How to Pay Off a Mortgage Faster and Save Thousands of Dollars!

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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

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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:

  1. 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
  2. Many folks refinance their homes and in that process start the 30-year cycle over (and again, never get out of debt)
  3. 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!

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.

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!

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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?

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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.

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 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!

pay off mortgage faster Middle Class Dad mortgage rate savings infographic

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:

  • $500
  • $750
  • $1,250
  • $1,500
  • $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!

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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!

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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 –
Fortune –
Stuck truck –
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.

9 Top Pros and Cons of Refinancing Your Home You Must Know!

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Considering the Pros and Cons of Refinancing Your Home?

Maybe you’re wondering if a refinance will drop your monthly payment?

The pros and cons of refinancing must be considered before you get started!

You might shortening your loan, saving you tens of thousands of dollars! Or you may just want to drop PMI or just get a better interest rate.

There are some great reasons to refinance. But there are also definitely some things to avoid.

A home refinance can be a great way to lower your payment. It can also reduce your interest rate or enable you to pay the home off faster.

It’s also important, however, to avoid some of the common pitfalls that many home owners fall into when doing a home refinance.

In this post, we’re taking the myserty out or mortgages, refinancing and when & how to do them.

Specifically, we’re looking at all the big pros and cons of refinancing your home so you can make the right decision for your home.

What does refinancing a home mean?

This is your existing mortgage (which is just a fancy word for a loan).

Then you work with a new lender (or the original mortgage company) to renegotiate the terms of your loan.

Most of the time you can expect to pay a few thousand dollars in the negotiation process.

So we want to review the pros and cons of refinancing your home to make sure it makes good financial sense over the long term.

First we need to identify your goal and see if it makes sense in the pros and cons of refinancing your home:

As I said, you might want to:

  1. Lower your interest rate (rates are currently below 4% and you can always see the current rates no matter when you read this post by checking out MarketWatch)
  2. Lower your monthly payment – Lowering your interest rate will drop your monthly payment. If, however, you are currently paying PMI (Private Mortgage Insurance) and your home has gone up in value since purchase, you may be able to refinance and get rid of the PMI payment. This is likely adding $100 or more per month to your payment)
  3. Get a shorter loan term – Most homeowners go for 30 year loans and most of us grew up just thinking that was how it was done. In reality you can get a loan for almost any length of time. A 15 year loan will save you big bucks over the life of your loan depending on the home price. That money, if invested in mutual funds, could bring you millions for retirement. A great alternative to giving it to the bank!
  4. To move to a fixed rate loan – If you are currently on an adjustable rate or an interest only loan you are seriously jeopardizing your family’s financial future. Moving to a fixed rate loan could literally be one of the best decisions you ever make.
  5. Cash out equity – Equity is the amount of money your home is worth over how much you owe on it. If it’s worth $200,000 and you owe $150,000, your equity is $50,000. This is my least favorite of the reasons. Going this route, you are essentially borrowing money and using your home for collateral; meaning if you default on the payment you could lose your home. There are a lot of ways to improve your monthly cash flow. Saving for big purchases is always preferable to borrowing money, but if you are going to do this we need to be smart about it.

Is it bad to refinance?

Generally speaking you should only consider the pros and cons of refinancing your home after you’ve been in the home at least 2 years.

You also want to make sure you plan to stay in the home at least another 5 years.

We’ll get into that more below.

Lastly you need to have a clear goal for your home refinance.

Whatever your reason to refinance, you want it to make sense financially. A lower interest rate, lower payment or dropping PMI might all be great reasons to refinance.

But before you rush off to call a loan officer, let’s dig into all the pros and cons of refinancing your home and examine each one as it pertains to you and your situation.

So let’s look at each of the pros and cons of refinancing your home, one by one


1. Lower Your Interest Rate

Generally speaking if you can lower your interest rate by half a percentage point (or more), it’s probably worth doing.

For instance, let’s say you bought the house 8 years ago on a 30 year fixed loan and at that time you got a 5.25% interest rate.

