House and Keys

For many people paying off their home mortgage is a lifelong goal, and rightfully so. A large portion of your mortgage payment is nothing but the interest that you are paying to the bank for the privilege of taking out that money.

On a $350,000 loan at 4% interest over 30 years, you are going to be paying that bank $250,000 just on interest on that loan. That's assuming that you never took out a home equity line of credit or refinanced your loan, in which case you may be paying the bank a whole heck of a lot more. So by paying off your mortgage early, you may be eliminating tens of thousands of dollars, if not hundreds of thousands of dollars that you would be paying the bank in interest, and you'll be eliminating another one of your monthly bills. For many people eliminating this monthly expense is the difference between retiring and not. I'm going to teach you 10 strategies to pay off your mortgage in the next five years.

Make biweekly payments

Now you've probably heard of this strategy before, but you may not fully understand how it works or the impact that it can have on your mortgage. So typically you make a mortgage payment once a month and that works out to 12 mortgage payments a year. Now, if your bank allows you to make a half payment every other week instead, that works out to 26 half payments or 13 whole payments a year. So in the end, you're making one extra mortgage payment every year, but because you're paying it every other week you're not really seeing a big difference in your monthly expenses. Now you're probably saying right about now, now how big of a difference can one extra payment a year actually make? And the answer is a big difference.

With a $350,000 loan at 4% interest over 30 years, you would pay off your mortgage four years early and save over $35,000 in interest just by making a biweekly payment instead of a monthly payment. 

Make extra payments to principal and interest

So my second strategy is pretty similar to the first one, but it's just structured a little bit differently and it's what I personally do. That is to keep your monthly payments, but make extra payments to the principal every month. Now, if you wanted to keep the same benefit as the previous example, what you would do is take one month's mortgage payment and divide that amount by 12 and then add that amount to each of your 12 monthly mortgage payments. Personally, I found it just a little bit easier to track this in my head rather than making the biweekly payments.

So in our $350,000 example, your monthly payments would be about $1,670 a month. If you divide that by 12 months, that works out to $140 a month. So by adding $140 a month to every one of your monthly mortgage payments, that'll be the equivalent of making one extra mortgage payment a year. Now you don't have to stop at making just one extra mortgage payment a year. Instead of adding an additional $140 a month to every mortgage payment. If you just bump that up to $200 a month, you would save $52,000 in interest over the lifetime of the loan and pay off your mortgage five years six months early.

Now, if you really wanted to hustle and you can make the equivalent of one extra mortgage payment every quarter, instead of every year, you would save over $105,000 in interest over the lifetime alone and pay off your mortgage 11 years five months early. What I love about this strategy is that it's completely optional. You can turn these extra mortgage payments on and off whenever you choose.

So, as an example, when I was in the military, I was paying extra towards my principal every single month. When I got out of the military and started my career as a real estate agent, I actually turned those extra mortgage payments off for about a year until I kind of got established in this new career. Now, if you contrast that to let's say getting a 15-year mortgage instead of a 30-year mortgage, on a 15-year mortgage, you are stuck paying those higher mortgage payments. You don't have the option to turn that off and on at will. So personally I love the flexibility of going with a 30-year loan and making extra payments to the principles every month, just because I have the flexibility to turn that on, or turn it off, or ramp it up, or ramp it down as I see fit.

Take out a manageable Mortgage Size

So my next strategy may seem like common sense, but it's the truth, and that is to simply not take out a large mortgage payment, to begin with. Just because the bank says that you can qualify for a $500,000 loan does not mean that you should get a $500,000 loan. If your goal is to truly pay off your mortgage and live debt-free, you have to ask yourself, is that a higher priority than having a large home, having a large yard, or having a two-car garage? For some people, it's not. For some people having that larger home is a higher priority than being debt-free.

