Paying Down Your Mortgage Example
So lets assume its still the early days for your mortgagewithin the first decade. Lets say you have a 30-year fixed $200,000 loan at a 4.38% rate that amounts to a lifetime interest charge of $159,485 if you pay the usual 12 times a year. Make that a lucky 13 payments each year, though, and you save $27,216 in interest overall. If you kicked in an extra $200 each month, youd save $6,000 in 10 years, $50,745 in 22½ yearsand youd have the mortgage paid off, too.
Why You Should Pay Off Your Mortgage Last
Although we wanted to focus on paying our mortgage off early, we also realized we should start paying down our mortgage after everything else was paid off. Luckily, we started our debt-free journey years ago and were able to move on to our mortgage goal.
If you are like most Americans, you may have student loan debt, and car debt. You should pay these off before you begin throwing extra money at your mortgage.
Suppose you do the opposite start paying more on your mortgage, every extra cent you can find. Then you have some type of emergency that causes you to be out of work for eight weeks. Your income is radically cut in the short term, and even though you will be back to work in two months, how will you pay your bills in the meantime?
Overview: Paying Off Your Mortgage Early
Every time you make a mortgage payment, its split between your principal and your interest. Most of your payment goes toward interest during the first few years of your loan. You owe less in interest as you pay down your principal, which is the amount of money you originally borrowed. Most of your payment goes toward interest during the first few years of your loan. You owe less in interest as you pay down your principal. At the end of your loan, a much larger percentage of your payment goes toward principal.
You can apply extra payments directly to the principal balance of your mortgage. Making additional principal paymentsreduces the amount of money youll pay interest on before it can accrue. This can knock years off your mortgage term and save you thousands of dollars.
Lets say you borrow $150,000 to buy a home at 4% interest with a 30-year term. By the time you pay off your loan, you will have paid a whopping $107,804.26 in interest. This is in addition to the $150,000 you initially borrowed.
Now, lets say that you pay an extra $100 every month toward a loan with the exact same term, principal and interest rate. At the end of the term, you will have paid $82,598.49 total in interest. Thats $25,205.77 less than you would have paid if you didnt make any extra payments. Youll also pay your loan off 74 months earlier than you would if you only paid your premium each month.
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Extra Monthly Principal Payment
Making an extra payment, even as little as $100 per month, can knock years off a loan.
Leffler gives the example of a 30-year loan for $200,000 that would have $231,700 in interest payments over the life of the loan. Paying $100 more per month toward the principal will save $49,100 in interest and pay off the loan in 24 years and seven months, he says.
You can stop the extra payments at any time. Or they can be increased over time as your income grows, allowing more flexibility than a 15-year mortgage. The disadvantage is you won’t receive the lower interest rate that you’d get by refinancing into a 15-year loan, Henninger says.
How It All Started
One month before getting married, on a Saturday morning, I saw an email notification about a new listing, and I thought it was a nice house but a little too expensive for us, and in a suburb we had never been.
After I nagged begged my husband to come with me to check it out just for fun, he reluctantly came with me. Well, he fell in love with the suburb and the house and he wanted to buy it right away
I also fell in love with the suburb and the house, however, I still thought it was too expensive and also wanted to check out other houses in that same suburb. That weekend and Monday after work, we checked out as many listings as we could, and narrowed it down to 3 favorites.
Monday night, we spent the whole night debating on which house to pick. We finally agreed on one house, that was a little bit newer, a little bit less expensive and with potential for customizing it for ourselves.
And on Tuesday around midnight, we were sitting down with our realtor, the sellers and their realtor, negotiating the sale price and conditions. We finally signed the deal around 1am. It was a 2300sq, 4 bedroom, for $557,000.
We took a 30 year mortgage and since we were about to get married, and dealing with wedding expenses, we were able to put down only 5% instead of the recommended 20% .
It turned out not to be a bad idea actually, because if we had waited a year or 2 to come up with the 20%, we would have been priced out. In our neighborhood, houses have been increasing about $100K/year.
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Decide If A Refinance Is Right For You
Many owners opted for a 30-year mortgage when they purchased their home. However, if you calculate the monthly payments on a 15-year-mortgage, you may find that it is do-able for you.
