What would you do with no mortgage payment? Imagine saving tens or hundreds of thousands of dollars in interest? What could you invest or have the freedom of purchasing without a house payment every month? Paying your mortgage off early gives you not only freedom but peace of mind in tough economic times knowing that your house is paid off. If the worst happens and you lose a job or have a medical emergency, you’ll be able to get by on a whole lot less. Did you know that an average 30 year mortgage on a $250,000 house can turn into a total of $500,000 in payments over the life of the loan depending on your interest rate and other factors? But it doesn’t have to be this way! Phew! Step 6 in your path to financial freedom is a big one! At this point in the journey your mortgage is your last remaining liability standing in the way between you and a completely debt-free life!
Why you should pay off your home early
Let’s face it there are a lot of arguments out there against paying off your home early. Here are a few of the ones I think have very valid points.
Should you keep your extra cash to stay flexible?
The argument: Cash is king. At this point in your path to financial freedom – you have paid all other debts and keeping your extra cash in more liquid holdings gives you flexibility. When you invest your extra income in your house you can’t exactly cash it out or gain access to it in case of emergency.
The Answer. This is absolutely a great point. But by following the 7 steps to financial freedom you are one step ahead of this game. You have saved your emergency fund (read more about step three here), and you have paid off all your other debts using the debt snowball (read more about step two here). So at this point in your journey you have hedged yourself against emergencies and other unforeseen events which may cause you to need cash to fall back on for flexibility. Also keep in mind your ultimate goal here. One of the best things about paying your mortgage off early is that it helps you minimize the risk of emergencies once it’s paid off. With no mortgage you know that you are much closer to true financial and emotional peace simply because you don’t have the debt weighing on your shoulders. The fear and risk of losing your home because of a job loss or medical issue are greatly reduced. No mortgage means you’ll only need to cover the minimum of life’s essentials giving you more power and control over your financial future.
Can’t I get better returns in the market than what my mortgage rate is?
The argument: My mortgage rate is 5% and I can get 7% return on my money with other investments. This argument required a few key assumptions. First, and the main assumption, is that you earn a consistent return. Second, you achieve a premium rate of return. Third you accomplish both of these things for an extended period of time. Based on those three assumptions this is a very sound argument. If you can achieve a higher return, for an extended period of time, and achieve that consistently without fluctuation your cash may produce a better return for you than chopping down your mortgage.
The answer: The reality, and any of us that have lived through the great recession can attest to this, is that these 3 assumptions are not dependable. The market does not produce consistent returns, you can’t rely on it to be at 7% or above in the near and moderate future, and you certainly cannot predict timing (although many have tried and failed). For most of us we are not professional investors, we don’t have time to seek out the perfect investments or study markets, therefore there is inherent risk in trying to compete with your mortgage interest. Your mortgage is a debt that you owe, here and now. It won’t go away and it cannot be escaped. As many of you might know who follow me, I am a big fan of building wealth through real estate, and I am a believer in investing. However we will be able to get into more wealth building in our last and final step to financial freedom so for now hang in there and remain disciplined.
Isn’t inflation my friend?
The argument: I hear this argument often and it goes like this: Inflation goes up by an average rate of 3-4% every year, so by not paying your mortgage early you are essentially paying less money for a home that is increasing in value every year. So as an example, if you were to buy a house this year with a 30 year fixed rate mortgage, the amount you are paying is the same in 30 years when you make your last mortgage payment as it is now, even though your home has increase in value an average of 3-4% per year for the next 30 years. So aren’t you getting more for your money?
The answer: Yes this is a true and fair argument! The problem with this logic though is that you are comparing apples to oranges. Let me explain by asking a simple question: Would your house stop appreciating in value if you didn’t have a mortgage payment? Of course not! In fact you win from both angles because without a mortgage payment and all the interest baggage that comes along with it you now not only get what equates to a huge raise every month in income, but you are ALSO seeing your home appreciate in pure equity. This is when you truly see the power of wealth building in real estate at its peak, and why building wealth in our next step is so powerful to through more real estate purchases (more on that in step 7 here).
So how do you pay your mortgage off early
So now that we understand the importance of buying real estate with a financial game-plan, and answered some of the objections that come with paying your mortgage off early, let’s dive into some strategies on how to tackle this financial mountain.
Step 1: Start by making sure you are at home that you can afford.
First of all let’s clear something up. Owning a home has huge benefits and we talk a lot about it here on this site. I speak with homebuyers all the time that are looking to buy a house and they don’t have all their debts paid off or they haven’t set clear budgets. And you know what? That is ok! You can let yourself off the hook. There are many benefits of homeownership and you should be a homeowner. However, what you must do before you go into one of the biggest financial purchases of your lifetime is have a plan. Otherwise you make the already difficult journey of financial freedom even more challenging by pinching your ability to save, pay down debts, invest, and give! I help people create wealth through smart real estate transactions and the very first thing I do is sit down with my clients and build out a financial strategy and game-plan for their next home purchase. Ideally your mortgage payment should not be more than 25% of your monthly income. A lot of factors come into play here not just purchase price, including mortgage rates, HOA fees, insurance, and more. Reach out to me today and let’s build a roadmap so we can get you on the path of homeownership that is sustainable and within your means. Don’t stretch yourself, it’s not worth it. If you’re reading this and it’s too late, your mortgage is already more than 25% of your income, don’t worry. Contact me and see if you have options to get into a more suitable payment or scenario so that you give yourself a fighting chance to financial freedom!
Step 2: Restructure your payments
Now let’s dig into the execution. Dave Ramsay, the author of the Seven Baby Steps Formula, suggests that people refinance into a 15 year mortgage as the best way to pay off your loan and save all that interest. And for some that is a great option. However there are ways to achieve effectively the same result. Here are 3 potential options.
- Option 1: Refinance into a 15 year mortgage.
- Option 2: Keep your 30 mortgage but simply double your payments. Make sure that your loan servicer applies these extra payment amounts directly to the principal.
- Option 3: A hybrid approach – change your payment habits
- Set up your payments on bi-monthly auto-pay. With bi-monthly drafts, they will take half of your total monthly mortgage payment out of your account every other week. They will do this 26 times in a year … so, they’ll be making 1 extra monthly mortgage payment for you each year.
- Round up! Depending on your financial situation, round up to the next highest round number. For example, if your monthly mortgage payment is $1,827.36 … round up to $1,900. Make sure the mortgage servicer adds the extra money towards principal reduction!
- Make 1 additional monthly mortgage payment on your own each year. You’ll do this directly with the mortgage servicing company, not the company that you set up your auto-payments with. Make sure they know to apply this amount to principal reduction, as well.
As with all our advice make sure to talk with a professional about mortgage your options and see what scenario is best for your situation. These are merely general suggestions but everyone is unique and might have a slightly different scenario that needs to be accounted for. Feel free to reach out to me directly to get in touch with one of our trusted mortgage partners and build a game plan today.
Step 3: Stay consistent and don’t get distracted
In the path to financial freedom it can get hard at times to fall off the bandwagon and stay consistent. Most get rich quick schemes and real estate investing gurus paint a picture of building wealth as this fast past action movie that is high style and highly entertaining. The reality is that building wealth is not fast paced, and can actually be very boring.
The key to financial freedom is a very simple formula that many of us overcomplicate. Have a plan and stick with that plan long enough to achieve a goal. That’s it. These 7 steps to financial freedom give you a plan, a roadmap to achieve your goal. It’s up to you to be diligent and stick with it long to reach the finish line. Picture the day you become mortgage free and truly “own” your home. What will you do to celebrate?