by Christy Bieber | Updated July 19, 2021 - First published on Sept. 1, 2020
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Here's how we're paying off our mortgage 13 years ahead of schedule.
In 2010, my husband and I took out a 30-year mortgage to build a home. But rather than having our home paid off in 2040, we're on track to make our last mortgage payment in 2027. A little quick math will tell you that's 13 years ahead of schedule.
Becoming debt-free sooner will give us a lot more freedom and flexibility in what we do with our money. We'll also save many thousands of dollars in interest. Here are the four steps we've already taken, or are currently taking, to make this possible.
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A low mortgage interest rate is key to paying your loan off ahead of schedule, as it means more of each payment you make goes toward the principal. So from the time we first got our mortgage, we've done everything we could to keep our mortgage rate as low as possible.
This meant we shopped around with lots of different mortgage lenders, comparing banks, online lenders, and credit unions. We've also refinanced our home loan three times since 2010, dropping our rate each time.
On two of the three refinances, we opted for an adjustable-rate mortgage (ARM), because it provided a substantially lower starting rate. ARMs are risky loans, because -- unlike fixed-rate mortgages -- the rate can go up after a period of time. But we were willing and able to take this risk, because we made a large down payment on our home, so we knew we wouldn't end up underwater and could refinance if we had to. We also checked to make sure we could afford the maximum payment even if rates went up and we somehow got stuck with our loan.
We started with a 4.10% rate on a 5/1 ARM in 2010, which we refinanced down to 3.75% for a 7/1 ARM, and finally down to 3.125% for a 15-year fixed-rate mortgage. Note that it normally doesn't make a lot of sense to refinance unless you're dropping your rate by a little more. But in the case of our first refinance, we were nearing the end of our five years and our initial rate was going to start adjusting. In the case of our second, we switched from an adjustable-rate to a fixed-rate loan at a lower rate.
Of course, if rates for a 15-year loan drop much further, we may very well be refinancing again soon.
Fifteen-year mortgage rates are generally well below the rates on 30-year loans, even if you opt for a 30-year adjustable-rate mortgage. Unfortunately, the payments are much higher, which makes sense, since you're paying off your loan in half the time. That meant that we weren't eligible for a 15-year loan when we first secured our mortgage.
By the time we refinanced for a third time, our incomes had risen and we'd paid down more of our principal. This allowed us to qualify for a 15-year fixed-rate loan and score the lowest possible rate. Since we refinanced into our 15-year loan just eight years after purchasing our home, this move alone would've shortened our repayment time to 23 years, down from the original 30.
Refinancing into a 15-year loan isn't for everyone. You're committing to higher payments, which means there's an opportunity cost. You can't use the money for other things, such as investing for retirement. It may not even be the smartest financial move, since the return-on-investment associated with paying your mortgage is simply the interest you save, while you could invest in an S&P 500 index fund and earn around a 7% average annual return.
However, there's a psychological benefit associated with being debt-free, which was important to us. And we made sure we were able to contribute a comfortable amount to our retirement accounts while still making the higher monthly mortgage payments on the 15-year loan.
Although paying off our loan seven years ahead of schedule by refinancing to the 15-year loan would've been great, we'll actually be paying it off 13 years early. That's because we've been making extra mortgage payments from the beginning and will continue to do so.
By paying extra each month, we've paid the principal down much faster. Each time we refinanced, our loan balance was much lower than it would've been otherwise. And we're continuing to make extra payments on our new 15-year loan so we can pay it off by 2027, or earlier.
There are lots of different ways to make extra payments. We've just opted to include more money every month, while being sure to note the extra should go to paying down principal. You could also make biweekly payments to make the equivalent of an extra monthly payment each year.
Sometimes we pay even more than our scheduled extra payments.
At one of my jobs, there are some months when I get a performance-based bonus. I never know how much this will be, or even if I'll receive it at all. So we don't consider that money to be part of our normal monthly income when we make our budget. Because of that, when it does come, it's "extra" we can pay towards our mortgage loan.
Using extra or unexpected funds to pay down your mortgage can be a great way to reduce your balance quickly, as you'll be able to pay down your principal much faster.
There's an opportunity cost associated with paying off your mortgage early, just there is if you opt for a 15-year mortgage instead of a 30-year one. The extra money we put toward our mortgage payments could instead have gone into retirement savings, for example. But for us, it's the right move, because we aren't compromising other financial goals, and becoming debt-free is important to us.
If you're also eager to repay your mortgage ahead of schedule, perhaps these tips can help you to do the same.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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