4 Easy Ways to Pay Your Mortgage Off Early
August 16, 2013One of the things that I’ve grown to believe in more and more as I talk to people who are nearing retirement and hitting the panic button about their ability to fund their retirement lifestyle is that retiring debt-free is the only way I want to retire. I’ve always been debt-averse, but as I help people look at their financial lives and their ability to live the lives they want in retirement, the more clear the vision I have for myself is becoming. I have seen people with near identical incomes, 401(k) balances, pensions, and Social Security estimates have completely different views on retirement. The #1 reason for those views is their mortgage payment.
It doesn’t take a financial planner to figure this out, but those who retire with a completely paid off mortgage are going to fare a whole lot better than those with mortgages. Savings and investments can stretch a lot further if there isn’t a recurring debt that requires funding. So, if you want to get rid of your mortgage prior to retiring what can you do? Here are a few ways that people I’ve met with have gotten rid of their mortgages. I figure: let’s learn lessons from those who have actually accomplished their goal of being 100% debt free in retirement.
Refinance to a lower rate and pay the same amount as today’s mortgage. This usually ends up with an extra $100-$200/month being added to principal payments and can shave years off of the back end of the mortgage. A lot of times this can translate into a 30 year mortgage being paid off in 15-20 years and sooner if larger additional principal payments fit into your budget.
Refinance to a shorter term, like a 15 or 20 year mortgage. I’ve talked to a lot of couples who didn’t know mortgages shorter than 30 years existed. They do!
In fact, I met with someone today who refinanced to a 15 year mortgage and her rate was so much lower than her prior 6.5% mortgage (in the low 3% range) that by shortening to a 15 year mortgage at that rate, her payment actually dropped by $20/month. She’s going to pay a bit more than her prior mortgage and try to get it paid off in 10 years. Coincidentally, her retirement target is 10 years out. Maybe that’s not such a coincidence?
Pay half of your mortgage payment every 2 weeks. With many companies paying employees every 2 weeks, getting into a biweekly payment plan (26 times / year) translates into making 13 monthly payments in a year. That extra monthly payment shaves 6-8 years off of the back end of a 30 year mortgage and saves tens of thousands of dollars in interest over the life of the loan. If you want to look into this option, contact your existing mortgage lender to see if they offer this program. It’s becoming more popular every year, so many lenders are adopting this as a convenience for their customers.
Pay $1 more each month. This is the newest trend I’m seeing. I first heard of people doing this maybe a year or two ago and now I’m starting to see it gain momentum. Here’s how it works. If your mortgage payment is $1,000, you would pay $1,000 this month. Next month pay $1,001. The month after that pay $1,002, then $1,003 and so on until the mortgage is paid off.
We can all find $1 in our budget over the course of a month, right? When I first ran that concept through an Excel spreadsheet I was blown away by the power of $1. I still am.
A lot of life’s financial successes and failures don’t happen in big chunks. It’s a slow path toward success or failure. What happens in tiny little increments so often determines what the future will look like. You can make small changes now that can have a significant impact in the future. Whether you decide to pay $1/month more, pay bimonthly or refinance and shave years off the mortgage, you can do it with minimal effort and it won’t seem incredibly painful.
Yet, the results can be magical. Picture your retired self in a home with no mortgage and enjoying all that you worked hard to accomplish. With a few small changes today, that vision can become your reality.