Owning a nice home is the dream. Paying on it until retirement is not. And yet, this is what many people find themselves facing. Maybe not all the way to retirement, but pretty close. Paying off a mortgage fast seems to be a part of that dream as well.
I remember running across an ad a couple of years back that piqued my interest. We own our place, now, but it definitely is not our dream home. It was more a means to an end- a source of stability. I paused and paid attention. It was a brand-new community of homes being built- beautiful inside and out with plenty of bedrooms and closet space, and an extra bathroom. I looked at the bottom of the ad and saw that the monthly price was something we could afford as long as we kept a tight rein on the rest of our finances.
Should We Do This?
I was getting really excited, until I did the math. We would be paying on the thing for almost thirty years at that price. Let’s be clear: I want a bigger home for my children. With this mortgage, they would be moved out and married with their own kids before we paid it off. I quickly threw out the ad, but it brought up some legitimate questions and concerns. How long were we willing to pay for a mortgage? Were we really going to get into a thirty-year mortgage so it would finally be paid off at the age of 65? Um, no.
If you are considering buying a home but do not want to be stuck paying for 30 years, or if you are already in a 30-year mortgage, I have some good news for you, and me for that matter. We can pay it off before then, if we choose, and save ourselves a ton of money in the process. We do not actually have to be stuck paying for that entire amount of time. Let me share what I have learned.
Understanding Your Mortgage
I am all about basic knowledge, so that is where we will begin. Mortgages can be tricky and confusing things. Before you even begin the process it’s very important that you understand your mortgage. You should know that Americans want to get their dream homes, so they are ready for debt to make that dream happen. Mortgage statistics show that this option is very popular.
If you’re thinking, “I just want a house. Oh, I sign this paper, make payments, and that’s it?” Well, yes, you can keep it that simple, but not if you want to pay it off quicker. There is a lot more information that you need to know, but don’t worry. We’ve got your back. Let’s break it down.
What Exactly is a House Mortgage?
So, what exactly is a house mortgage? In short, it is a long term loan that you use to buy a home. Like other loans, you will not only pay back the amount you owe but also interest on it.
How Do They Work?
When you decide you want to buy a home, you will speak to a bank or other lender that offers mortgage loans. They will look at your finances and your credit, and then they will tell you what they think you can afford. Getting a mortgage with good credit is always somewhat easier. Here is one of the biggest mortgage tips on this list: do not go by this number. Many people just go with what the bank says you can pay back, but the bank does not live with you.
You, and your spouse if you have one, need to look at your budget yourselves and decide what you can afford. This means you need to consider everything the bank is not considering, like fees at your children’s school, charitable donations, anything you want or need to spend money on that is not considered a bill. Banks do not think about things such as this, so you have to.
Once you have been given an amount by the bank, and you have decided what you are willing to pay each month, you begin to look for a home within those parameters. Once you find one and sign all the paperwork, you will move into your new home and pay the mortgage. Typically, the bank or lender expects you to have some money as a down payment. Your mortgage payments will be spread over a certain amount of years, the most popular of which is 30 years. If you think you don’t know enough, it’s a good idea to get to know the mortgage process as much as you can.
Mortgage Payment Structure
When you get a mortgage, there are four parts that will be included in what you owe: principle, interest, taxes, and insurance, or PITI. The principle is the actual loan amount, interest is the lender’s fee for borrowing the money, real estate and property taxes are included, and insurance is required until a certain amount of the principle is paid down.
Here’s where things are going to get good. You should receive what is known as an amortization schedule. This is a breakdown of how much of your payment is going to the principle and the interest. The first several payments, the majority of your payment will go to interest, but as you get closer to the end of the mortgage, most of it will go to the principle. In a few minutes, when you are working on paying off a mortgage early, the amortization schedule comes in very handy. We will get back to it in just a moment.
Paying Off Your Mortgage Faster
So, paying for 30 years is not your idea of a good time either? Cool, let’s get down to paying off a mortgage faster.
Look at What You Owe
Any time you want to make a plan, you need to understand where you are starting. So, your first step is to look at the total amount that you still owe. For the sake of this article, we are going to keep it simple and say I still owe $50,000 on my home. How about you? How much more do you owe? And, what is the interest rate you are currently paying? Write it down.
