How To Pay Off Your Mortgage Early

by heather

In today’s economy, prepaying a mortgage might not seem like a good idea. After all, most people are trying to save money, right? Why would you want to pay even more on your mortgage than you already owe every month?

Well, there are a lot of reasons. Let’s start by why some people think you shouldn’t pay off your mortgage.

The Argument For NOT Paying Off Your Mortgage

Are there people that argue against paying off your mortgage loan? Yep. Plenty.

This great article on USAToday.com makes the case quite well. Personal finance columnist Jim Waggoner says that you should not pay off your mortgage for the following reasons:

  • Taxes– Jim says that paying off your mortgage early means that you can’t deduct your interest payments off your federal income taxes. On the surface, this seems like an appealing argument. But once you start digging, it’s not that great a perk. This article by US News and World Report explains why: most Americans pay $10,000 or more in mortgage interest payments each year. This deduction saves $2,500 in taxes. But think about it: you’re still out $6,500. It’s not that big a perk when you think about how much you’d save if your mortgage was paid off.
  • Investing– This great article from Get Rich Slowly says that it makes better financial sense to pay your mortgage payments regularly, and invest the extra money instead. Theoretically, you make more in the long-term with this method; after all, average returns on stocks are 9% or so. Well, at least they used to be. In this economy, however, investing in the DOW takes a strong stomach and a high capacity for risk.
  • Liquidity– Jim at USA Today also says that keeping your money in liquid form (ie: stocks, bonds, cds, etc.) is a better option. If you pour all your money into your house, then it’s like sinking it into a vat of concrete. It’s stuck there until you sell your home. Keeping it liquid means that you can access your money quickly when you need it. But, there’s a flip side to this, so keep reading…

The Argument For Paying It Off

Did you know that the word “mortgage” is French? Yep. “Mortgage” literally translates into english as “death contract”. Yikes.

There are several advantages to paying off your mortgage early.

  • Freedom– Can you imagine the freedom of not having that mortgage payment hanging over your head each month? If you paid it off and eliminated your other debt, you could live debt-free. Bliss. Plus, you’d only have to earn enough to pay for your basic necessities: food, heat, electric…Imagine the possibilities this would open up for you! Perhaps you could quit your job and start a business. Become a painter. Backpack through Europe. The world’s your oyster.
  • Less Stress- You can probably guess that not having a mortgage payment would mean significantly less stress in your life. You wouldn’t have to worry as much about losing your job, for instance.
  • Liquidity– I know I put this in the drawback section, but I believe that paying off your mortgage early gives you plenty of liquidity if you look at it differently. For instance, if your mortgage payment is $1,500 per month and you pay it off, this means that you now have an extra $1,500 per month in your bank account. You could invest this, or build up a fantastic emergency fund. I’d call that liquid.
  • Safety- Once you’ve paid off your mortgage debt, you truly own your home. This means you always have a place to go. And as Suze Orman says, you can’t live in a stock certificate. Yes you might earn more in the long term investing the money, but you might not. Owning your home is a safe investment for the simple reason that you always have shelter. That’s good enough for me.

Take It From Suze Orman

Need some more convincing? The Today Show interviewed Suze Orman on why you should pay off your mortgage. She brings up some great arguments in this MSN Video, so check it out!

Today Show Suze Orman Interview

Mortgage Calculator- How Much Money Will YOU Save?

I found this handy mortgage calculator at MortgageLoan.com. Basically, it shows how much money you save by paying extra on your mortgage each month. Here’s another cool mortgage calculator from Bankrate.com.

My goal is to get my mortgage paid by next December. If I can do that, I’m going to save over $318,000 in interest payments.

It’s a mind-numbing total. And, my loan is small compared to most people’s! I can’t imagine how much you’d save with a loan over $200,000. Wow.

How To Pay Off Your Mortgage

Paying off your mortgage is a pretty big deal. First I’ll describe the strategy I set up for myself, and then go into some other strategies.

1. My Plan

Here’s my situation: Andrew and I both work, we have no debt aside from our mortgage, and no children. So admittedly, this plan won’t work for everyone. This plan is just what I came up with that fits our particular situation.

Basically, it’s simple: we live on the money I earn, and save every penny of Andrew’s salary. We do not prepay our mortgage; everything goes into a high interest-earning savings account. We also have a cd.

The reason why we don’t prepay is because funneling our money into an interest-bearing savings account keeps it liquid. If we have an emergency, it’s there.

It’s also earning us money; prepaying a mortgage, either yearly or bi-weekly, basically means you’re giving it to the bank so they can earn interest on your money. No thanks.

Now, I make significantly less than Andrew does. Living off my income means we live well below our means. But doing this saves a ton of money every month. We don’t go on shopping sprees, we keep our heat low, and I can’t even remember the last time we took a real vacation.

Is it worth it? Absolutely yes. The sacrifice is small compared to what we’ll get. I loathe owing this money to the bank, and I won’t really feel free until it’s paid off. So yes, it’s worth it to me.

Can this strategy work for you? Of course it can. Everyone’s situation is different, but you can certainly come up with a similar strategy that fits your own situation.