Chances are at today’s rates, you could drop that to 3.99%, saving you 1.25%.

Say you refinance the balance of what you owe ($150,000). Over the course of 30 years from that point forward, that change in interest rate will literally save you about $40,000. (factored using the mortgage calculator at

Dropping your interest rate is certainly one of the top pros of the pros and cons of refinancing your home.

2. Lower Your Monthly Payment

We know lowering the interest rate can save you cash, but what about just doing a home refinance to lower your monthly payment?

Aside from interest rate, you can also lower your monthly payment by eliminating PMI which as I noted above is Private Mortgage Insurance.

This is insurance your lender (the company giving you the money to buy or refinance your house) requires when you owe more than 80% of your home’s value. And they make you pay for it. It insures them in case you default on the payment (stop paying your monthly payment).

In a nutshell if you buy a $200,000 house, and your loan amount is over $160,000 you will have to pay PMI.

PMI typically adds about $120 to your monthly payment on a $200,000 loan. Check your specifics by using this PMI Calculator by GoodMortgage.

That’s a savings of $1,440 per year! That might be worth doing

Getting rid of PMI without going thru a refi

PMI doesn’t just automatically drop off your mortgage when your home value goes up.

Depending on your loan terms it will, however, likely drop off when you have paid down the loan principal enough to where the LTV (loan to value) gets better than 80/20 (where you owe less than 80% of the home’s value).

But for many of us, the home value is increasing faster than our loan principal is going down. In which case a refi to get rid of it might make sense.

However, you may be able to request it be dropped by your current company without going through the hassle and expense of a refi.

But in order to prove your case you’ll likely have to pay for your home to be appraised by a professional appraiser.

Before you pay for this you’ll want to contact your current mortgage company and ask if this is possible and find out what they need specifically to make this happen.

Need more on this? Check out the government’s page on PMI at the Consumer Financial Protection Bureau.

Getting rid of PMI, which only benefist the lender, is definitely a good pro in the pros and cons of refinancing your home.

3. Get a Shorter Loan Term

Nothing sheds tens of thousands, if not hundreds of thousands off your mortgage more than shortening the loan term.

Back in the “old days” everyone just got a 30 year fixed rate mortgage and that was considered “normal”.

However you need to understand that your are paying compound interest over decades. In doing so, you begin to realize that the $200,000 mortgage you just took out will actually have you paying back almost $348,000 (factored using the

Thus, cutting your loan term down by ANY amount can save you a lot of money. This is my favorite in the list of the pros and cons of refinancing your home.

How the math works on reducing the length of your loan

Just as a for instance, if you took that $200,000 loan from a 30 year down to a 15 year, you would only be paying back $266.287.

Saving almost $82,000 is a good reason to refinance!

Now, I know some of you are thinking that going from a 30-year mortgage to a 15 year means your payment doubles.

As crazy as it might sound, that is not correct.

While it’s true it will be higher, it may be a manageable increase and worth some cut backs to save that $82,000! No; going to a 15-year loan means a monthly payment of about $1,479/month. That is versus the $955 it was at a 30 year.

Yes, a monthly payment difference of about $500 can save you $82,000!

To keep things a little simpler, all my mortgage calculations are with principal and interest only. Thus I’m not factoring in things like property tax and home owner’s insurance, all of which can vary a lot from place to place.

Also, know that you’re not locked in to only 30 or 15. If you can afford a 7 year or less; go for it! Can’t quite make the mortgage payment work at 15 years? Ask about doing a 20!

Want to dive in deeper on the benefits of Paying Off Your Mortgage Faster? I have a highly shared post on that very subject. Take a moment and review if you want to learn more.

4. Get a Fixed Rate Loan

A fixed rate loan should be the only type of loan you consider.

Thankfully one of the benefits of the crash of 2008 is that many of the riskier loan types aren’t pushed nearly as hard now.

But if you got your loan before that, it’s possible you have an adjustable rate mortgage or an interest only mortgage.

Let’s review why these are a TERRIBLE IDEA.

An interest only loan is literally just that.