Refinancing can make sense if you can get a lower mortgage interest rate. When that happens, more of your payment is applied to the principal, and you pay thousands and thousands less interest over the life of the loan. You might consider refinancing to a 15-year, fixed-rate mortgage to cut the length of your loan in half like my wife and I did.
Historically Low Interest Rates
With historically low interest rates, refinancing to a lower interest rate and shorter term may be the perfect scenario for you. Depending on your current interest rate, you may be able to cut your loan term down to 15 years without noticing a change in payment.
This means your full monthly payment will put more towards the principal and less towards interest. Keep in mind that refinancing comes with additional fees so be sure to add in the extra fees to see if it makes sense mathematically.
Watch Out For Penalties
Paying off your mortgage right away instead of waiting for the term to end can be very costly. There are several charges for paying down the mortgage before the term ends, which is what would also happen if you refinance. Your lender charges a prepayment penalty, which is either equal to three months of interest in the case of a variable rate, or the higher of three months interest and the interest rate differential in the case of most fixed rates. You can use a mortgage penalty calculator to estimate the cost of breaking your mortgage. If you want to avoid paying a large penalty, here are some things you can do:
- Dont rush to pay it off: If your interest costs are low, it might be cheaper to take your time to pay off the mortgage instead of paying the penalties that come along with paying it off in full.
- Consider a shorter term when renewing: If you expect to pay off your mortgage in five years, choose a three-year term instead. You can increase your regular payments and wont have to pay additional penalties when the mortgage is paid off.
- Convert your mortgage into a secured line of credit: You can use the line of credit to pay off the mortgage when the term ends. You could borrow against the equity in your home to do a renovation, for example. The line of credit can be paid down whenever you want, and there arent any penalties. However, the interest rate will often be higher than a mortgage. Also, you might end up borrowing more if you dont have financial discipline.
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You Can Pay Off Your Mortgage In 5 Years
When you finally achieve your goal, remember that you now have the opportunity never to have a mortgage again. Its a unique situation, and its a great one! So remember the value of owning your home, and dont go back into debt.
This is a big commitment, and a mortgage is a huge debt that many would love to pay off. Its entirely possible to pay off a mortgage in five years.
It takes hard work and patience, but its definitely something that can work out with the right planning and lots of determination. You can do this, and youll likely succeed if you dont give up and make an actionable plan laying out the steps.
Something to think about is what life will be like without a mortgage. Youll be able to afford to do many things.
Many of your savings goals can become a reality sooner. Youll also pay less for bills each month. Remember to keep that no mortgage lifestyle in your head as you progress.
This guide will help you pay off a mortgage in five years. Follow the basic principles of refinancing, saving money, and other techniques, and youll soon be able to make this happen.
What To Factor Into Your Budget
Youll want to make your budget the way you usually would with expenses and savings. Youll likely want to save still and invest in addition to paying off your mortgage, although you may be putting less money in those categories than usual.
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Its important that while you add a lot of money to the home payoff section of your budget, you dont forget about everyday life. Youll still have many expenses to pay for like groceries, phone bills, and utilities.
You may choose to skip the grand vacations or pricey dinners out for now, but be sure to take care of your basic needs before putting more money towards your home.
After you do your regular budget expenses, see what you have leftover to add to your mortgage payment. If it isnt as much as youd like, you can try these ideas.
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How Can I Pay My Mortgage Off In 5 Years
5/5How to pay off a mortgage in 5 years
You make half of your mortgage payment every two weeks. That results in 26 half-payments, which equals 13 full monthly payments each year. That extra payment can knock eight years off a 30-year mortgage, depending on the loan’s interest rate.
Similarly, how can I pay off my 30 year mortgage in 10 years? How to Pay Your 30-Year Mortgage in 10 Years
Beside above, how can I pay off a 10 year mortgage in 5 years?
Divide your payment by 12 and add that amount to each monthly payment or pay half of your payment every two weeks, also known as bi-weekly payments. You’ll make one extra payment each year, saving you $24,000 and shaving four years off your mortgage.
How can I pay my mortgage off sooner?
4 Simple Ways to Pay Off Your Mortgage Early
Extra Mortgage Payments Vs Investing
Assume you have a 30-year mortgage of $150,000 with a fixed 4.5% interest rate. You’ll pay $123,609 in interest over the life of the loan, assuming you make only the minimum payment of $760 each month. Pay $948 a month$188 moreand youll pay off the mortgage in 20 years, and youd save $46,000 in interest.