Keep in mind, however, that my plan works for us because we have no debt. If we did have debt like car payments, student loans, or credit card debt then I’d pay that off first before working on my mortgage debt. And, we do still contribute to our Roth IRAs each month; this takes priority.

This plan also works for us because we’re not tempted to spend the money we’re saving. We put it into an ING Direct online savings account, which means that even if we did need it for something it would take 10 days to get out. The harder the money is to access, the less “real” it is, and the less we’re tempted to blow it on something frivolous.

2. Make Extra Payments

Another way to pay off your mortgage is to make one or two extra payments on the principal every year. Bankrate.com estimates that making one extra payment every year will trim 6 years off a 30-year mortgage. That’s a lot.

This great article, again from Bankrate.com, explains how to do it. Here’s a quote from the article:

Contact your loan service agent and find out if you may start sending a half-payment every two weeks without enrolling in their biweekly program. Some banks flat out won’t allow it. In some cases, the loan agreement prohibits partial payments. Some mortgage servicing companies will permit it — but you must write out very specific instructions with each check so that they know where and how to apply the money. If your mortgage institution doesn’t seem willing to oblige, don’t try this option.

Let’s clarify here: if you decide to make extra payments, make sure you write on the separate check “Prepayment On Principal“. This tells the bank exactly where you want that money to go. Skip this step and who knows where they’ll put it; perhaps on next month’s interest payments, which won’t do you any good.

Last Word…

I’m not a personal financial advisor, so please do your own research before deciding whether or not to pay off your mortgage early. I’ve done my best to pull good information from reliable sources, but the person who cares most about your money, and your situation, is you.

Many people think it’s not even possible to pay off their mortgage early. But it truly is. If this is a goal that’s important to you, important in your heart, then I believe that you can find a way to do it.

For me, paying off my mortgage is my #1 goal right now. I’m willing to make sacrifices in order to have the freedom that living completely debt-free offers. I’ve got 12 months to go, and I know I’ll get there.

Are you interested in paying off your mortgage early? Do you have any tips or tricks you can offer readers to help them along? If so, please send them in!

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{ 45 comments… read them below or add one }

Heidi December 15, 2008 at 11:28 am

Is your interest bearing account higher than the interest you are paying on the loan? I haven’t found one that is higher than ours yet which would make your plan not work for us 🙁

heather December 15, 2008 at 11:34 am

Hi Heidi,

Thanks for writing in!

Our savings account is earning 2.75%, and our cd is at 4.25%. Our mortgage interest rate is 6.5%.

Many people have tried to reason with me about the financial benefits of not doing this; they say that it’s better to use the bank’s money to live on, and then invest my own to reap a greater return. And in some ways I see their point.

But for me, the psychological benefit of paying off my mortgage far outweighs what I might, or might not, earn on any investments. My feeling is that it’s all about freedom; how do you put a price on that?

Thanks so much for writing in; I hope that helps!

Daniel Scott December 15, 2008 at 3:29 pm

Hi,

I don’t think that’s what Heidi means. Surely if you make extra payments as soon as you can, then the overpayment is ‘effectively’ earning interest at your mortgage rate. You receive less than this in savings so it’s better to pay any extra cash into your mortgage account, rather than earning in ‘high interest’ savings which are at a lower rate.

So either you earn 4.25% in your savings account, or you ‘earn’ 6.5% in the mortgage account. Paying off the mortgage is better (apart from the liquidity that you mentioned)

Dan

John December 15, 2008 at 4:22 pm

My problem is that both my wife and I have lost our jobs in this lousy economy, and ourbiggest fear is not being able to make mortgage payments once severance and rainy day funds are exhausted. We can’t use lower interest rates, which seems to be all the rescue talk on Capitol Hill. What households like ours need is the ability to tap our IRAs and 401ks to pay off mortgages without penalty, so we don’t lose our homes because we have no liquidity to make mortgage payments.

heather December 16, 2008 at 5:07 am

Hi Jon,

I’m so sorry that you and your wife have lost your jobs. I’m hoping that once Obama gets into office he’s going to speed up some relief for homeowners; didn’t he suggest a policy like that in his campaign? I mean, allowing homeowners to tap into their 401ks without penalty to make mortgage payments if they were in trouble?

I think I remember hearing about that.

Thank you so much for writing in!

And Dan, thank you for clarifying what Heidi was asking me!

Heidi December 16, 2008 at 7:48 am

Yep 🙂 I completely agree with you about paying your mortgage off early! We pay ours off as we get the extra income rather than keeping it in a separate account because we haven’t found an account that pays us more interest than we are giving the bank to borrow their money.

However, to have the liquidity of keeping the money in the bank – but still have the ability to pay it off definitely has it’s advantages, even if it won’t save quite so much.

Do you plan on paying it off once you reach the full amount (in your savings account) or are you going to keep with normal payments?

Funny about Money December 16, 2008 at 9:46 am

Interesting discussion! I paid off my mortgage years ago, against the advice of my financial adviser, and have never been sorry.

First, as you point out, the tax advantage is not nearly so great as advertised.