You are paying the bank the interest (profit) only, for a set period of time, and not putting anything towards the principal (the amount you actually owe). Imagine buying groceries each week.

You give the store $100 each week and then at the end of the year you have to pay $5,200 because that $100 you gave them each week was just for the privilege of shopping with them.

That’s EXACTLY what an interest only loan is.

Would you even consider that?? I hope you answered no.

Adjustable rate mortgages are the financial equivalent of Russian Roulette.

You are simply gambling on how much and when your interest rate will go up. Maybe it will only go up a percent or 2 after a few years.

But depending on your terms, in 7 years it could double and at that point you might not be able to afford the payment and you could literally lose your home.

I still recall when I was in my early teens and the home my mother had purchased went up to almost 14% interest and we had to sell it.

That was because of her adjustable rate mortgage and the crazy economy in the early 1980’s.

Don’t gamble on your family’s future! If you have one of these loans, now is the time to ditch them. If you don’t have one; keep it that way!

So getting rid of an adjustable rate or interest-only loan is probably the #1 pro in the pros and cons of refinancing your home.

5. The H.A.R.P. Program

HARP (the Home Affordable Refinance Program) was created by the Federal Housing Finance Agency.

It is specifically designed to help homeowners who are current on their mortgage payments, but are upside down. By that I mean they owe more on their home than it is now worth.

In a traditional refinance setting you would not be able to refi if you are upside down on the home’s value. Thus the HARP program could be a great way to reduce your interest rate if that’s the boat you’re in.

Learn more and see if you qualify on the government’s HARP Page.


6. Cash Out Equity

As I mentioned, this is my least favorite of the pros and cons of refinancing your home although it’s widely done.

Essentially you are borrowing money using your home as collateral.

Now, since you already have a home loan, you are technically already doing that. The key difference, however, is that your original loan was for the home by itself.

Taking out equity loans are often done for a variety of reasons outside of just paying for the home. Reasons range from paying for remodels to vacations to paying off other debt.

The reason I don’t like this is that you are increasing the amount of money your home is borrowed against.

This means it will take longer to repay. Unless you are also dropping your interest rate significantly, you are also increasing the monthly payment.

The danger then becomes that if there is a change in employment or income, the new higher payment can be harder to meet each month and the risk of losing your home to foreclosure increases.

If you insist on doing a home equity refi the only way I would personally be OK with it is if you are:

  • Adding to the value of the home (genuine home improvements that boost home value, such as these mentioned by
  • Using the money in a way that generates additional income (eg: you or your spouse going back to finish a degree that has a high probability of significantly improving household income)

I would never recommend doing a cash out refi to:

  • Pay for things that go down in value (cars, boats, campers, etc)
  • Loan money to friends of family (do you really want to lose your home bailing Uncle Johnny out of jail?)
  • Pay for frivolous things that don’t bring value to your home or income (vacations, cosmetic surgery, etc) – that’s what being frugal and saving money and working hard is for

Lastly, on this subject, I would also encourage you to check with your local credit union about a Home Equity Line of Credit.

As I go into further below, a refi will cost you between 3-6% of the total loan value.

So if you owe $150,000 and want to take out an additional $40,000, your new loan is $190,000. 3%-6% of that is $11,400.

That’s a lot to pay for the privilege of borrowing money even if it’s for one of the better causes I mention above.

My local credit union is currently offering Home Equity Loans for as little as 2.75%.

Of course the amount I borrow and my credit will be factors, but even at 3%, I’m only paying $1,200 to borrow that same amount of money.

Unless you are also dropping your interest rate and maybe dropping PMI, just doing a refi just for equity is probably a terrible financial idea.

If you own your home some of the processes or terms can be confusing.

I encourage you to check out my previous post called 9 Key First Time Home Buyer Steps You Must Take That post covers the entire process and terms in-depth. It breaks everything down so that even a novice can become an expert!

7. If you plan to be in your home less than 5 more years

Many of us had grandparents or great grandparents who lived in the same house decade after decade. Maybe they still live it the same house you remember as a kid.