Compare that Interest Rate to Other Debts’ Interest Rates
Take a look at your other monthly bills, especially credit cards and other loans. What are the interest rates on those? And your monthly payment? Before you jump into overdrive to pay off your mortgage, you need to have some free-flowing money. If the interest rates on any other debt are higher than your mortgage, pay it off first- and quickly. Why? Think about it: if you are currently paying $300 a month on a credit card, you can pay that card off now, and then have that $300 extra for your monthly mortgage payments. You need to free up what money you can before starting to work on your mortgage so you have something to work with.
Pay Weekly or Every Two Weeks instead of Monthly
Let me throw some crazy math at you: There are 12 months in a year, right? If you pay monthly, that means you are making 12 monthly payments. (Yes, I know this is simplistic but I do have a point.) If you break that monthly payment in half and pay that half every two weeks, you are making 26 total payments. This adds up to paying one full extra payment a year- a pretty big deal in paying off a mortgage faster.
Put Any Bonuses or Refund Checks on It
Any extra income that you have coming in, such as Christmas bonuses, birthday cash, tax refunds, anything, put it toward the mortgage payment. Every single penny that you can pay over the interest is going to knock down your principle. The lower the principle, the lower the interest. The lower the interest, the more you can pay on the principle. Even if it is only an extra $20, put it on there.
Set a Goal for Paying Off a Mortgage Faster
Ever since watching the movie Pretty Woman as a kid, it has stuck with me, but not really for the same reasons as everyone else- though I do love the whole movie. At the end of the movie, her former roommate Kit is looking for a new roommate and speaking to a potential candidate. She’s telling the new girl that she will be returning to school, and then says, “You have to have a goal. Do you have a goal?”
Those words replay in my mind constantly. Perhaps that is why I am so goal oriented? Anyway, the point is that having a goal is necessary. Just winging it is probably not going to get you where you want to go. And I am talk about a goal that says more than, “I want to pay off my mortgage early.” Ok, so does probably every person paying a mortgage, but almost all of them have different reasons and different timelines.
You need to have the confidence to move forward in your journey, but it is hard to be confident when you do not know your destination. So, let’s set one. Answer the following questions (in writing, please):
What do you want?
Yes, to pay off your mortgage, so write that down.
When do you want it?
I am a dreamer and a very hopeful person, so my brain wants to scream out “5 years!”. That would be awesome, and if that is your goal, cool, but think it through first. Can you logically and realistically pay it off in 5 years without killing yourself from working too hard, doing without necessities, neglecting your family, and so on? If so, go for it. If not, expand your timeframe.
It’s great to be challenged but do not be ridiculous. I do this to myself quite often. I decide I want something, so I go for it. People ask me, “Is that realistic?” or they say, “There’s no way you can do that.” Huh- watch me. I hate being told that I cannot reach my goal, so I push even harder to prove that I can. I soon realize that I am neglecting other things in my life and have to reassess the situation.
What have I learned? A.) Do not share my goals with someone who does not believe in me. I only share now with the ones that know me well enough to say, “If that’s what you want, I know you can do it.” B.) I have limitations, but rather than letting someone else tell me what they are, I tell myself. The point? Assess the situation yourself and decide if your goal is something you can do without sacrificing important things.
Get the Family Involved
Fighting a battle alone can be lonely, tough, and seemingly impossible. If you have a family, you do not have to do it alone. When I am working more than usual to pay off a bill or save for something, my children feel like they are not a priority, unless they know what is going on. I have learned that having us all on the same track is very helpful.
For instance, when we started talking about buying a house, I knew it was going to take some work. We would need to work on our credit and save some money, which would all require more money than usual. Instead of keeping it between my husband and myself, we explained to the children what was going on. We took them out looking at houses to motivate them, and I took pictures of their favorite aspects of different house. I then printed those pictures out and hung them on a poster surrounding a goal thermometer.
The poster hung in our den where everyone would see it every day. I then sat them down and had a full fledged financial class on credit and saving. We went over different ways we could save money, like cutting the electric bill down by being cutting off lights that were not in use and limiting TV time. I hung up our list of savings ideas on the poster, as well. We then set a savings goal for each month.
