Why You Should Pay Off Your Mortgage Early

Chances are you've never heard this financial advice: You should pay off your mortgage as fast as possible.

Wait, what…? Is he crazy?

Did he just say pay off my mortgage?

Now I already know what you might be thinking, shouldn’t I pay towards my retirement first before considering my mortgage?

I mean who really pays their house off anyways? I have a 30-year loan, why would I want to pay it off sooner?

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…

Because you should seriously consider paying off your mortgage.

Pay off your mortgage fast.

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 though first.

For starters, there is a lot of standard advice that says pay the minimums, throw a certain percent of your income at your retirement and you will eventually get to 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, aka not having a mortgage payment or any debt. 

And when it comes to living life on your own terms – well I would rather do that in my 30's, 40's and 50's instead of waiting until 70. Why is that conventional wisdom is so ingrained into us?

So just the thought of having a home paid off before the 30-year mark sounds ludicrous to many, and there are two reasons why:

  1. Most people not meeting the recommended salary to mortgage ratio of 28% (Their house is too expensive).
  2. They didn't even think about paying their house off quicker. 

Here is what I mean – most people think that auto, mortgage, and consumer debt payments are just part of life. However, in reality, that isn't true. 

While homeownership does fall into the asset column because of appreciating value and equity, what many fail to recognize is that a mortgage is a liability until paid for in full.

Additionally, just look at your amortization schedule to see how much of your monthly payment is going towards interest each month, instead of the actual principal. 

It takes 12 years (144 payments) before 50% of the payment goes towards interest!
why you should payoff your mortgage
30 year, 4%, $300,000 amortization schedule

In the first 7 years of owning most borrowers can expect 10-12% of their actual payments to go towards the principal balance. So while saving for retirement a 65 is great, shelling out 7 years of payments to have 90% of the money go towards interest is alarming… and wasteful. 

Don’t get me wrong, homeownership matters, but that doesn’t mean it has to take 30 years to pay off. Here are a few reasons why you should consider paying off your home quicker!

Why You Should Pay Off 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.

Locking into a 30-year agreement is risky if you think about all the curve balls life has for us. A mortgage is also the most expensive budget item every month for adults. 

No to be the bearer of bad news, but things can happen in a 30 year period that is often times not accounted for when purchasing a home like: 

  • Layoffs
  • Economic changes
  • Personal family situations
  • Health issues
  • Job Loss
  • Relocation
  • Inability to sell home

Personally, I can attest to this. I saw first hand when my mom experienced health hardships how hard it was to afford her once affordable mortgage.

Getting out from under a mortgage provides options such as extra cash flow, better potential for creating a passive income stream, 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

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 for rentals, 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 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 and you can avoid the Big Short of 2008! (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 ways to pay off 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.

Pay off your mortgage quicker
pay off mortgage early

3. Consider Leveraging a HELOC

If you want to understand how equity works, you will quickly realize that equity is a dormant asset. However, there are ways to leverage equity to pay off your mortgage quicker. 

While using a HELOC to pay off your mortgage faster might seem like a gimmick, it works. But it depends on 3 variables:

Do you have a 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 admittedly am skeptical. However, there is no catch, it is just a different concept that starts with understanding equity.

A mortgage and housing expenses have become so ingrained that most consider the idea of being mortgage-free a pipe dream. I like to work backward 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?

Truth in Equity was a program we used to leverage equity to pay off student loans, and in 2020 we will use it to pay off our house. 

Results Matter

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!

Q: What would you do with an extra $2,000 each month??