Second, my mortgage bill was half of my salary, and I was teaching. No one should have to try to live on half of what a teacher earns. Or even, come to think of it, on all of what a teacher earns. Not having a mortgage bill to pay means you have that much more to live on.

Third, once I got a better-paying job, I had much more cash flow to enjoy–and to keep me out of debt.

Fourth, when I sold my old house, I was able to buy a new one in cash.

And fifth, as rumors of layoffs swirl about me and I realize that at my age it’s extremely unlikely that I will ever land another decently paying job, I know that if I’m canned at least I will have a roof over my head. Not having a mortgage or rent payment will make it possible to live on a much reduced income.

One thing you should bear in mind: You don’t own your house. You and the tax man own the house. You still have to pay property taxes, which can only go up, property devaluation notwithstanding. Taxes, once they have been put in place, never go away. At this point, my tax bill is right at the upper limit of what I will be able to afford if I try to live on Social Security and 4 percent of what little is left of my life savings.

heather December 16, 2008 at 12:02 pm

Hi Heidi,

Yes, I’m planning to pay it off in one fell swoop. I haven’t yet found in my mortgage paperwork if there is a penalty for doing this. I’ve heard of some people who have gotten walloped with a fine for early repayment, some as much as $8,000.

Has anyone ever heard of this? Is it common? I was planning to do more research on this the closer I got to my payoff date, but now that I’m thinking about this it should probably go into the article, especially for those who are close to paying theirs off.

Funny About Money,

You make a really excellent point about the taxes. Living in a downtown area mine are fairly high as well, and in this economy I suppose they’re only going to go up.

Thanks so much for writing in!

Andy @ Retire at 40 December 16, 2008 at 12:11 pm

This post has been featured on the 89th Carnival of Money Stories at Retire at 40.

Great article and well worth reading. I think paying off your mortgage early is one of the most important things to do in my book.

Michael December 16, 2008 at 5:05 pm

Hello,

My wife and I just bought our dream home in Florida, we already have lots of equity because it was a foreclosure sale. It is a 15 year loan fixed @ 4.75% with bi-weekly payments, so our home will be paid off in 13 years. Our monthly payment is $1930.00 which is half of our monthly income, but it will be worth it when my home is paid off at age 43. Both my wife and have a one day at week part time job for extra cash and spending money. We still invest in our 401k on a weekly basis thru our employers. Put in work, save wisely, watching your spending, and enjoy your life!

Michael.

Heidi December 16, 2008 at 8:54 pm

Most do not have a prepayment penalty, but some do. We just refinanced at a lower rate and it has a prepayment penalty if we pay it off in less than a year. Our first mortgage had none. Just check with your mortgage company 🙂

Blu December 17, 2008 at 6:43 pm

I paid off my home 4 years ago. I was laid off a few months ago, but because I have no mortgage, I can actually cover expenses with unemployment compensation. I am much less stressed than others laid off at the same time. That peace of mind is priceless.

My strategy was to put money into prepayments when it was the best possible investment. During the dot com bubble when PE ratios were through the roof I was paying off my home. It kept me from overpaying for stocks and allowed me to make productive use of my $$$.

Before going the prepayment route, if you are in a 30 year fixed, see if a refi to a 15 year fixed is viable. Same concept – pay more, finish earlier, but you have the structure of regular payments.

Finance Gourmet January 2, 2009 at 9:29 pm

As a former financial advisor (former means I don’t have any stake either way) I have seen way too many people fall into this early repayment trap. The argument is always the same: “Imagine the freedom you would have without a mortgage.” Well, how about this, “Imagine the freedom you would have with $300,000 in the bank.” Just a free don’t you think? Trust me when I tell you that you would rather have a $300,000 mortgage and $300,000 in the bank than you would have a $0 mortgage and $0 in the bank. Sure, that sounds extreme, but the logic is the same. $200,000 mortgage and $100,000 in the bank is better than $150,000 mortgage and $50,000 in the bank too. The ONLY reason paying off your mortgage early makes any sense is IF all of your other savings and investing goals including a cash reserve fund are already taken care off. Otherwise, the hard truth is that most people just cannot summon the willpower to save the same amount of money each month that they send in to pay off their mortgage early, and if they can, then they can’t summon the willpower to keep their hands off the account once it builds up a little bit. The temptation of $50,000 is just too great, and then poof its gone, whereas paying off the mortgage locks away that $50,000. The fatal flaw, however, is liquidity. That doesn’t sound like a big deal when you have a job and income, but as lots of people finding out, you can’t make next month’s mortgage payment with “savings” that are locked away in your house. And, if you are thinking about a home equity loan, forget it. No bank will give you a loan (even an equity loan) unless you are capable of repaying it, and that means income. Even if you make it to retirement, the trap I’ve seen countless retirees fall into is that they have a $450,000 home and no mortgage and a fixed income. Then, they need repairs, or a new furnace and that $450,000 “freedom” becomes a big anchor around their necks. Next thing you know, they are asking about reverse mortgages which are a TERRIBLE deal unless you are quite old (approaching 80 is where they start to make sense). So, if you have your other financial needs taken care of, then by all means, go ahead and pay off your mortgage early. Of course, if that is the case, you might as well refinance get a 5.5%ish rate and enjoy the tax deduction because it won’t be long again before you can get 4.5% or 5% on a CD and then you’ll be making a profit on your mortgage. (In the 25% tax bracket the equivalent yield on a 5.5% mortgage is just 4.125%)