The results were awesome. The kids took to heart ways to save and felt that that was their contribution. They were constantly turning off lights, turning off the TV, and more. They would remind one another, “This is for our new house.” Over a couple of months, our electric bill was cut almost in half, along with other ways they helped to save. As they watched the goal thermometer fill up, they grew more and more excited and worked even harder.
That is the power of teamwork. When you have others that want the same thing you do, i.e. buying a house or paying off a mortgage, it becomes much easier. You not only work hard together but you encourage one another along the way. Even if it is just you, though, having your goal physically hanging in front of your face with a progress chart can keep pushing you.
If there are children involved, like mine, be sure to set little rewards along the way. The big reward is the home or paying it off early but that may be a few years away. Keep them motivated with milestones like, “Once we save this much, we will go to the movie theater.” Ice cream works, too, of course, but the reward needs to be something that will excite them.
Look In Your Budget
Unless you are eating zero snacks, only driving to work and back, watching only DVDs, eating from your own garden, and you have no cell phone, there is something in your budget that can be cut down or out. Creating a budget that will help you with your goal is very important. The question comes down to what you are willing to cut down or out in exchange for paying off a mortgage quicker.
This, of course, is a personal decision and relies heavily on your values, which will vary from person to person and family to family. For instance, one of the first things people tell you to cut is cable. I understand why. It is crazily expensive and there are alternatives to watching your favorite shows.
However, I will not cut my cable, at least not at this time. In my little town, especially in my particular neighborhood, the only way to get decent Internet is through cable. Internet is necessary in my home because I work online, do online classes, and use the Internet a lot when putting our homeschool lesson plans together.
Yes, there is a library down the road with free WiFi, but I am not going to go sit at the library all day every day to use the Internet as much as I need. Therefore, until another Internet solution for my neighborhood comes along, the cable stays because it has value in our family. It comes down to personal priority. I have friends who do not need cable or Internet, so they do not pay those bills, and they save those hundreds every month.
The bottom line is that you and your family will have to determine what you- not the rest of the world- need and what your priorities are. If movie night every Friday is important, that is up to you. Just take a look into your budget and determine what you are willing to give up, even for a short time, to assist in paying off a mortgage faster.
I said it above and I will say it again: if paying off a mortgage early is the goal, pay every extra dime you can. Let’s talk about that amortization schedule now. Bear in mind that interest and payments are based on each individual loan, but I am going to give you an example using the $50,000 balance I mentioned above and $500 monthly payments.
The first several months I pay that $500, $50 goes to the principle and $450 to the interest. In a year, may $100 goes to the principle and $400 to the interest. A year later, maybe $200 goes to the principle and $300 to the interest. Do you see how it works? The payment you make is not split evenly, so while you think, “Yes! I have paid $5,000 on my mortgage,” the truth is that likely less than half of that actually goes to the loan itself.
All of this, though, can be used to your advantage. Using my example again, I see that only $50 is going to the principle, so I put an extra $20 on the payment every month, or more when I can. Every single bit I pay that is over the interest amount goes directly to the principle- this is what you want. When paying off a mortgage, you want to overpay everything you can. It does not have to be the same amount each month, either. It just needs to be something.
What do you do, though, if you have no bonuses, refunds, or space you are willing to make in the budget? You have two choices: make the extra money or continue paying for the full thirty years. If you want to make the money, I can help you out. Where there’s a will, there’s a way- if you have the will, I’ll show you the way. Here are some ideas:
Use Apps for Cash
Have you heard of the Shopkick app? Let me just say it is awesome. Every single time I go into the grocery store or Walmart, I earn at least a few hundred “kicks” which can then be converted to gift cards or PayPal cash.
If you shop online, do it through Ebates (I think it is called Rakuten Now). You can earn cash back on your regular purchase that will then be sent to you three times a year if you meet the minimum amount.
Inbox Dollars is another good one I use. I really could go on all day about apps that can earn you cash, but you get the idea. Even those that do not pay out cash usually pay out gift cards that can then be used for other things you need. I use mine for Christmas gifts, household items, and more because they are saving me from spending cash.
By this, I literally mean extra cash that only comes once, like from yard sales. Sell some of your stuff online, ask you parents if you can clean the junk out of their shed and sell it, anything you can think of.