So let's say you're approaching retirement. You need to ask yourself is downsizing an option for you so that you can reduce your mortgage debt? Can you go from owning a detached home to living in a townhome that may be $50,000 cheaper, or maybe even living in a condo that's $100,000 cheaper? Can you move to another area that may give you a longer commute to work, but has more affordable housing? Can you move to another state like Delaware that may have lower property taxes, lower school taxes or lower sales taxes? Because if so, you could then take that savings and put it towards the principal of your mortgage. If paying off your mortgage and living debt-free is really your top priority then you will seriously take a look at a few of these options.

One Time Payment To Principal

My next strategy is to make a one-time payment to your principal. Let's say you come into some money, maybe it's a tax refund, an inheritance, or a bonus at work. You can put that money straight towards the principal of your mortgage. With that $350,000 loan example, just a $20,000 payment towards the principal at the beginning of that loan would save you over $42,000 in interest over the lifetime of the loan and pay off your loan three years one month early.

Increase Your Income

No, now that we've shown how much of an impact additional payments to your principal can have, my next strategy is going to seem like common sense, but it's simply to increase your income. Now, the longer you work with any given company, you're most likely going to get raises along the way. So one common strategy is every time you get a raise, you actually keep your living expenses exactly the same, but put that additional income towards your principal. Another strategy that I like is actually using your property itself to earn you more income. With websites like Airbnb, you can rent out a single room or even an entire floor of your home for a few days or a few weeks at a time. I've even heard of people building sheds on their properties and renting them out as storage space or charging people to leave RVs or boats on your property.

I also highly recommend getting some sort of side hustle. Now, honestly, I think everybody needs to get some sort of side hustle if they expect to get ahead in this world. Now, luckily for you, it's never been easier in human history to get a side hustle than it is right now. There are also websites like Etsy.com, Fiverr.com and Upwork.com that allow freelancers to get paid for a wide variety of jobs that they can do right in their own homes. These jobs can range anywhere from graphics design, to woodworking, to administrative tasks or writing blog posts. Just about any skill that you have, you can monetize on websites like these.

There are also services like Uber and Lyft that allow you to drive cars on your own schedule, and you may be able to bring in a few extra hundred dollars a month with these. Now, before we get to the final five strategies, I want to kind of give you a bonus tip and that tip is that paying off your mortgage early should not be the top priority for everybody. There are some situations where there are some other things that should be a higher priority. So just an example, mortgages are usually pretty low-interest rate. Right now they're between three and 4%. If you have other debt at a higher interest rate, that should be your top priority.

Let's say a credit card at 15 or 20% interest, you should be paying off your highest interest debt first and then focus on your mortgage. Luckily for you, a lot of the strategies that I'm teaching you will also apply to credit card debt as well. Another situation would be if your employer is offering to match your 401k contributions and you are not already maxing out that opportunity. So if you put $500 in your 401k and your employer also puts $500 in your 401k, that is an instant 100% return on your investment. So I really recommend that you max out that opportunity first before you start focusing on paying down your mortgage.

So the last exemption would be if you don't already have some sort of emergency fund of three to six months of living expenses, and I know this doesn't sound very exciting, but here's the truth. Unexpected expenses are going to happen. Your home's air conditioning is going to break down at some point, your roof is going to have a leak in it at some point. Your car is going to need some sort of major repair at some point and when these expenses do occur, you do not want to have to resort to a credit card with a 15 or 20% interest rate in order to pay for them. That is a real reason why you need to have an emergency fund to keep you from going further in debt in the future.

Reducing Expenses

Every dollar that you save is another dollar that you can put towards your principle without really affecting your quality of life all that much. So you need to ask yourself, do you have any monthly expenses that you can live without? Could you live with a slightly slower internet speed and save $20 a month? Could you live without Netflix, or Hulu or Disney+? Can you go a few years without upgrading your phone rather than upgrading it every year and then paying it off monthly? Instead of eating out once a week, can you change that to only eat out once a month?