Grace February 2, 2009 at 3:03 pm

My husband talked me into paying off our mortgage at 20 years, instead of 30. Then when the bottom dropped out last fall, we bought a foreclosed house at 50% of what previous owners had paid, and rented our old house (debt free now) for enough money to pay the taxes and insurance on it plus about 1/2 or our new mortgage payment. So paying off has unexpected benefits down the road! Because we were self-employed those 20 years, we also maintained a debt free lifestyle, no credit card debt carryover, no car payments, and a 6 month reserve of bill payments, and are raising two kids. It’s a frugal and freeing way to live. It takes agreement and commitment on both spouses, but I can guarantee this – if you set up a plan like this, you never have to argue or worry about money!

heather February 2, 2009 at 3:09 pm

Grace,

That’s awesome! Good for you. I totally think that early payment is the way to go. I’d like to do something like you guys are doing; rent out my current house once it’s paid off and buy another dirt cheap. Property in Michigan is almost being given away, and the deals are unbelievable.

Thanks so much for writing in and sharing your story!

Paul Morales February 23, 2009 at 3:52 pm

Great post with the current economy that is a great idea. In my future, I plan on having a big house and paying a mortgage but I will make sure the first house I have will be a decent sized home that will be fully paid off.

Loot Money March 12, 2009 at 11:17 am

I completely agree with Finance Gourmet’s post. Heather, I was hoping you would have responded to his very good points so I could see why you disagreed. I completely understand the psychological benefits of being debt free or being free and clear on a house, but Gourmet makes an excellent point – if you do not have the proper cash reserves and savings taken care of, you should really not be locking in your money to an illiquid investment!! The bottom line is, everyone’s situation is different. Personally, I have no problem with a mortgage “hanging over my head” – I’d rather have free cash sitting around in case of an emergency than home equity I cannot access easily. However, I do prepay my mortgage a little bit each month – it saves literally thousands in interest costs over the life of the loan. I’m not in a huge rush to pay off the mortgage, but neither do I enjoy throwing interest to the bank. So, moral of the post – figure out your specific situation and do what’s right for you – just know, there is no right answer for everyone. Not paying off your mortgage isn’t necessarily bad, and paying off your mortgage isn’t necessarily good.

heather March 12, 2009 at 11:28 am

Loot Money,

Thank you for writing in!

Finance Gourmet did bring up some excellent points, and I can completely see his point. In fact, I completely agree with him.

I was not planning on paying off my mortgage and leaving myself with $0 in savings. I’m self-employed, and the idea of having no cash reserve at all is horrifying. I was going to pay it off once I’d saved the entire amount I owe, in addition to an extra cushion in my savings account. Once I did that, I was planning on funneling just as much money into my savings account as I always do; I’m not into “lifestyle inflation”.

For me, paying off my mortgage is completely psychological. I hate owing people money, and this is the only debt I have. Once it’s gone, I’ll really feel free. But, that’s just me!

And, both of you are right. Paying off a mortgage early won’t work for everyone; some people are better off paying theirs and keeping their savings liquid. And that’s fine; whatever works. I just wanted to offer up my story and my two cents on the issue.

Thanks again for writing in!

Kirk Womack April 14, 2009 at 7:35 pm

I just wanted to say that paying off our mortgage early is going to be the best thing that we ever did for ourselves. Two years ago I came home after listening to Dave Ramsey and told my wife that we needed to get out of debt as quickly as possible. We started to make extra payments on our home ($2,000+) and in two years we have nearly paid our home off. We only have about 10k left to pay and we are so excited!

heather April 15, 2009 at 5:26 am

Kirk,

That’s awesome, good for you! Dave Ramsey has helped so many people get out of debt; that man is amazing. Kudos to you and your wife for making it happen!

Ashley April 16, 2009 at 6:28 pm

I would HIGHLY recommend you remember your tax payments when you go to pay off your mortgage!!!! I know someone who paid off their loan and then had a $8K property tax bill due 2 months later because they had not considered when the bill was due. You don’t want to pay off the mortgage and then discover that the house is going to be taken away for failure to pay taxes right afterwards 🙂

Ashley April 16, 2009 at 6:36 pm

Oh, and PS – even if your mortgage has a fine associated with paying the mortgage off early, it might be worth paying the fine. Consider what you’ll be saving in interest by paying the mortgage early. If it’s more than the fine, there’s no logic in not paying the fee. Remember to consider lost investment opportunities when doing your calculations to see the truest numbers (use a financial calculator, Excel, or a mortgage calculator online to do this).

