In Berks County, I find a disproportionate percentage of people who laser beam on getting rid of their mortgage — sometimes at great expense to other goals. In my last post I covered When Paying your Mortgage Early Doesn’t Pay Off! In this article I’ll cover ways to balance paying your mortgage early without shorting your lifelong financial well-being.
If you’re like most of my clients, you’ve got many goals to accomplish in your life. Here are the 10 general categories I mostly hear.
- Pay all my bills and have a little extra
- Get my kids through school and out on their own
- Be prepared for an emergency
- Be prepared for job loss or business downturn
- Save enough for my retirement (And can you make it happen next week?)
- Protect my family against catastrophic loss
- Get out and stay out of debt
- Create an independent source of income besides my J.O.B.
- Have some fun along the way
- Leave a legacy (not always money) to my family and community
To accomplish all of these, you need an integrated plan, one that keeps all your goals in balance and helps you catch up on any areas woefully behind. That’s my job as a financial advisor – keeping all your goals moving forward in balance while matching timeframes so you don’t run short.
So here’s a list of simple ways to pay off your mortgage early without jeopardizing the rest of your goals:
Double the Principle. A $150,000 loan at 4% for 30 years has a payment of $716/month. The first month’s principle is $216.13. Simply add an extra $216 to your payment and it essentially pays two months of loan, since month two is only about 70 cents more in principle payment. You’ll pay off your mortgage in ½ the time because in month one you’ve made two months of payments so in month 2 you are making the payments of months 3 and 4. Of course over time your payments get bigger, but it’s not until year 15 that the principle portion of payment exceeds $400.
Bi-weekly Payments. If you get paid every two weeks, it is easy to pay your mortgage on that same schedule and level out your expenses. Over the course of each year you’d make 1 extra payment, ½ in week 15 and the other half in week 26. On the normal monthly payment schedule, you’d pay 30 years (360 payments) and pay $107,802 in interest payments. Paying semi-monthly, you’d be done with your mortgage in 310 months or a little more than 4 years earlier and save $16,960 in interest payments.
The Best Gift That’s Not Stuff. For the person who has everything, why not make an extra mortgage payment each year on your birthday? Or maybe your Christmas present? Or when you get your tax refund? You’d also get your mortgage paid in 312 months (4 years early), and save $16,105.
Rounding up to the next $100. Some people like writing checks for even numbers; it makes their checkbook math easier. That would be $84 per month extra principle. You’d be done paying in 22 years and save $32, 270 in interest.
One Third of your Bonus. My clients who get bonuses (or any ‘surprise’ money) are honor bound to use my 1/3, 1/3, 1/3 plan. Basically any bonus you get is 1/3 your play money for anything you want, 1/3 to debt, and 1/3 to savings. There are 4 benefits to this plan:
- You pay your mortgage faster
- You get further along on your retirement path
- You get to do something FUN
- Since most people SPEND 130% of their bonus, it cuts down on that overspending factor.
For example, if your bonus was $5000 each year, you’d pay $1666 once a year against your mortgage. You’d also get to put $1666 towards whatever your idea of FUN is. And best of all your mortgage would be paid off in 22 years and 2 months, saving you $31,083 in interest.
Each of these methods will pay off your mortgage years earlier and leave money for your other goals without breaking the bank or subjecting you to a diet of spaghetti.
I’ve got dozens of tailored ways to grow your business, stash cash into your goals, take control of your lifelong financial plan, and get to financial freedom.
Note: Most calculations verified through decisionaide.com/calculators which is in no way affiliated with LPL Financial.