Disclaimer: This post may contain affiliate links, for full disclosure please check out the MLW disclosure page.
Chances are you’ve never heard this – you should pay off your mortgage as fast as possible. Wait, what, is he crazy?
Now I already know what you might be thinking, shouldn’t I pay towards my retirement first before considering my mortgage. Or what about my interest deduction on my taxes and my low interest rate.
If any of that popped into your head then keep reading.
Conflicting Financial Advice
I think if I had to classify my financial personality I would be the person who says all debt is bad and the quicker you are debt free the more freedom you have to do what you want!
Let me elaborate. For starters, there is a lot of standard advice that says pay the minimums, throw a certain percent of you income at your retirement and live life on your terms.
While I agree with the idea of throwing money at your retirement, I think the power of compounding interest is always greater with more cash flow. And when it comes to living life on your own terms – that is easier said than done with most people not meeting the recommended salary to mortgage ratio of 28%.
Did you know: 1 characteristic of a millionaire is they never leave money on the table. For instance, if a company matches 401K contributions they max out the amount to get the full contributions.
Here is what I mean – most people think that auto, mortgage and consumer debt payments are just part of life. However that is completely inaccurate.
While home ownership can fall into the asset column, a mortgage is a liability until paid for in full. If you look at how much of your monthly payment is going towards actual principal, you will be appalled.
In the first 7 years of owning you can expect 10-12% of your payments to go towards actual principal. While saving for retirement is great, shelling out 7 years of payments to have 90% of the money go towards interest is alarming.
Don’t get me wrong, home ownership matters, but that doesn’t mean it has to take 30 years to pay off. Here are a few reasons why should should consider paying off your home quicker!
Why You Should Pay Your Mortgage Quicker
It is important to point out that there are some simple ways to pay off a mortgage quicker then you might expect. However, what is more important is the impact of being mortgage free.
While home ownership is coveted, with many looking to buy and trade up every 7-10 years, sometimes a mortgage can be unintentionally harmful.
Speaking of Mortgages, Andy at Marriage, Kids, Money paid off his mortgage and actually runs a podcast, I was featured on the tail end of it, you can check it out here!
Locking into a 30 year agreement that is typically the most expensive budget item every month might not seem risky, however that is not the case.
Things can happen in a 30 year period that are often times not accounted for such as layoffs, economic changes, personal family situations, and relocation. I know first hand when my mom experienced health hardships and was unable to afford her once affordable mortgage.
Getting out from under a mortgage provides options, extra cash flow, the potential for passive income, and more freedom of choice.
1 . Cash Flow
Imagine what you could do with an extra $1,500-$3,000 every month. Would you invest, or maybe finally start that business you have been talking about but didn’t have the capital.
Cash is still kind, even in a world of Bitcoin and Apple Pay, the more positive cash flow each month, the better.
Let’s say you had an extra $2,000 each month after paying off your house. You could save $500 a month for vacations and travel, save another $500 for an emergency fund, and use the other $1,000 for college tuition, investing, or purchasing another piece or real estate.
Which leads to the next option, passive income…
2. Passive Income
Passive income gets thrown around ALOT! However, finding passive income streams is easier said than done.
One of the simplest ways to create more passive income is through real estate. But if your budget is already stretched thin because of a mortgage, owning multiple pieces of real estate is typically not an option.
Having a paid off home allows flexibility to buy more real estate, look into business opportunities that in the past were not possible, or invest in small startups.
Owning real estate, while not for everyone, is one of the quickest ways to achieve passive income streams.
If interested, read more from my friend Cube about Landlording Your Way to Retirement.
3. Freedom of Choice
My favorite reason for being debt free and paying off our home – freedom!
Like Mel Gibson in Braveheart, I just want more freedom. The fact that about 99% of all decisions revolve around money (and not usually the abundance of it) sort of sucks.
Say what you want, but in most cases, money influences everything we do. It determines what time we wake up, where we live, where we travel, what we drive, and what we do for fun.
Getting out from under a mortgage can quickly create SERIOUS options that honestly, you never thought were possible. (Personally I am starting a trip of the month club when we are debt free!)
So how exactly do you pay your mortgage off quicker? Read below for three simple steps!
How to Pay Your Mortgage Quicker
1. Find Your Magic Number
After staying on a budget, paying down debts, and creating some positive cash flow, see how much extra each month you could put towards your principal amount.
Wendy at the Motley Fool says it this way,
“So consider sending just a little extra to the loan holder every month as an extra principal payment. For example, if you have an odd payment amount such as $1046 per month, you can round it up to $1100 and dedicate the extra bit as a payment on the principal.”
Similar to the pay yourself first concept, see how much extra from every check you can dedicate to your principal each month.
2. Make Bi-weekly Payments
Splitting your mortgage in half and paying bi-weekly ends up resulting in one extra mortgage payment each year. On average, a person can pay off their mortgage 4 years quicker, saving up to $50,000 in interest, depending on the size of their loan.
The charts below show the difference in just using the bi-weekly mortgage payment method compared to the standard 30 year repayment schedule.
3. Consider Using Equity Optimization
If you want to understand how equity optimization works, start with just familiarizing yourself with this in depth article I wrote.
Transparent statement – this is not something that works for everyone. Three factors contribute to whether using equity optimization is an effective option for you or not.
Do you have positive monthly cash flow, a credit score above 680, and positive equity? If not keep reading and strive to get there. If you do, then you may be able to pay off your mortgage in the next 5-7 years.
When I hear things like “Pay off your mortgage in 5-7 years” I admittley am like well what’s the catch. However, there is no catch, it is just a different concept that starts with understanding.
A mortgage and housing expenses has become so ingrained that most consider the idea of being mortgage free a pipedream. I like to work backwards and think, “What sort of options would I have if I didn’t have a mortgage?”
Would you travel more? Would you help others? Could you save more for college or retirement?
I use Truth in Equity and I write about them because they have seriously changed my wife and I’s life.
We will pay off our mortgage in 2021 and at age 34 and 33 we will be able to live life on our own terms with no debt! Sure, we could invest, but we would like to have some real-estate and just know that if anything ever happened, the last thing we would have to worry about would be a mortgage.
Over the long haul, the money saved on interest is astronomical. Play around with amortization calculators and see for yourself.
At the end of the day, paying off your mortgage does one thing – it pays off your most expensive budget item and frees up money.
While most say time is money, having more money can mean more time to do the things you enjoy!