Now, lets say you invested that extra $188 every month instead, and you averaged a 7% annual return. In 20 years, youd have earned $51,000$5,000 ahead of the sum you saved in intereston the funds you contributed. Keep on depositing that monthly $188, though, for 10 more years, and youd end up with $153,420 in earnings.
So while it may not make a huge difference over the short term, over the long term, youll likely come out far ahead by investing in your retirement account.
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Compromise Position: Funding Both At Once
Between these two options lies a compromisefund your retirement savings while making small additional contributions toward paying down your mortgage. This can be an especially attractive option in the early phases of the mortgage when small contributions can reduce the interest you’ll ultimately pay. Or, if the market is being extremely volatile or spiraling downward, it might make more sense to pay down your mortgage instead of risking the loss of investment funds.
Since individual circumstances vary widely, theres no one answer as to whether its better to pay down a mortgage or to save for retirement. In each case, you have to run your own numbers. Overall, however, dont sacrifice the long-term savings goals of your retirement plan by focusing too much on your mortgage. By prioritizing your retirement-savings goals first, you can then decide if any additional savings are best spent on further contributions to your mortgage or on other investments.
In fact, you should balance paying down a mortgage against the return prospects of other, non-retirement savings options. For example, if your mortgage interest rate is far above what you can reasonably expect to earn, getting rid of it can be advantageous . Also, if you have an unusually high interest rate on your mortgage, it makes financial sense to pay down the debt firstor look into refinancing.
Why Have A Mortgage At All
Why not simply rent and avoid all the hassle? I respect this view and understand why many in the early retirement community lean towards renting over owning. For me, I simply enjoy having a house to customizing and work on. Sadistic, I know.
There is some peace of mind not having to worry about what the landlord intends to do with the house long-term. The landlord could opt to sell your house despite your lease agreement. It happens all the time, and especially nowadays in a supercharged sellers market.
I would suggest the following approach if you live in a market with extreme housing costs : Rent or move.
So, friends, what do you think? Now that you know how to pay off the mortgage in 5 years, will you take the plunge? Please comment below!
Postscript 7/3/19: Weve paid off our mortgage early in May 2019. No champagne or anything, just a progress tracker wiped clean off our fridge whiteboard. One less cloud!
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Here Are Some Of My Fellow Bloggers That Have Paid Off Their Mortgages
- Million Dollar Journey paid off his mortgage at 31 years old!
- Ms Mazuma bought her last house in cash after loosing her houses during the last market crash
- Sean Cooper paid off his mortgage at 30 years old!
I always say that instead of giving the money to the bankers, give it to charity instead. We want to challenge our readers to find a way to pay off their mortgage within 15 years max, ideally 5-10 years. A paid off house, gets you closer to financial independence.
What are your plans with the mortgage? Do you also hate paying interest? How prepared are you for the next inevitable recession? Do you have a VISION2020? A goal you would like to achieve in 2020 finance or non-finance related?
Feel free to comment and share. Let us know about your dreams, goals and aspirations. We love ya and wanna get to know ya!
Do you want to learn more about us? If so, you can also read these posts:
Make More Frequent Payments
It could be one extra mortgage payment a year, two extra mortgage payments a year, or an extra payment every few months. Whatever the frequency, your future self will thank you. Maintain these additional payments over an extended period of time and you’ll likely eliminate several years from your term.
A quick note here: there is no best day of the month to pay your mortgage. Both the principal and interest amounts decrease over time, whether you make payments on the 1st, 15th, or a date in between.
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A Cup Of Coffee A Day Can Save You Thousands
All for an extra $70 every two weeks. Which is about the cost of a fancy coffee every day .
If you were to cut your amortization to the following numbers, this is what savings you would have on a $320,000 mortgage with 5% interest rate.
If an extra $5 a day saves over $60,000, $10 a day could save you over $100,0000.
Whats crazy is that its small changes that we can easily make.
Buy What You Can Afford
Yes, it sounds obvious. Buy a home that fits your budget. But the reality is, when it comes to buying a home, most of us struggle. On one side, we want our dream home. On the other is the desire to be fiscally smart. Quite often, its a trade-off. If you focus on buying within your budget , then youre less likely to dip below the 20% down payment and more likely to stick to your plan of paying off the debt sooner.
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