That, however, is not the reality of the current generations.

According to the National Association of Home Builders, the average length of time a home owners stays in their home is about 15 years.

For first time home buyers, that time is even less. So you will likely live in your home 15 years minus however long you’ve already been there.

As we get into below, in most cases it will cost you more (in fees) than you will save (on your new monthly payment) to do a refinance if you are likely to move in fewer than 5 years.

Thus this is also one of the biggest cons in the pros and cons of refinancing your home list.

8. Longer approval time

Before the economy tanked in 2008 it was common for new home loans and refinances to take up to 30 days.

These days that process can be considerably longer. If you recently changed jobs, have poor or mediocre credit or a variable income, expect it to be even longer still.

Thus expect your refinance to take up to 90 days. Of course your lender can give you a more accurate estimate. But in my experience, it still often takes a little longer than they initially project.

9. The Streamline Refinance Program

The streamline refinance program is a government program.

If you have bad credit and your home is underwater then you might move this to the pros section of the pros and cons of refinancing your home.

But for most people with decent credit, you will save more with a traditional refi.

They sell the program as having no or low fees, no credit check, etc. Sounds great, right? It does until you consider the interest rate is higher than a traditional refi to cover that expense and risk.

So in most cases this is a con, not a pro. Underwater on your home, the HARP Program is probably a better option than this.

Is it worth it to refinance?

In the case of looking at any of the above pros and cons of refinancing your home, we need to make sure it makes sense monetarily.

It can be all too easy to see the potential savings of a lower interest rate or payment. But don’t forget about how much it’s going to cost you to do a home refinance.

How much it costs you and how long it takes to make that back is the best way to decide if a refi is right for you.

This is the most important of pros and cons of refinancing your home!

How to calculate whether a home refinance makes sense for you

Let’s say you owe $200.000 on your home and it’s now worth $300,000.

We can already tell from those numbers that we can drop the PMI we are paying. That alone saves us up to $120/month or over $1,000/year.

Doing a traditional home refinance will cost you between 3% and 6% of what you owe on your current loan.

Those figures and some great detail on doing a refi can be found on the Federal Reserve’s page. For our purposes, let’s assume the cost will be right in the middle, 4.5% on that $200,000 loan or $9,000. In my experience having done home refinance several times, that amount is about right.

So we now know we need to save at least $9,000 to make this home refinance make sense.

Quite simply, divide the total costs of the refi ($9,000) by the monthly dollar savings the refi gets you.

If you’re doing the refi to take out cash or shorten the loan period then this doesn’t apply to you. In this case, you aren’t doing the home refinance to save money on your monthly payment.

So in my original example, dropping the interest from 5.25% to 3.99% on a $200,000 loan balance nets you a monthly savings of $151.

That’s not including possibly dropping PMI and saving up to an additional $120/month.

So $9,000 divided by $151 is 59. That’s how many months of new lower payments it will take to recoup your expenses, or (divided by 12) about 5 years.

Plan to be in the house at least another 5 years? Then under the scenario of my example numbers, it would make good financial sense to do a home refinance.

Before you dig in on the pros and cons of refinancing your home make sure your finances are in shape!

Need help getting your family’s monthly finances on track?

I have a copy of my Budgeting Spreadsheet available at no charge!

It’s a simple, highly customizable, Excel spreadsheet and you can download it quickly and easily FOR FREE!

pros and cons of refinancing your home free budget spreadsheet click box Middle Class Dad

If you struggle each month, aside from being on a written budget like my spreadsheet provides, you might also want to check out one of my previous posts called 7 Best Ways to Stop Living Paycheck to Paycheck

A home refinance can definitely help get your finances in order. But nothing does the job quite a well as 2 people working together with a plan and some organizational systems!

So let’s review the . . .