Maximize Credit Card Reward

You need to take a long, hard look at all of your monthly expenses and once again, ask yourself, is this expense a higher priority than paying off my mortgage early? So my number seven strategy is to maximize your credit card reward. So generally speaking, I'm against credit cards at all, but here's the truth. If you are not taking advantage of credit card reward programs, you are essentially paying for those people who are taking advantage of them. There are cards out there that offer you up to 5% cashback on things like grocery stores, gas stations, and Amazon.com. If you're already spending this money monthly, you might as well put it on your credit card and earn 5% back.

The trick is that every time you redeem your points for cash, you need to make an equivalent one-time payment to your mortgage for that exact same amount. If you put all of your living expenses on a credit card like this, this could easily add up to several thousand dollars additional payments to your principal every single year, which could save you tens of thousands of dollars on interest and pay off your mortgage a few years early.

Now, this can be a dangerous game to play and you really need to make sure that every single month you are paying off your entire balance before they charge you interest on your balance. What I personally do is I have two recurring reminders on my calendar to go into my credit card and pay off my entire balance.

Create a Household budget

So my next strategy ties into the last two strategies, and that is to create a household budget. Now they say that 90% of all diets work, because no matter what diet you're following it's just making you more conscious and aware of how much food you're actually eating. I think creating and following a budget has the exact same effect on people. After you track your expenses for a month, you may be very surprised of where your money is actually going.

No matter what you budget for yourself for things like entertainment, or eating out, or clothes, just having that budget in place will really make you think twice about every single purchase that you make. Set a goal that if you stick to your budget for the entire month, you'll then make an extra payment towards your principal. 

Eliminate Principle Mortgage Interest (PMI)

So my ninth strategy is to get to 20% equity in your property as soon as possible to eliminate any PMI. So for many loans, if you put less than 20% down on the property, your lender is going to charge you private mortgage insurance, which is an additional monthly payment and it covers a lender in case you default on the loan.

In our $350,000 loan example, your PMI payment may be anywhere from 150 to $300 a month, and this is a big chunk of change. But the good news is once you get to 20% equity in your property, your lender will eliminate your PMI payment. If this is the case for you, you want to get to that 20% mark as soon as possible. So when your lender does eliminate your monthly PMI payment, you want to actually keep your mortgage payment exactly the same, but put that funds towards paying down your principal instead.

Refinance your Property

So my 10th strategy is not to refinance your property every time the bank offers it to you. So here's the truth, offering you an opportunity to refinance your property every few years is one of the scams that the banks run to make more money off of you. So banks usually wait until interest rates drop a bit, or you build up equity in your property to offer you the opportunity to refinance. Even if your monthly payments become lower, in many situations it's still not worth it.

So first off, your bank is going to charge you an upfront fee of several thousand dollars to refinance your loan into another 30-year loan. But more significantly, if you remember when you purchased your property, your lender probably showed you a 30-year amortization schedule of your loan. What that schedule showed you was at the beginning of your loan the majority of your monthly payment goes straight to interest to the bank and only a little bit of it goes towards your principal. As you move along that 30-year schedule, that ratio flips to where your last few years, most of your mortgage payment goes towards your principal and only a little bit of it goes towards your interest. So it's actually in the bank's best interest to keep you in those early years of your 30 year loan, as often as they can and that is why they keep offering you an opportunity to refinance your loan.

So once again, let's look at our example of a $350,000 loan at 4% interest over 30 years. On your very first payment, only $504 will go towards your principal, while $1,166 goes straight to the bank's pocket in interest. After 10 years, $751 of your payment goes towards your principal and $919 goes towards your interest. After 20 years, $1,120 will go towards your principal, $550 would go towards the interest. And after 30 years on your final payment, $1,665 would go towards your principal and $5.55 will go towards interest.

So as you can see, it's in the bank's best interest to keep you in those earlier years of a 30 year mortgage while it's in your best interest to get to those last few years as soon as possible. So even if the bank offers you a lower interest rate and a lower monthly payment, you need to look at where you're at in your amortization schedule and how much of your monthly payment is going towards the principal. This is one of the biggest traps I keep seeing people fall into is that they keep resetting their 30-year loan and they never make any real progress towards paying down their principal.

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