Lisa G. April 21, 2009 at 1:18 pm

I just wanted to comment that I think it is a WONDERFUL idea….. alot of my friends think i am crazy because I am 31 years old and DREAMING of the day when I will be mortgage free!! We purchased a single family home December of 2007 (30 year fixed – 6.25%) and just recently refinanced into a 20 year fixed (4.87 %) and I AM LOVING life, it is such an amazing feeling to shave 20 years of a mortgage payment off with the swipe of a pen. We are signed up for the biweekly payments and every year I plan on sending in a lump sum to try to get that mortgage paid off at least in 15 years! Reading things such as this just help me stay motivated – thanks so much!

Lisa G. April 21, 2009 at 1:19 pm

Sorry meant to say ‘shave off 10 YEARS of a mortgage payment’……..

Carol May 21, 2009 at 3:43 pm

Finally – someone else with the same idea! Two incomes? Live on one and save the other (and actually live within that income level – what a novel concept! *wink*). (We also do not have children.) For us, we are prepaying our principal, but we have quite a savings cushion. Last fall, when keeping my job looked uncertain, we stopped paying extra to the principal and beefed up our savings. Now that my job is secure (my company was bought, but I’ve now been offered a job in the new organization), we’re back to paying down the principal, with an even bigger cushion. I’d say we have about 1.5 years of expenses saved. We expect to have the house paid off by September 2010, which is 4.5 years after we purchased it. How wonderful it will be to be debt free!

heather May 21, 2009 at 4:10 pm

Carol,

Yes, this lifestyle we’re living (two incomes but living off only one) has been an enormous lifesaver.

I’m a freelancer copywriter, and my income has taken a huge hit in the past 4-6 months because of the economy. But because we had so much saved up, it was a non-issue. Business is picking back up (thank goodness!) but without the security of our savings we might have been sweating it for sure.

Living well below your means is so worth it. I wouldn’t trade it for anything, especially since it really saved us so much stress in this recession!

Good job for getting your house paid off so soon! Thanks so much for writing in.

Abril June 23, 2009 at 4:19 am

Hi,

We have just added your latest post “The Benefits of Paying Off Your Mortgage Early | The Greenest Dollar” to our Directory of Mortgage . You can check the inclusion of the post here . We are delighted to invite you to submit all your future posts to the directory and get a huge base of visitors to your website.

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Shane September 6, 2009 at 7:22 am

Regarding advice from a financial advisor. Every, financial ‘advisor’, yes, EVERY one of those people who I’ve spoken with have advised me to invest in a plan they sponsor, usually a retirement plan where my money can grow tax free, complete with the chart portraying what $10,000 will become in a certain number of years. We’ve all heard the stories and we’ve all heard what $10,000 will become in twenty years, precisely at retirement age. Have we stopped to consider the amount of interest the bank will accumulate after a 30 year mortgage is paid off in 30 years? It’s close to double the loan amount. Think about what you could do with an additional $250,000. Talk about liquidity.

Financial advisors are not in business to help you nor are they your friends. They are in business to help themselves by selling retirement plans that portray false earnings and growth at a designated retirement age. Of course they don’t want us to prepay our mortgage-they want us to take that money and invest with their companies.

Randy September 30, 2009 at 10:23 pm

In 1994 we bought our house and started a bi-weekly payment plan at about 6.25%. In 2002 we refinanced to a 15-year mortgage at 5.25%. By paying about 4-5k extra on the principal every year, we are on the verge of paying off our 15-year mortgage in 7 years. We have saved about 15k in interest. We did this against advice that I received telling me to invest in the stock market because “you will make more in dividends than you will save in interest.” I did not follow that advice because I wanted the guaranteed return of 5.25% tax-free and I dislike being in debt, because the borrower is servant to the lender (Proverbs 7:22). Next week we are going to send in a cashier’s check for our payoff amount, and it’s going to be a great day in our house!

jeremy.b.bowers@gmail.com October 1, 2009 at 1:24 pm

Hey guys,
I’m 23 and I just bought my first home, I’m a slow starter on this, I had dreamed of buying one when I was 18 but I didn’t have the income to support the cause back then 🙂 I am asking for advice on paying the house off quickly, from what I understand I can make “Principle Only” payments on Bank of Americas online banking, this in short would decrease the amount of interest that follows each additional month on my regular automatic payments. My goal is to pay the principle down every month with left over money thats sitting in my checking account. I think I can do this for a year or so with high payment because I’m on a deployment for a year, how do I know how much my interest is paid off, is there a calculator for this? I also wanted to know your inputs about selling the house after 3-5years and buying another outright with the profit earned, I heard this can be done over and over again with foreclosures because they have equity built into them. Thanks for the help, feel free to email me with your responses.