9 Top Pros and Cons of Refinancing Your Home You Must Know!

  1. Understand your goal in doing a home refinance
  2. If you are doing the refi to lower your interest rate, make sure you can lower it by at least .5%
  3. If you think your home has gone up in value enough to drop PMI, see if you can get that dropped by your current mortgage company without the hassle and expense of a refi (not sure? Ask a Realtor friend to run “comps” in your neighborhood to see what “comparable” houses are selling for)
  4. Make sure if you are doing the refi to lower interest rates or payments that you can cover the cost of the home refinance in the remaining time you plan to live in the home (ideally you should recoup the savings within 5 years)
  5. If you can make it work, go for a 15-year loan rather than a 30, but even a 20 year is an improvement!
  6. NEVER do an interest only loan
  7. NEVER do an adjustable rate loan
  8. If you are doing the refi to take out equity, understand that you are essentially taking out a loan on your home and if you have any trouble making the increased payment, that can put your home in jeopardy.
  9. That being said, if you insist on using your home to borrow money, make sure the refi is the best option as a home equity line of credit from your local credit union might cost you less

Are you looking at the pros and cons of refinancing your home?

In this post, we took an in-depth look at the sometimes confusing world of home refinancing.

We looked at all the best options out there and what pitfalls to avoid.

Specifically, we looked at the top pros and cons of refinancing your home so you can decide if a refi is right for your situation.

Do you have questions? Have you done one and had issues? Done one and had it meet your goals?

Feel free to comment here or email me with any questions as I am here to help!

If you like this post, please follow my Real Estate board on Pinterest for more great tips from myself and top financial experts!

pros and cons of refinancing your home Jeff Campbell bio Middle Class Dad

Photo credits (that aren’t mine):
Monopoly houses and dice –
Growing Money –
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.

How Much House Can I Afford Rule of Thumb – Steps You Must Know

steps to buying a house for the first time brick house with a green lawn Middle Class Dad

Buying a home for the first time is scary!

It means a big step into adulthood, but it can also add a lot of stress.

How much do houses cost? Even if you know the sales prices of homes in your area, how much will that cost per month? Done right, home ownership can set you up for huge financial success.

Done wrong, however, it can lead to being house poor and maybe even bankruptcy or foreclosure.

Fear not though.

It is possible to get answers to all your questions and make smart and informed choices about your home purchase.

In this post, we’re walking together through all the most common questions about buying a home, figuring out all the things that make up your monthly payment and navigating the sometimes complicated world of real estate.

Specifically, though, we’re looking at the exact how much house can I afford rule of thumb formula. That way you can rest easy and make the best choice for your financial situation and start your journey down the road of financial success.

Ready to look into a mortgage? The digital age has made applying, qualifying, and funding a mortgage easier than ever! Check out Floify to learn more!

Before you buy a house, it’s vitally important to know the how much house can I afford rule of thumb

Are you on the verge of buying a house? If so you’re probably scared to go through with the deal. After all, it’s the biggest financial decision of your life.

What if you buy too expensive of a house? What would it be like to be house poor? More importantly, what is the how much house can I afford rule of thumb?

Then comes more panic and more questions!

What percentage of your income should go to housing expenses?  How do you figure the total cost of your mortgage?  What do you do if you’ve already bought a house and feel it’s too big a chunk of your monthly budget?

Except for medical care, we never buy anything without first knowing:

  1. What it costs in total
  2. How much we can afford
  3. If it works for our household budget

So with that in mind, its crazy to think that many of us have bought houses without ever knowing the “how much house can I afford rule of thumb”  And yet many of us have, myself included.

If you have not yet bought a house but are considering it, I highly recommend taking a moment to check out my post called First Time Home Buyer Steps. I break down all the best practices, define all the common terms and walk you through the process step by step.  I also utilized 2 amazing realtors when researching that post so you know it’s accurate!

The biggest perils of not knowing the how much house can I afford rule of thumb

How much house can we afford rule of thumb keys in a front door Middle Class Dad

The downsides of not knowing the how much house can I afford rule of thumb can be many and could literally turn your dream into a nightmare.

Worst case scenario you could be facing foreclosure.

