10 methods to shortly repay a mortgage
When you're fed up with your mortgage, here are 10 best ways to get it paid back quickly and get out of your life.
Today's classic is being republished by White Coat Investor. You can see the original Here.
Only a true fan of leveraged investing will consider a mortgage as something other than one of their biggest bills that they would like to wipe out of their life. Just think – what could you do each month if you didn't have a mortgage payment? If, like most doctors, you are on a mortgage paid off, you can buy a new car every year. You could have several very nice international vacations. Perhaps you could achieve financial independence half a decade earlier by investing what you paid for.
Long-term readers know that we will have paid off our mortgage in about 7 years and are currently debt free. This was an important financial goal for us and we are happy to have achieved it. If you want to do the same, consider these 10 strategies to quickly repay a mortgage.
# 1 Don't get a big fat mortgage
There is a reason this "technique" is listed first – because it is the most effective! Would you like to know the best way to pay off your mortgage early? Make it a very small part of your financial life. You can start by buying a home that you can actually afford. My usual guideline is to limit the mortgage to less than twice your gross household income. But guess what? Nobody says you need to get a 2X home. You could get a 1X house. Or a 0.5X house. Even if you want that 2X (or 3X or 4X) home, you could just invest more money and keep the mortgage-to-income ratio low. That would of course mean that you would have to control your spending. But the less you spend and the more you spend, the easier it will be to repay the mortgage. And if you think you can expand this policy because you live in NYC, DC, or California, please go only 3-4x and make changes elsewhere in your financial life to make up for it.
# 2 Don't get a great long mortgage
Guess what? If you get a 15 year mortgage, never refinance it, and make all mortgage payments, it will be paid back in 15 years. You could even get a 10 year mortgage if you want. Do you want to quickly repay your mortgage to cut interest rates? Reduce it even more by getting a lower interest rate for a shorter mortgage term.
# 3 Pay every two weeks
This is one that people think is pretty awesome. Instead of paying your mortgage once a month, you pay half of your mortgage every two weeks. Instead of making 12 full payments per year, you make 26 half payments, which is one additional payment per year! A 30-year 5% mortgage cuts your mortgage by 3 1/2 years.
# 4 Pay a little more every month
Do you know what else will pay off your mortgage faster? Throw more money on it. Imagine you have a 5% 30 year mortgage of $ 500,000. The principal and interest payment for this is $ 2,684. What if you spent an additional $ 500 a month on it? Well, you'd take almost 9 years off the mortgage.
# 5 Refinance your mortgage
If you have an above market mortgage this can be very helpful too. Just make sure you don't reset the payment period back to 30 years! Take the difference between your old and new payments and pay it as an additional principal payment each month. To make this even more powerful, refinance in a shorter amount of time (e.g. 30 to 15 years) and throw extra money into the loan.
For example, let's say you've been paying a 5-year, 30-year, $ 500,000 mortgage for 3 years. You have paid out $ 23,282. Let's say you are ready for a 15 year mortgage and can refinance into a 3.5 year 15 year mortgage AND have $ 50,000 to take care of as part of the mortgage refinance. Your mortgage payment just went from $ 2,684 to $ 3,051, and you've cut your mortgage by 12 years.
# 6 Mortgage Acceleration
This has made the rounds, mostly from people who hope to profit from the sale of this "system". The bottom line is that you are using a HELOC as a current account. This will save you some money by letting your “check money” earn at a higher rate (the HELOC rate), but most of the time it will only entice you to put more money into the mortgage. It works, but nowhere near as well as systems vendors would like to believe. Watch these charges!
# 7 Sell the house
Just because you once bought a large house on a large mortgage in a high cost of living area doesn't mean you have to stay there forever. If you sell the house, the mortgage goes away. If you buy a cheaper one, you might not have a mortgage, or at least you should have a smaller one that you can pay off faster.
# 8 Sell the rental properties
Are you burdened with not one but two, three or even four mortgages? Why not sell all of these rental properties and use the proceeds to pay off your mortgage? Yes, you can manage to hold onto your real estate and get the most out of your life (especially if the appreciation works well for you). However, by selling rental properties, you have a quick way to remove a lot of debt from your life in one fell swoop.
# 9 The Mortgage Side Fund
This is one that Katie and I have tried for a while. Instead of investing extra money on our mortgage at 2.75% (more like 1.6% after tax), we invested it in a taxable account (after using our retirement accounts to the max). The plan was to wait for the taxable account to match the mortgage, liquidate the investments, and repay the mortgage. The idea was to borrow at 1.6% and earn at 5%, 8%, 10%, 12% +! You can read more about it here. We never really liquidated the investments because we found an even better way to quickly repay a mortgage.
# 10 Toss Wind Falls on the mortgage
Katie and I actually did. If we made more income than we expected or otherwise had a stroke of luck, we threw it on the mortgage. The bigger or more frequent the windfalls, the faster the mortgage will go away. Again, imagine you have a 5%, 30 year, $ 500,000 mortgage and get $ 50,000 in profit every three years to throw on the mortgage. How long does it take to pay off the mortgage? 15 years. Fortunately, our windfalls were bigger and more frequent. We were 6 years on our 15 year mortgage and took three big winds over the course of about a year and a half to complete it.
When you are fed up with your mortgage, use one or more of the techniques mentioned above to get it out of your life! If you don't like it, you can always go into debt, but if you are like me you will never come back to it.
What do you think? Have you paid off your mortgage? How did you do it What do you think is the best way to quickly repay a mortgage? If you are working on getting your mortgage paid off early, what are you doing and how does it work? Comment below!