V/R,
Jeremy B Bowers

Bill October 9, 2009 at 10:14 am

Hi all, this is my 2 cents on the whole paying off argument: I look at like this, why give the bank all your money and help them get rich, help yourself get rich. I agree with the previous posts, that you do need to have a cash emergency fund and should also have an IRA funded and hopefully contributing to a matched 401K before considering paying off your mortgage. The tax deduction argument makes absolutely no sense at all, does it really make sense to save .30 for every dollar spent? The getting a higher return by investing only makes sense providing you do ACTUALLY make that higher return. Just because historically the market has returned between 8 & 10% does not mean that trend will continue, just ask someone who invested 10 years ago. As of today, the economy does not look like it will be very strong for quite some time. I think for some the psychological benefit may outway any slight monetary gain anyway. I think the goal is to be debt free so you are the master of your own universe other then being a slave to someone else who holds your debts. Be free!

mom-to-4! November 15, 2009 at 7:01 pm

Thank you so much for your views on this! My husband and I are paying off our mortgage early. I thought maybe I could share how we are doing it – it might help others come up with a plan. We have four children and live on my husbands salary – I stay at home. My husband is payed every two weeks – therefore, there are 26 paychecks in one year. We have chosen to live on 24 paychecks; two each month. (It makes budgeting so much easier.) The extra two paychecks then are used to save, invest, or pay down debt. We just payed off our car, and except for our house, are debt free. We contribute to his company-matched 401k up to the match, and we already have 7-8 months of emergency savings for our expenses should the need arise. Having those things in place before focusing on the mortgage we felt was essential. We realized that by paying it off early, we can save over $70k in interest. I’m a saver as it is, so this plan feels natural to me. I can’t understand why anyone would want to pay more for something than they have to – interest can double the cost of your home if you stay in it for the life of the loan.
If someone else were to use this plan, and they brought home $1500 per pay period, for most people, I think, that is close to the amount of a mortgage payment. So, this person could pay $3000 extra principle each year on their house (which is more than two extra payments) and not even miss the money. On a $200,000 30-yr loan at 6%, that shaves 11 years off the loan, and saves over $90k in interest.
By the way, our “car payment” is now going monthly to our mortgage principle, as well. A $200 “car payment” each month could take an additonal 4 years and $32k in interest off this fictional loan. Every little bit adds up! Good luck to everyone finding a plan that works for you!

Steve November 18, 2009 at 1:28 pm

I believe one of the key factor the author missed is the inflation. Sure CD now yields only 2% compared to mortgage rate of 5%. Keeping the extra cash in hand costs you 3% or effectively 2% after about 33% tax savings (federal+state+township). However, as we all know the inflation is due sooner than later with much “stimulus” money printed every seconds, the interest rates will go higher and higher while your mortgage rate is fixed. For me, with two kids going to college in the next 3-8 years with small chance of getting financial aids, I will keep a large sum of cash+bond on hand. Stock market is another way to go but not for me at this moment, I already put maximum 401K 100% in stock market. $100 now may worth only $20 20 even 10 years from now. In short, cash is king if you have the need in next a few years like in my case I am planning for future loans for my kid’s education. If you really have extra money, go for real estate, as long as you can break even there. My key point is: the inflation beast is coming.

denhay December 16, 2009 at 8:32 pm

Hello, Heather. I just came upon your post today. You wrote it a year ago and I am wondering if you were able to reach your goal. If so, congratulations!!!

My husband and I also paid off our home a while back. We have 2 young children, and I am a stay-at-home mom. Like you said, we have the psychological benefit of security– our home cannot be taken away from us!

I’ve recently discovered another psychological benefit that comes from full ownership of a house: contentment. I can’t tell you how many other mothers I meet who complain that their homes (usually bigger than mine) are too small for their families and that they “need” something larger, usually something that includes a play room, hobby room, family room, etc.

If I looked at bigger as being better, then I probably would also dive right into buying a home with more square footage. But to me, the security in fully owning a home benefits my children far greater than providing them with extra living space. I don’t want another house. I have so much pride in our home…it’s OURS…fully! I can now focus on the other dreams in my family’s lives–travel, the kids’ college savings, a decent cushion for retirement. Sometimes I see a big, pretty house and think, “Oh that would be nice to live in”, but then I remember that I would have to clean all the places that my children would find to make messes in (ugh), that we would have to pay much higher utilities (there goes a lot of discretionary income), that my children might not benefit if they were to expect a certain material lifestyle for themselves when they start out on their own lives years from now,…but the biggest reason I don’t want to get a bigger home at this point is because, in order to do so, I would have to be in DEBT (No thanks–not ever making anybody else rich by borrowing their money). I don’t care what any financial planner says. Paying off a mortgage is worth it!

Alfred January 4, 2010 at 2:09 pm

If Family Income is big enough to make substantial extra mortgage payments, then great…. Pay off your mortgage and become debt free fast. The overwhelming majority of Home Owners, however, have little money left to save as an emergency fund. Many simply live Pay Check to Pay Check. If you are in that category, then you pay three times for the mortgage. This is because the average Home Owner really knows too little about interest and especially compound interest. The big benefit of paying the mortgage fast is the savings not just from interest charges, but also the savings from many years of mortgage payments you did not have to pay .

It is possible to use Loans, Investment Loans to help to pay down the mortgage. We counsel willing Home Owners with similar strategies. Most Consumers, including professional Financial Planners cannot wrap their heads around this idea. In fact it is often treated like heresy to suggest it. Another myth about mortgage payments that is spread by Accountants, Loan Officers, Financial Planners and the University Professors who taught them is the return on that $1000.00 of extra mortgage payment. If the Mortgage Interest is written at 5%, returns on the $1000 is much more than the 5% returns that current scholarship assigns it. My Math is not good enough to calculate the exact returns. My educated guess is that those returns are closer to 100%, maybe 200% than to 5%.

