Paying your mortgage: something you do every month for decades of your life.
It’s great to be able to be a homeowner, but wouldn’t it be even better to live without that mortgage hanging over your head?
If you’ve decided you want to pay off your mortgage early, you’ve come to the right place.
4 Tips To Pay Off Your Mortgage Early
I’m going to start from scratch here, just in case there are people reading who are new to the wonderful world of budgeting and saving. I’ll get to the in-depth stuff too, but these first steps are just as important.
1. Create a Personalized Budget
A good mortgage payoff plan always starts with a personalized budget. The more control you have over how you manage your money, the more extra cash you’ll find to whittle that mortgage balance down.
Use the Clark Method to Creating a Monthly Budget and determine your monthly expenses vs. your monthly income.
There are budgeting apps you can use as well, but I’m a big fan of a simple budget spreadsheet. In fact, I still write my budget out on a piece of notebook paper every month.
The budgeting method you use isn’t as important as ensuring that you are, in fact, using a budget.
Use it to get a good handle on your monthly income and expenses. Then you’ll find the extra cash you need to pay off that mortgage ASAP.
2. Determine Your Cash Surplus
Now that you’ve created a working budget, look at the amount of money that’s left over after you pay your expenses. This money is called your monthly cash surplus.
And it’s the ticket to mortgage payoff success. Instead of using that monthly cash surplus to do something “fun,” use it to pay down your mortgage faster.
While you may be hemming and hawing at not having as much money to blow right now, I promise you’ll appreciate your own sacrifice when that mortgage is gone.
Keep in mind that using your budget surplus to pay down your mortgage is only temporary. When the mortgage is gone, you can go right back to spending that cash on other stuff.
Note: Have you found that there isn’t any cash surplus after you’ve created your budget? These next two tips will help you find some.
3. Use “Found Money” To Speed Up the Process
Your mortgage balance will likely drop pretty quickly if you use most or all of your monthly cash surplus to make extra principal payments on your mortgage.
However, if you use other surprise or “found” money to make even bigger principal payments each month, you’ll really knock that mortgage out quickly.
“Found money” is any money you never expected to have in the first place such as:
- Overtime hours at work
- Side hustle income
- Tax returns
- Work bonuses
- Monetary gifts
- Money from selling items you already own
As you can by this list, you can actually create “found money” if you want to. You can scour your storage areas for items to sell. You can ask for overtime hours at work.
Or you can combine several ideas to make extra money each month. Do what you need to do to gather up extra money for your cash surplus, then start socking that money toward extra principal payments on your mortgage.
4. Trim Your Budget
An additional way to earn more cash to put toward your mortgage payoff is to trim your current budget. When you read that line you may be thinking “I don’t have any place I can trim my current budget.”
And maybe you don’t. However, the truth of the matter is that most everyone spends money each month on at least some things they don’t need.
Maybe it’s daily latte runs. Or frequent fast-food drive-thru trips or restaurant takeout meals. What about the money you spend at the big box store simply because you find items you like or because you find a “good deal”?
Scour your budget to see if you can implement any of these tips to increase your cash surplus:
- Cut the cord and drop your cable or satellite package in exchange for a live TV streaming service. You can even get your monthly TV bill down to $0 if you use a free streaming service or antenna.
- Drop recurring payments for goods or services you use infrequently such as gym memberships or magazine subscriptions. Work out at home and read articles on free online websites.
- Take a hiatus from eating out and start cooking more meals at home.
- Plan at-home games or movie nights with your friends instead of hitting the bars.
- Go on a clothes shopping ban and wear what’s in your closet for a year.
- Trim salon expenses by doing manicures, pedicures, and hair colors at home.
With a little ingenuity and self-sacrifice, you’re almost sure to find some extra cash in your budget for your early mortgage payoff goal.
Next, let’s talk about setting a timeline date for your mortgage payoff.
Determine Your Timeline for Extra Motivation
You can focus on the four steps above and celebrate when the mortgage is gone. But it may help you to have a goal achievement date in mind.
The simplest way to choose your goal achievement date is to determine your mortgage payoff date using a mortgage amortization calculator. Money expert Clark Howard says every homeowner should use one.
“Every homeowner with a mortgage should print out an amortization schedule to track the exact progress of their mortgage,” Clark says. “They’re free and easy to find online.”
You can choose your mortgage payoff date by deciding on the dollar amount of extra principal payments you want to make. Or you can choose the date and let that date determine how much extra you’ll pay on your mortgage each month.
Here are some examples.
Let’s say you owe $250,000 on your mortgage. You’ve got 25 years left on your 30-year mortgage and your interest rate is 4.0%. Your current principal and interest payment is $1319.59.
If you decide you can afford to increase your principal payment by $200 per month ($1519.09), you’ll have your mortgage paid off in just under 20 years.
Now let’s look at it another way. Let’s say you’ve decided you want to be mortgage free in 15 years, regardless of the cost.
Using the same scenario, you’d need to pay extra principal payments of roughly $530 per month in order to have the mortgage paid off in 15 years, shaving 10 years off the life of your mortgage.
Your job is to figure out what combination of the above four steps you’ll take to come up with an additional $530 per month to put toward that mortgage payment.
Using a mortgage amortization calculator like the one above to determine your goal date can be a great way to give yourself extra motivation along the way.
But should you even be considering paying off your mortgage early? Aren’t there better ways to manage your money?
Should I Pay Off My Mortgage Early?
You might be wondering if you should bother paying off your mortgage early. After all, many personal finance experts advise against doing so.
Why? Because you can often earn a higher interest rate on your investments than what you’re paying on your mortgage. This is especially true in today’s world where mortgage rates are hovering around 3%.
While it’s true that the money you would earn by investing your cash surplus would likely outweigh the money you’d save by paying off your mortgage early, it’s important to consider a couple of things.
Downward Market Swings Do Happen
Investing experts will tell you that during the lifetime of the stock market, the market earns average annual returns of anywhere between 8% and 11%.
That news alone may make you ditch your plan to pay off your mortgage early and use your cash surplus to invest in mutual funds.
But consider this: downward market swings do happen whereas the money you’ll “earn” by paying off your mortgage is a sure bet.
And while the interest you’ll save probably isn’t in the 8-11% range, it’s still a 100% guaranteed return. And if the market happens to be in a huge downturn when you need to pull an investment, you could end up losing money.
That’s a longshot bet against the market, I know. But there’s another reason you may want to consider paying off your mortgage even though you could earn more by investing.
Having No Mortgage Payment Equals Freedom
Aside from the fact that the grass under your feet really does feel different when you own your house outright, remember this:
Paying off your mortgage increases your cash surplus in a big way. Without your mortgage payment, you’ve now got an extra $1,300, $1,500, or $1,800 a month at your fingertips.
This freed up cash can offer you several benefits:
- Giving you more money each month to put towards retirement savings, non-retirement savings, or college costs for your kids.
- Making room for fun purchases such as travel, home improvements, or a dream purchase such as a boat.
- Giving you an income pad so you can take that lesser-paying “dream job.”
- Giving you more freedom to move where you want, when you want.
The less money you owe each month, the more freedom you have, plain and simple. And you might just find that freedom well worth making those extra mortgage payments for a few years.
If you’ve decided you want to be free of your mortgage payment, using the four steps listed here will help you do that.
And those who have taken the plunge typically find the efforts well worth the benefits.
Be sure to let us know how that grass feels under your feet when you’ve achieved your goal!