Best case scenario you’ll be house-poor.  By that, I mean that so much of your income will be going towards your house payment or rent that you can’t afford much else.  Or (even worse) you begin to live off credit cards to offset you much you’re overspending.

Knowing the “how much house can I afford rule of thumb” is one of the most crucial questions you’ll ask yourselves.

If you’re at least not going further in debt you’re talking about no vacations, bare-bones grocery shopping and rarely eating out.  If you do end up using credit cards to make ends meet you’re not actually saving any money; you’re just delaying the punishment.

Plus when you factor in credit card interest you’re coming out even further behind.

If you struggle to make ends meet each month and need help just getting the basics under control you should check out my post entitled Household Budget Template Tips  It’s just a 3-minute read, but it’s full of useful tips and action items!

The crucial steps to factor the how much house can I afford rule of thumb?

The rule I learned from Dave Ramsey about 8 years ago was to not spend more than 25% of your household income on housing expense.

I was also reminded of the how much house can I afford rule of thumb while listening to a recent podcast by the always insightful Brandon Gaille.

In his podcast, he details the 8 habits of millionaires which includes not spending more than 25% of their annual income on housing expenses.  It’s a great listen!

The worst financial mistake of our lives

Anyway, when we bought our house in Dallas in 2006, it was before I knew the importance of knowing the how much house can we afford rule of thumb.

My family and I bought that house for $389,000 and we had a 1st mortgage and a 2nd one.  In those days if you couldn’t qualify for a loan for the whole thing they would do a 2nd mortgage.

That 2nd mortgage would be at a higher interest rate.  It would, however, allow you to avoid PMI (private mortgage insurance).   Those types of loans are something of a rarity these days following the crash in 2008.

We had a 1st and a 2nd mortgage and had not made a sizeable down payment on it.  My wife was mostly at home with our kids and my salary was around $75,000/year.

Guess how much our mortgage payment was?  Including principal, interest, taxes, and insurance, we were paying upwards of $2,700/month!

Our house payment was a whopping 43% of our income!

Is your budget a mess or non-existent?

If you are struggling with bills and can’t seem to get ahead, you may not be using a monthly budget. The budget was one of the real keys to my family getting out of debt, going on dream vacations and getting ahead. And we did while salaries were pretty stagnant!

If you aren’t sure of the basics, check out my post called How to Make a Budget.  I walk you through the exact steps we took to pay off over $80,000 in debt!

But if you’re ready to get started, grab a FREE copy of my budget template right here! It’s the same template my family has used for over 7 years and hundreds of others are using it too!

Digging our way out of the financial hole we were in

Unfortunately for us, we started listening to Dave Ramsey after we bought that house!

Thus we never knew the “how much house can I afford rule of thumb”.  We just blindly assumed if we could qualify for the loan we could afford it.  That was WRONG!

Once we started listening to Dave it was clear something had to change.

We were making things work by using credit cards. But as I’ve already said, that’s just delaying the inevitable.  And for us, the inevitable could have been bankruptcy.

If you are struggling with debt take some cues from my mistakes!

Want to know more about the best percentages to divide up your income by?  Check out my handy infographic!

How much house can we afford rule of thumb how to divide up your paycheck infographic Middle Class Dad

The terrible truth if you’ve already bought too expensive of a house

The sad truth is that many people, just like my family, have already purchased a home they can’t afford.

If you’re already in a mess you have 2 options:

  1. Sell the house or (if you’re renting) break the lease and move to a cheaper house
  2. Ride it out and make cutbacks elsewhere

Deciding which option can be a little tricky.

In the case, I laid out above we had a house payment that was 43% of our income.  Once we finally realized the “how much house can I afford rule of thumb”, the answer was crystal clear.

Thus we had to sell and move down in house. We decided to sell in August of 2008.  Guess what else happened around that time?

Yes, if we’d only sold about a month earlier we could have sold quickly and probably made an extra $100,000.  But no, life was determined to make sure we learned our financial lessons.

Thus it took a year and a half and an over $100,000 price drop to get the thing sold.