The 5% figure fails to recognize the fact that your $1000.00 early payment has an impact on every other one of your mortgage payments afterward. Following your early payment of the $1000.00, the Principal share of all of your payments following could increase by an additional $20.00, $25.00, $30.00 or more, (depending on the mortgage balance and how early you are in the amortization table). Your mortgage gets repaid months faster because of even one single extra $1000.00 prepayment early in your mortgage payment years.

I have published articles on this subject that show the benefits of fast paying a mortgage to the Consumer. These articles can be found in the “articles” page of the Mortgage-Freedom.com website. The real truths about mortgage payments are hidden, dark secrets, filled with myths almost like witchcraft and sorcery were mixed up with religion in the Dark Ages of History. People, including the so-called academics and Professionals are basically ignorant on how mortgage payments really work to favor the ordinary Consumer. This is because we are afraid of debt. You see debt usually favors the Lender or Banks. In fact, Wealthy People become wealthy because they know how to harness the power of debt as the road to riches.

Ohm January 28, 2010 at 11:59 pm

I am a 34 year old male that has a home paid off (GREAT FEELING)!
As a self-financial guru, I believe paying off your home or buying a home for cash is a great deal of accomplishment! If you are able to save the reserves to do so, you should be able to save another nest-egg into your retirement. Now I know some people are at or near the retirement age and yes paying off your home (if it is a large amount example
40% or more), would not be a great idea. But if you are not remotely close to retirement, by all means pay it off! The interest you pay on a 30 year note will double or triple depending on your rates! Think about it, you spend $200,000 on a home and after all the interest paid, you would have nearly $450,000 into a home that you hope appreciates! After you have paid your home ,still Pay the monthly mortgages for 30 years, but put the money into CD’s, not interest to the bank! Accumulate 4% + interest on your behalf and tell me where you stand in 30 years!
Paying off a mortgage early is a dream come true for most people, and there is a reason for that. Think about why the banks are into alot of trouble these days, it’s not about auto or consumer loans, it’s mortgage loans! Why do you think financial guru’s tell you to keep mortgage loans, so they have jobs!

Mars February 11, 2010 at 4:53 pm

I paid off my mortgage so all I have to think about is the taxes and insurance. The amount is small enough that it makes life manageable. I live on a fixed income. I know that I can meet my other expenses each month with what I live on. Not having to worry about losing my home is a great comfort to me. I sleep better at night. And that is better than any small tax break I might get from the IRS.

Tim June 16, 2010 at 1:11 pm

I agree with the article, though I do take pause with a certain statement

“Once you’ve paid off your mortgage debt, you truly own your home”

In most states, you never “own” your home. If you pay off your mortgage you have earned the right to live their at a very low rent (the rent being the state property tax). Do not believe me……pay off your mortgage and then stop paying your taxes for a few years. Tell me then how much you “own” your home as the sheriff escorts you off the property.

adrian September 7, 2010 at 10:02 pm

Hi Heather! As this thread has been going on for a bit, I hope you and your husband are well on your way toward your goals. My wife and I lived a similarly frugal life and were able to pay off the mortgage on two houses! We paid off our first home bought in 1995 for 70k in 3 years. We then sold that house and where able to take all the proceeds, $175k and put it into our current home which we bought for $400k in 2001. When we were in our first home the low price, even though we had a moderate income at the time, made paying it off seem with in reach and then actually paying it off and achieving that goal gave us the courage to try and do the same thing with our current home which we again were able to achieve in three years.

We used a number of techniques to pay down our mortgage.

First, as you mentioned, we lived frugally and paid most of one of our salaries into the mortgage as principal payments along with our regular monthly mortgage payments.

Second, each year we took our entire Federal and State income tax returns and put the whole lump some toward our principal.

Third, we took advantage of refinancing opportunities as rates were coming down. Our original Mortgage was 30years at around 7 percent. As we paid down the principal, we eventually refinanced the 30 year down to a 15 but instead of taking money out, we lump summed the income tax return and borrowed less than what we currently owed. We did this again and finally had a 10 year loan at 4.5% which was a very good rate at the time. We were fortunate that our Mortgage company did not charge us any pre payment penalties nor did they charge as any money at all to refi down to the lower amounts and terms. The benefit of doing this was that our regular monthly payments were working harder for us by having more principal and less interest being paid out of each payment.

It’s very important, if you are really trying to prepay, to pay as mush as you can as soon as you can. On 30, 15 and even 10 year loans, the bank takes a huge percentage of the total interest up front. Look at your amortization schedule and play with the numbers. Paying down as a big a chunk as you can up front saves you tremendously in how much of your monthly payment goes to interest. The time to start paying down is with in your first year. Do not wait until you are 3 or 5 or 10 years into your mortgage. The bank has already run away with their profits by then. Mortgages are a dirty business.

