How To Pay Off Your Mortgage Early

by Derek Clark

First I’d like to touch on why you might want to pay off the mortgage early. Elle from Couple Money recently wrote about accelerating their mortgage payments to save money. It is a great idea, and I thought I’d add a few ideas and tips of my own. Here is her simple plan and the impressive results that will go with it:

If we continue to pay $150/month extra towards principle, our 30 year mortgage will become a 20 year mortgage. That means we’ll save $42,408.57 in interest payments!
If we continue to pay $150/month extra towards principle and put down our $8,000 tax credit, our 30 year mortgage becomes a 18 year mortgage. That means we’ll save $55,113.56 in interest payments!

Some people will argue that you should keep the mortgage for the tax savings and invest, but saving 40 to 50 thousand dollars in interest and 10 to 12 years of bondage sounds like a pretty good argument for paying off the house. Assuming you are in the 25% tax bracket, arguing for tax savings means you think it is a good idea to give the bank a dollar to save 25 cents in taxes. Just pay off the loan, it will work out better for you.

The other argument that people make is that you can make more money investing than you pay in interest. I’d like to remind them of a few things. First, the last 10 years the stock market has been basically even. Sure you could have made money, but it isn’t a guarantee, and when you have to beat that 4-6% interest you are paying to the bank it is even harder. Even with the tax break from the deductible interest, it is still hard to make this work.

Keep in mind that unless it is in some sort of tax advantaged account, you would have to pay taxes on any gains as well. Very few people will recommend borrowing money to invest, but that is effectively what you are doing if you invest instead of paying off the mortgage early.

Cut 7 Years Off Your Mortgage With Bi-Weekly Payments

Many people get paid weekly or bi-weekly. If you are one of these people you probably plan your budget based on either 4 or 2 paychecks a month. However, 2 months out of the year you are going to have an extra paycheck as there are 52 weeks, or 26 2 week periods in a year.

Instead of just pretending you hit the jackpot during those special months, plan to pay your mortgage payments in every four week period. Doing this results in 13 payments instead of 12. You probably won’t even notice the difference, but it will cut seven years off of life of your mortgage, and save you lots of interest.

Some banks will even let you pay half a mortgage payment every two weeks to make this even easier. Make sure that they don’t charge you for it though. Some try and make you pay a fee to do this. If that is the case with your bank, just pay extra with each regular payment.

If you get paid monthly, or bi-monthly, this doesn’t really help. You are just going to have to suck it up and pay a little extra each time. Take your mortgage payment and divide it by 12. With a $1000 mortgage each month, you only have to add about 83 dollars to each payment to have the same effect. It is a little extra coming out of the budget each month, but it will be worth it when you get to say “I’m debt free” that much sooner.

If you are following Dave Ramsey’s Plan and are onto Baby Step 6, you definitely want to pay extra on the house. When my wife and I get to step 6, we are planning on putting as much we can on the house. I have a personal goal to have it paid off by the time I’m 30. Today is my 25th birthday, so I’ve got 5 years to really be gazelle intense. I’ll be sure to keep you updated.

By the way, tomorrow is the last day in my Total Money Makeover Giveaway, if you haven’t entered yet check it out here and sign up to win your copy.

{ 19 comments… read them below or add one }

Dee | Payoff Your Mortgage Early March 25, 2010 at 11:50 am

Great article, but did you know there’s a free informational ebook and video that explains how to payoff your mortgage in 90 days? It’s great information and a helpful tool to get yourself out of debt.

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Jeff March 25, 2010 at 12:04 pm

Great points for paying the mortgage off early. I’ll be working on my mortgage after I’m out of debt. Somehow I don’t think the video above in the comment is going to help 🙂 Hard work is the only way to get there.
P.S. great guest post today at BMM.

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Derek Clark March 25, 2010 at 12:17 pm

Thanks so much. Hard work is definitely the way to go 🙂

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Derek Clark March 25, 2010 at 12:06 pm

I’m sorry Dee, but I don’t believe you. The only way for me to pay off my mortgage is to have about 130 grand. That isn’t happening in the next 90 days no matter what is in the book.

Everyone else, things that look to good to be true usually are.

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Deacon Bradley March 25, 2010 at 2:30 pm

Great tips! How long have you been on Step-6? I’ve been working on it for about 6 months and it’s hard to balance the extra payments with regular house things that need to get done. Maintaining this focus for years will be a fun, but probably tough battle! keep it up!

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Derek Clark March 25, 2010 at 3:03 pm

@Deacon

I’m actually not quite there yet. I’ll be starting step 6 a few months from now. These are just part of plan 🙂

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Joe Plemon March 26, 2010 at 7:22 am

Derek,
Thanks for keeping this discussion common sense. After all, that is part of your blog name isn’t it? 🙂

There is no “magic” in making payments every two weeks. It works, like you said, because you make 26 payments instead of 24 every year. But 7 years early is pretty impressive!

About 90 days…you handled that one well.

We have a paid for house, but we didn’t get there until we were in our late 50s. You are way ahead of the game…nearly on Baby Step 6! Congrats!

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Derek Clark March 26, 2010 at 7:50 am

Thanks Joe. There definitely isn’t any magic, just a little common sense. It’s just so uncommon these days though.

