered the question of how to do it quickly or succinctly. So my hope with this post is to truly answer all the questions related to how to pay off a mortgage faster. Is there a penalty for paying off your mortgage early? No; unless your loan specifically penalizes you for what they call early payoff! I have personally never had or seen a loan that prevents early payoff, so chances are yours doesn't either. To be sure though, read the loan docs you signed or check with your loan agent or mortgage company! I am not a Realtor, attorney or mortgage broker; I'm just speaking from my personal experience. Even when #opportunity knocks, a man still has to get up off his seat and open the door. https://t.co/XGlbRFotqM #Success #Entrepreneur pic.twitter.com/rOU5b3KulA — Felix L. Griffin (@FelixLGriffin) December 27, 2016 So How do you Pay Off a Mortgage Faster? Of course, the exact dollar amount you have to pay on top of your 30-year mortgage payment is going to vary. It's affected by your loan balance and interest rate, but we can break down the formula into simple math. Then with the help of a trusty mortgage calculator like this one at www.mortgagecalculator.org you can easily get your specifics. For now, let's use the math examples I used at the start. You owe $190,000 on a 30-year mortgage. You have a fixed rate of 4%. We'll also assume it doesn't make sense for you to simply refi to a 15-year mortgage. If it does make sense to refi, that's a good way to go; just make sure you shop around and get the best rate. Even a small difference can add up to big bucks! At 30 years using the figures above, your monthly payment would be about $907. That is just principal and interest. I'm not going to include property tax, homeowner's insurance, and PMI in my calculations. The reason is those things can vary so much by state to state and even city to city. If you had a 15-year mortgage using the same numbers, your payment would be about $1,405. That's a difference of just $498 per month. That difference amounts to about 54% of your original payment. Thus if you pay an additional 54% of your monthly payment, you would pay your 30-year mortgage off in about 15 years. How to understand your mortgage payment My numbers are not factoring in things like PMI, taxes or insurance so make sure you know the breakdown of your payment. If you have no idea how much of your total monthly payment is interest and principal you can: Call/email your mortgage company or loan office and ask Log into your mortgage company account on their website as I'm sure it's listed Call or email your mortgage company and ask for what they call an amortization table or schedule. This is a list of every payment over your 30-year mortgage showing each month's principal and interest breakdown. But using the 54% as a guide, you can see the following as it might apply to different monthly payment amounts: MORTGAGE PAYMENT (P&I) $500 $750 $1,250 $1,500 ADDITIONAL $$ TO PAY $270 $405 $675 $810 Those numbers are not going to be accurate down to the penny, but they will be close. The goal, of course, is to pay your mortgage off early and save a boatload in interest. Following the above will do exactly that even if it takes 14 1/2 years or 16; so don't get mired in the math if it's not 110% accurate! Hopefully, this helps simplify the process! That's not even factoring in things like: PMI (private mortgage insurance which covers the mortgage company in case you stop paying - required if you owe more than 80% of your home's value) Homeowner's Insurance (which protects you in case of damage to your house) Property taxes (what you pay your county, state, and city for tax on your home) If these terms are confusing, I have an earlier post that goes into the home buying process in great detail. I cover all the terms and the entire process, so it's well worth checking out. That post is called 9 Key First Time Home Buyer Steps You Must Take Can't afford to pay off your 30-year mortgage in 15 years? No problem! Money is tight in my house too! You see ANY amount extra you pay will go right to the principal of what you owe. So any extra amount helps you pay off a mortgage faster. Just make sure when you write that check or pay the additional amount online that you specify "extra principal" so they know where to apply it. Believe me; they'd love to assume that's extra interest! Every time you pay down the principal, the amount of interest you owe gets a little smaller. In other words, every little bit helps! If you can't pay an additional 54% now, just pay what you can; 20%, 30% or 40% maybe? You may not pay your home off in 15 years, but even if it took you 20 years, guess what? You just saved $50,000! That's right; if you pay off a mortgage faster, using the numbers I've illustrated, will save you $50k! Your family could do a lot with $50,000! Plus as you go along, you'll likely find your income going up and thus your ability to pay a little more gets better each year. Want some quick and easy ways to pay off a mortgage faster? Simply pay 1 extra house payment 4 times a year. That trick should save you over 10 years on a 30-year mortgage Divide the mortgage payment by 12. Pay that amount every month which amounts to 1 extra payment per year, saving you 4 years on that 30-year mortgage Do bi-weekly payments. This system simply has you paying half your mortgage payment every 2 weeks. You end up making 1 extra payment each year. This saves you 4 years on your 30-year mortgage Round up your normal monthly payments by any amount you can spare Got a big bonus at work? Throw all of some of that at the mortgage as a 1-time extra payment If you aren't on a monthly budget, then you likely have no idea where all your hard earned money goes every month. Once you begin to track your every dollar earned and dollar spent, you will quickly find extra money that isn't being spent wisely. When you do that, the amount of money you have to pay towards your mortgage grows. Want help getting going on a monthly budget? I have a copy of my Budgeting Spreadsheet available at no charge. There's no point in learning pay off a mortgage faster until you get your financial house in order. It's a simple, highly customizable, Excel spreadsheet and you can download it quickly and easily FOR FREE! Confused about the process of how to pay off a mortgage faster? In this post, we took an in-depth look into the world of mortgages, home refinances and how they work. We took the mystery out of it and broke it down so we can truly understand just how much money we stand to lose with a traditional 30-year mortgage. We also looked at many different strategies to pay off a mortgage faster to save thousands (maybe tens of thousands) of dollars. What's your biggest challenge in learning how to pay off a mortgage faster? If you like this post, please follow my Real Estate board on Pinterest for more great tips from myself and top financial experts! - Photo credits (that aren't mine): Remedy Oak Club House with some amazing Autumn colours by Neville Wootton is used under CC 2.0 Pile of cash - https://www.flickr.com/photos/miran/ Fortune - https://www.flickr.com/photos/isfullofcrap/ Stuck truck - https://www.flickr.com/photos/robertthigpen/ While I have years of successful financial & budgeting experience and run several million dollar businesses and handled the accounting, P&L and been responsible for the financial assets of them, I am not an accountant or CPA. Like all my posts, my posts are my opinons based on my own experience, observations, research and mistakes. While I believe all my personal finance posts to be thorough, accurate and well-researched, if you need financial advice, you should seek out a qualified professional in your area.