For all the nay sayers, the bottom line is this, at say 6% my original loan if paid over 30 years, would have cost me over 300k in interest of which I would only have gotten a fraction back. In the end as I recall, we paid about 40k in interest over the first 3years and then we were done. Total savings, $260k. In the time since we’ve lived with no payment we’ve saved nearly $150k in cash, contributed to our 401ks and have lived a wonderful care free life raising two wonderful children. We have no debt, credit card or other wise and we do not shudder every time there is another lay off in our industry. As someone pointed out, you never truly own your house in the US, but at least we’re not selling our souls to the bank, just to the tax man.

My motto and advice that I give to people is this, Always know how much money you are paying out in interest every month. This is how much the bank is screwing you out of. This goes for credit cards, student loans, car loans and your mortgage. Never ever pay interest if you can help it.

MOTHER OF 3 November 1, 2010 at 7:00 am

Hello everyone,
I love reading these posts. They are motivating. I am a single mother with 3 children. I only owe $5,000 on my house and am planning on having it paid off in May of next year. My sister, who is an accountant has advised me against it from day one because of the “tax benefits” of paying on a mortgage. I purchased my home in March, 2001 at 7% for a 30 year fixed. And have imagined the day when that last payment is finished since the day of purchase. I refinance 3 years later at a 4.5% fixed for a 15 year loan. My house should be paid for by August 2011 a couple of months behind my goal but it is ok. My job as a postal employee of 15 years is not guaranteed with this economy the way it is. Having my home paid off and knowing that my children and I have a home to live in without a mortgage will be a great blessing and stress reducer. Dave Ramsey was at our church this past year and I regret not going. My Supervisor went and in my head, I already have great financial sense being that I’m single and am well on my way to paying my home off without the help of a husband. I realize now that I could have learned so much more and can’t wait for Dave Ramsey to come back so that I can take his class.

Greg November 2, 2010 at 2:07 pm

Hello everyone,

I am a 29 year old single father of two kids. I just purchased my home June 29th of this year. I have a goal of paying off my mortgage early. If you play your cards right, you can pay your mortgage off early and still have money in your bank account. Here is my strategy, I took a look at my finances and realized that I could save $160.00 a month just by being honest with myself and cutting my spending. I cook my lunch now, disconnected my home phone since I have a cell phone, switched my cable package and other little changes that equal up to $160.00. I called my mortgage company and got on a bi weekly plan. That cut off seven years on my mortgage. I then requested that the $160.00 a month that I was paying on other bills be “applied to principal” every month. I was spending the money anyway so, I figured… why not use it to pay off my mortgage. This took off another six years off my 30 year term. I have only had my loan for 5 months now and it should be paid off in 17 years. Simply by putting money that I would have been spending anyway towards my mortgage. As far as money in the bank goes I use my tax refund to my advantage. I opened up a charls schwab high yeild checking account, brokerage account and Roth IRA account all at the same time. It only cost me $25 to open all three accounts. When I get my tax refund I now have the option to put money into my new Roth IRA for my retirement, I can spent a little in my new brokerage account if I want to test the stock market or I can just leave the money in the high yeild checking account and collect the interest. If you use this strategy you will get the best of both worlds. You pay off your mortgage early, saving you tens of thousand is interest and you get to collect a little interest money by having money in the bank that you can touch if times get hard. I have learned to let money work hard for me instead of me working hard for the money. I am currently writing a book this topic and hoping to have the book completed in the middle of next year. If you like the strategies that I have given you and you would like for me to sent you a email when the book is finished, send me a email at 4254watkins@comcast.net. Remember, you can do both if you “play your cards right”.

MOTHER OF 3 November 10, 2010 at 5:02 am

Wow,
Greg, I will be emailing you. I’m interested in your book. Will the book contain more information about the Roth IRAs?

girl009 January 4, 2011 at 10:28 am

If you have Bank of America for your mortgage, they have a great online tool that you can play with and see how much you would shave off your mortgage if you make $x.xx extra payment each month or semi &or semi annually extra payment. Worth looking at! On my loan, if I make an extra $100 payment each month, it will shave 7 years and 5 months off my 30 year mortgage that I just got at 4%.

Michael May 12, 2011 at 10:59 am

I am in the process of trying to pay off my $86,000 by age 30. I am following Dave Ramsey’s plan, not Suze’s.
In fact, since I’m young, I’m not sure Suze recommends I pay it off.
Dave Ramsey’s website has a good tool as well to tell you how extra payments can shave years off the mortgage.
I am on track to reach my goal, according to those calculators.
I’ve started blogging about my money saving strategies to keep myself motivated through the process.
Just four years to go! Maybe LESS!

Richard March 27, 2012 at 6:01 pm

Following the traditional methods of the so-called ‘financial experts’ is what has created 15 TRILLION DOLLARS in Federal debt as well as 15 TRILLION DOLLARS in new personal debt in America. The system is set up to enslave us financially, period. My wife and I were introduced to the system at http://www.Paxeon.com a couple years ago and it has literally changed our lives. Everyone discouraged us, but guess what, so far we’ve saved more than $48,000 on our mortgage, without paying a dime more out of our pockets and will have an extra $379,000 for retirement. The ‘experts’ can keep their advice.

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