Congrats on the paid for house, I know plenty of people who haven’t made it there past 50’s. I can’t wait, the level of freedom not owing anyone anything just sounds really awesome.

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Kelly March 28, 2010 at 12:07 pm

Great post on PRACTICAL solutions to paying off your mortgage early. We’re still plugging away at our credit card and other debt, but I will definitely follow this advice when we are ready to tackle the mortgage.

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Money Reasons March 28, 2010 at 3:50 pm

I paid off my house in February by making with extra payments. It took me about 10 years.

For my family (and I bet Elle too), the tax treatment doesn’t really affect us much, because the standard deduction is so high. We and don’t have much to itemize…

It made sense for me because my initial interest rate on the mortgage was almost 7%, I don’t know if I would do the same today, especially if you can get a 5% interest rate.

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Derek Clark March 28, 2010 at 4:28 pm

@Money Reasons
That’s awesome, congratulations. I can’t wait for that moment of financial freedom when I don’t owe anybody anything.

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IndianaTeacher April 5, 2010 at 6:17 pm

Good article. I paid off my house at age 40. (That was my goal.) I took out a 15-year mortgage and paid it off in seven years and two months. We don’t have car loans either (pay cash). I love life without payments.

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Derek Clark April 5, 2010 at 7:32 pm

@IndianaTeacher
That’s awesome. Congrats. I hope to be able to do something very similar myself.

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IndianaTeacher April 5, 2010 at 7:39 pm

@Derek Clark

You will – if you make it a goal and stick with it. 🙂

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Diane April 19, 2010 at 10:41 pm

Hi Derek,
I followed the link from ERE. You handled Dee’s comment beautifully. I was momentarily tempted to follow her link to see what kind of site it really was…thanks for saving me the trouble.
I’d say that I had the same mind set as you when I was 25. I had more than a year’s salary in the bank. I didn’t start a 401k or Roth because I knew I was going to use the money for a down payment. Fast forward (more years than I care to say). I’m on my fourth house and have over 50% equity in my home and close to that on a rental. HOWEVER, now that I am older and saving like mad for retirement, I regret the lost years of compounding opportunity. I wish I had put more of that money into retirement savings when I was as young as you are.

Oops! This next part is going to be long, but hopefully worth it.

Two very important things I wish I’d known then: First, (I’m paraphrasing and run-on here, but please bear with me.) if a 20- something person saves 1K/year for each of 10 years in a tax protected account and leaves it to compound until age 65, he/she will have more money in the end than a person who waits for ten years (until they’re 30-something) and puts 1K a year away in the same type account EVERY SINGLE YEAR until they turn 65!!!! Compound interest is a wonderful thing. Just ask Einstein.
Next, before you prepay a penny, read and understand Ric Edelman’s fine discourse on why and how a big, long mortgage can not only be an excellent investment tool, it can save your hide if/when you hit one of life’s rough patches. You can find it on his web site or read the first chapter of “Ordinary People, Extraordinary Wealth”. You are free to handle your mortgage any way you wish (I love this country!), but do yourself a favor and study both sides of the coin before you call the toss. That way, you’ll have nothing to regret later.

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Derek Clark April 20, 2010 at 11:38 am

@Diane
Thanks so much for the comment. I have looked at the other side and I definitely go back and forth sometimes. I do plan on putting some money away towards retirement, but I think the majority is going to go to the mortgage.

3 reasons.
1. Paying off the mortgage means significantly less expenses each month. This means that it would take less money to retire. I don’t plan on waiting until I’m 60, and the lower our expenses are the less money I’ll need to retire.

2. If I pay off the mortgage I have about 1k a month, or 12k a year extra that could fund retirement. If you start 5 years later, but put 12k instead of 1k, I’m pretty sure you come out ahead by waiting.

3. Peace of mind. I want to have as few obligations as possible. If you have the house paid off it isn’t going to get foreclosed if you lose a job or have some big medical expenses. Having a place to live with no payments means much less stress.

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Ellen April 20, 2010 at 3:27 pm

We are currently on baby step six. We bought our first house in June 2009 and are working feverishly to pay it off by December 2012. We are currently 29 years old. Our dream is for me to be able to stay home with our (future) children. The only way that we could figure out for that to happen AND be able ot save an appropriate amount for retirement was to get rid of the mortgage. We will be paying about $7,000 in interest on our mortgage, as opposed to $70K in interest if we kept it for all 30 years.

Getting rid of our mortgage will net us $450 each month after it is paid off, and that will all go towards our Roth IRAs.

Great post, as usual!

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Derek Clark April 20, 2010 at 5:26 pm

That’s awesome Ellen. We are going to be debt free except the mortgage next month, then after the emergency fund we’ll be working hard on the mortgage. We hope to have it paid off before I’m thirty (a little less than 5 years).

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John March 23, 2011 at 5:09 pm

Paying off the mortgage early is the best thing we ever done. Aside from having extra money to spend or save you don’t have to worry about having a place to live if, heaven forbid, you loose you job. We’ve did it twice already and are working on paying off our retirement home early, hopefully for the last time. If you have a car payment, pay it off early too. Being debt free is a good feeling.

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