Get a Second or Third Job
Yes, a third if you must. Remember, this is your goal- you either find a way to meet it, or you extend the deadline. And, truthfully, it does not have to be a regular clock in thing. You might make some extra cash delivering things, like magazines. There is something called Instacart that is becoming a big thing. When you have free time, you log in and see if anyone has put in a grocery order in your area. If so, you can do the shopping and deliver those items. You do not have to do it full time- do it with an extra hour or two that you have each week.
Start a Side Hustle
Side hustles have been around for as long as I can remember. When I was young, ladies sold Tupperware and home goods. There are literally hundreds that you can do now: Avon, Mary Kay, Pampered Chef, Pure Romance, It Works, and more- many of which I have put some time into. They can be lucrative, and you can build a nice business from them, but there are a few things you need to know.
- Not every single one is good for every area. Trying to sell swimming gear, for instance, in the snowy mountains- probably not going to work. Likewise, you might not live around people who love to cook or want to wear makeup. Basically, do your market research before choosing one.
- There is an investment, though it really is not that bad with most of them. Most of them can be done for under $100. The key is in researching the company to make sure they are legitimate. The ones I mentioned here are. Any other ones, be sure you check out first. And
- You will have to put in some work. It will not explode over night. However, if you can have just a couple of parties or sales each month, it will be worth it- as a side hustle. If you want to turn it into full time work, you will need to work harder at it, but people are able to do it.
You can start your own side hustle, too. What are you good at? Are you knowledgeable enough in a subject to tutor? If so, they have tutoring sites online. Do you have yard tools and the drive to get out and mow lawns or rake leaves? Go for it. Are you good at resumes? Offer to write them for $20. How about cleaning houses? Washing cars? Babysitting? Pet sitting? Find a side hustle and bust a move.
I have a couple of side hustles because I am always trying to pay off bills, pad the kids’ college funds, and- of course- buy a house. One of these is through an app called We Go Look. The “Looks” I do vary, but most of them revolve around taking photos for insurance companies who are not in town or delivering important documents. It is certainly not a full-time job, and I do not have Looks every week, but I have made as much as $70 in two hours by delivering multiple documents in one area. I only accept Looks that are worth my gas and my time. Finding small side jobs such as these can add some extra to your payments quickly.
Refinance Your Mortgage
This is a popular option for paying off a mortgage faster, if done correctly. Refinancing your mortgage is basically taking another mortgage loan for what you owe. If you find an offer with a lower interest than what you currently pay, it is probably worth it. Often the refinanced loan can shorten your mortgage repayment terms without changing your monthly payment amount, but there are a couple of things to think through.
First, you should be saving at least 1% interest with the new loan for it to really be worth the refinancing. Second, you will likely need to take out insurance again. If this is going to make your payments too high, forget it. You are trying to save money by paying off a mortgage early. Adding to the cost is counterproductive.
If you think that a mortgage refinance is the best solution for you, maybe we can help you to choose the right loan. Fill out the form below to get some offers:
If you feel like this is something you want to do, it is always best to speak to a financial advisor first that can help you look at the situation with no personal benefit, meaning that it is not one that works for your bank or lender. Speak to someone completely outside of the situation. Also, do some rate shopping beforehand. It is wise to know what exactly you are looking at before even starting the process. If rates are too high right now, wait a while and try again.
— Loanry.com | Loan Shop ? (@LoanryStore) August 11, 2019
Paying off a mortgage early can be both challenging and rewarding, but it is definitely not impossible. The most important step is deciding that you are willing to do what needs to be done. Once you have your mind set to it, you have made the first and biggest step.
Brandy Woodfolk is an educator, home business owner, project manager, and lifelong learner. After a less than stellar financial upbringing, Brandy dedicated her schooling and independent studies to financial literacy. She quickly became the go-to among family, friends, and acquaintances for everything finance. Her inner circle loves to joke that she is an expert at “budgeting to the penny”. Brandy dedicates a large portion of her time to teaching parents how to succeed financially without sacrificing time with their little ones. She also teaches classes to homeschooled teenagers about finances and other life skills they need to succeed as adults.
Brandy writes about smart money management and wealth building in simple and relatable ways so all who wish to can understand the world of finance.