But once we did, life was sweet.  We moved into a $900/month duplex. That way we could really make traction on our debt. And we could focus on getting ourselves out from under the mess we had made and to begin to plan for retirement.

Should you move or suffer and stay in an expensive home? 

For me, if your total mortgage payment (including taxes and insurance) or rent is under 33% of your total gross annual income, and you like the house; stay there.

Unless you went with an adjustable rate mortgage your payment will stay close to the same (taxes & insurance will slowly increase) but your income will hopefully be going up each year by a larger percentage.

If, however, your total payment is way over 33% of your income, it’s probably time to sell and move down.

If you’re renting and you have a lot of time left on your lease contact your landlord and see what the options are.  You signed a lease and that means you have an obligation.

A huge rent payment we agreed to is not the landlord’s problem.  But they also will probably sleep better at night knowing someone is in the house who isn’t on the verge of going broke.

Maybe a sub-lease or maybe the rental market is hot and you sacrifice some or all of your deposit to walk away.

If you own and are upside down on your mortgage that does add a layer of complexity.

But if your payment is way high like mine was and you’re only underwater by a little bit (under $20k), it might make sense to take our a personal loan from a credit union for the difference and sell anyway.

If the housing market in your area is terrible and you’re on the verge of defaulting on your mortgage you might also ask your lender about a debt forgiveness program.

Or maybe a short sale (where you sell for less than you owe and the bank accepts that as payment in full).  Banks were probably a whole lot more willing to consider those things in 2010 than now, but it never hurts to ask.

How much house can you afford on 60000 a year?

Of course, qualifying for a mortgage is different than what works with your budget.

Mortgage qualification is based on:

  • The total household income
  • Your credit score
  • All outstanding debt

But purely in terms of how much home I could afford using the rule of thumb, I would personally not buy a house that cost more than $150,000.

Ultimately at that income level, you want your total monthly payment (including taxes and insurance) to be around $1,250/month max.

How many times your annual income should your house be?

As I get into more below, you want your total monthly house payment to be about 25% of your monthly net income.

If your paychecks total $5,000/month that amounts to a net income of $60,000/year.

Knowing as we factored above that a house that costs about $150,000 is about right, you want to look for a home that costs about 2.5 times your annual salary.

So what are my . . .

5 Steps You Must Know About the How Much House Can I Afford Rule of Thumb?

How much house can we afford rule of thumb woman in a red top pointing to a laptop Middle Class Dad


Take your total household income.
If you’re looking at an annual amount, divide by 12 to arrive at a monthly figure. If you or your spouse get paid irregularly (pay dates or amounts), you’ll want to do the following:

  • Look at the previous year’s gross annual income on your tax return or W2
  • Decide if the coming year will be comparable, lower or better
  • Using that info, arrive at an estimated total and divide by 12 for a monthly amount
  • If you get quarterly bonuses or other large, irregular fluctuations, don’t include those amounts; I’d rather you occasionally get extra money to put towards debt, vacations or retirement than be counting on that money and not have it be there each month

Let me give you an example.

When I was a GM for the largest natural foods grocery out there, I made a nice 6 figure salary.  But a good chunk of that was in the form of a quarterly bonus based on the profitability of my store.

If sales tank, guess what else tanked?  My salary!  My actual regular paychecks added up to about $70k/year.

So using me as an example, I would take $70,000 and divide by 12 for a monthly gross of $5,833.  The bonuses which I may or may not get 4 times a year should not fall into that.  That’s gravy but shouldn’t be relied upon for essentials.


The monthly gross gets multiplied by .25, representing exactly 25% of your monthly gross household income.  Going back to my example, 25% of $5,833 is $1,458.


Now the figure you have is what your total monthly housing costs should be.

Again returning to my example, $1,458 is the max I should have spent on housing costs if there were no other steady sources of income.  Thus that house payment we had I detailed above was more than $1,200 too high!


If you own your home (and have not paid it off yet) your total housing costs include:

  • Your principal
  • The interest payment on that principal
  • Your annual property tax amount
  • The insurance on your home
  • HOA costs (if any)
  • PMI costs (if any – this stands for private mortgage insurance)

If you own your home and don’t know those amounts the easiest way to get them will be to login to your mortgage company’s website as the info will be right there.

