Recently I was reading, Jeff Yeager's “The Cheapskate Next Door: The Surprising Secrets of Americans Living Happily Below Their Means” and came upon the section on “Break the Mortgage Chains that Bind Thee”. One paragraph in particular in caught my attention on accelerating paying off your mortgage. Most all of us have mortgages right? Until a couple of years ago did I realize there are a lot of different ways that you and I can accelerate paying off our mortgages. Here are a few options I found in my research.
Switch from 30 years to 15 years
Most of us start out buying our first homes with 30 years mortgages, because it's what's easiest and gets us into the house at the lowest monthly mortgage payment. However, have you considered refinancing from a 30 to a 15 year mortgage? Here is an example of someone who took out a $200,000 30 year mortgage in 2007 (5 years ago) at 5%. If they refinanced to 15 years @ 3.18% interest rate they'd shave off $90,925.37 ($186,511.57 – $95,586.20 = $90,925.37)!!! You could buy another home with that interest you saved. The whole time this would only increase their monthly payment by $211/month.
Switch to bi-weekly payments
Most mortgage brokers offer a program where you'll make a mortgage payment every two weeks or 26 times per year. In the above example on a $200,000 30 year mortgage at 5% this would shave off about 5 years of payments and $35,534 of interest. Often times the banks automatically take this out of your account every two weeks and the payments isn't actually paid on your balance (principal/interest) until the end of the month. In addition, there is typically fees associated with this in the terms of either upfront costs or monthly transaction fees. With my bank there was a $599.99 upfront fee. Lastly, the bank can also make money on your money while they hold it for you until the end of the month. The big turn off to this program is 1) the bank fees and 2) the banks having the ability to make money on your money.
Self-managed bi-weekly payments
This is the option that my family and I choose, because it puts our money to work for us and costs us less in terms of fees. Figuring I get paid every two weeks here is howwe setup our self managed bi-weekly payments.
- Direct Deposit 1/2 the mortgage payment to our money market account
- Setup direct debit with my mortgage broker (no fees associated with this)
- Then two months of the year where I get 3 payments that month, then I apply that extra cash to pay down principal
With this process I'm able to not only make two extra payments on my mortgage (essentially bi-weekly payments), but I'm able to do this for free. On top of that, since I direct deposit the mortgage payment into a money market account we are able to earn interest on that cash at rest. It ain't much, but I figure that it's worth a nice trip to McDonald's or a couple cups of expensive Starbuck's lattes. :) Both of these techniques allow our money to work for us and not for the bank.
Payoff your mortgage in under 5 years
A few years ago a co-worker approached me about a program that would allow you to pay off your mortgage in less than 5 years. Basically he said you have to pay $3500 for a program that will help you utilize a home equity line of credit. With the program and line of credit, then you'd deposit your paycheck to pay down the line of credit. Essentially paying off the line of credit every month, which would then go to pay down your principal.
At the time I didn't get into it, because I had never heard of anything like this before and it seemed somewhat “shady”. However I would be interested to hear if any our readers have done this program.
Well these are a few of the ideas I've seen over the years. What ideas do you have to help accelerate paying down your mortgage? What works for your family and how do you make your money work for your family?
2 Comments
Great points, Jefferson. I totally agree with you that paying off your credit cards should be first priority, because typically those debts are a lot higher interest and you can’t write off the interest as a deduction.
Also a 20 year mortgage isn’t a bad option either. From what I’ve heard that recently they are now offering lower interest rates on the 20yr vs 30yr, which wasn’t always the case. Either way it forces you to accelerate paying off your debt. Great job and keep up the good work.
Great ideas..
We recently refinanced from a 30 year to a 20 year… The monthly payments were a little bit too high for us at a 15 year, and so we jumped at the sweet spot.
I should note that we used to pay more than the minimum on our mortgage on a regular basis (with the excess going to principal). But we realized that the money borrowed for our home is at a much higher rate than money that is owed to credit card companies. If anyone has CC debt, I would recommend paying that down first before paying more on your mortgage.