Paying your taxes and insurance through your mortgage company?

This is commonly referred to as escrowing.

Don’t know what that means?  When you buy a house you have 2 options pertaining to insurance and taxes.  You can include them with your mortgage payment. This is called escrowing those costs.  Or you can keep them separate and pay them on your own.

Unless you are a highly organized and disciplined person, escrowing them into your mortgage payment makes more sense.  Doing that, the mortgage company actually pays those entities at the end of the year, estimating the total payments.  Then they simply divide those total annual costs by 12 and add that amount to your mortgage payment each month.

If you escrow those costs then your mortgage payment IS your total monthly housing cost (not counting HOA if you have one).  If you do not, you need to know how much your annual property tax and insurance bills are.

Calculating insurance and taxes for a monthly payment

Then add those together and divide by 12.

Add that amount to your monthly mortgage payment.  If you are paying PMI, it will already be in your monthly payment.

If you have an HOA bill you pay each month, include that with the remaining payments.

Now you have your total monthly housing expense.  If you rent, your rent is obviously the main component. But if you have renter’s insurance, include that monthly amount as well.

If your total monthly housing cost is way over your 25% calculation, then the “how much house can I afford rule of thumb” tells us you spent too much.

Now you need to walk through the steps above to determine if you should sell or stay.


If you are in the market for a new home, that’s great!  Following the above steps, you know how much you should be spending per month on housing. But how do we translate that to the “how much house can I afford rule of thumb”?

Is that impossibly complicated math?  No!  Fear not.

First, we need to know how much of a down payment can you put down.  Avoid 0 down programs and plan to do somewhere between 5% and 20%.

Obviously the more you put down, the smaller your payment.  Also know that unless you put down 20%, you will be adding PMI to your monthly payment (probably a max of about $100).  This protects the lender in case you default.

Let’s assume for these calculations you plan to put down 5%.

Let’s also assume your gross annual income is $70k like mine was in the above example.  Thus we know your total monthly housing costs should be around $1,458.  For my purposes, I’m assuming an interest rate of 4%.

In this scenario, you are looking for a house with a sales price of about $160,000 on a 30-year loan. 

Here are the calculation formulas for you to factor your own situation.

  • Total monthly payment ($1,458) * 78.21% = principal & interest
  • Total monthly payment * 11.59% = property tax (can definitely vary quite a bit from city & state)
  • Total monthly payment * 5.8% = home owner’s insurance
  • Total monthly payment * 4.40% = PMI

Of course, there are a lot of variables and these will not be down to the penny.  They should, however, be in the ballpark and steer you pretty close to where you need to be.  Also, know a 15-year loan is much better financially than a 30 and can mean the difference on a $160,000 house of over $100,000 in interest over the life of the loan, but only increases your payment by about $400/month.

If you’re already in a 30-year loan and aren’t sure if you should refinance down to a 15 year, you’ll definitely want to check out my post How To Pay a 30 Year Mortgage Off Faster  It’s a simple 5-minute read that walks you step by step through the process of paying your 30-year mortgage like a 15.  And saving you thousands of refi costs in the process!

Did I cover all your “how much house can I afford rule of thumb” questions?

In this post, we looked at how to use the how much house can I afford rule of thumb to make sure you don’t end up house poor.

But we also broke down the crucial formulas used to calculate everything. Lastly, we looked at what to do if you’re already in a home that’s too costly for your income bracket.

Ultimately done right, home ownership is a dream. Done wrong and that dream can quickly turn into a nightmare.

Feel free to comment here or email me with any questions as I am here to help!

Love it? Pin it to your favorite Pinterest Boards!

How much house can I afford rule of thumb Jeff Campbell bio Middle Class Dad

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.
Photo credits (that aren’t mine or which require attribution):
Home Equity – Home on top of stack of Money by By: American Advisors Group is licensed under CC BY 2.0