As a Realtor, I believe that purchasing a home can be one of the most advantageous personal financial decisions that anyone can make.
Home ownership can be an aid to household stability, financial security, and wealth building for you and your family.
If it is done properly, that is.
Your home is both where you live and an investment in real estate.
I am a huge fan of paying cash for all real estate. For most people though, it is necessary to borrow money to pay for their first house.
That’s ok, but if you really want your home to act as a productive financial investment, you will make certain to pay it off as quickly as possible in order to minimize interest and other fees.
Most people don’t realize just how insidious even home loan interest can be.
Imagine the freedom and financial opportunities you would have with NO MORTGAGE PAYMENT.
It’s actually a goal that can be achieved in a relatively short time, if you stay focused and employ some smart, intentional strategies.
Paying off your mortgage early can result in absolutely enormous savings and set your family up to win big financially in the long run.
I want to show you how to maximize this opportunity.
Shorten the Term and Save Big
For a point of reference, if you were to finance a home with a $200,000, 30-year mortgage at 5% interest and make each of the 360 monthly payments on time, you would end up paying back a total of $386,510.41!
That’s $186,510.40 in interest alone. That doesn’t even include taxes and mandatory insurance associated with your loan and included with your payment.
On the other hand, that same loan on a 15-year plan (180 payments) will result in a total payback of only $284,685.46.
That’s more than a $100,000 savings! ($84,685.46 in interest vs. $186,510.40).
As you can see, paying off the loan more quickly can make a substantial difference in your total payback amount.
What’s more interesting though, is that while a 15-year loan is only half as long as a 30-year and results in substantially less than half the interest charged, the monthly payment for a 15-year loan is not double that of a 30-year as you might expect.
In fact, it’s only about 50% more.
For the above loan, the monthly payment on the 30-year would be $1,073.64 but for the 15-year it would only be $1,581.59.
That additional $507.95 per month saves you 15 years and $101,827.76 in interest!
If you are purchasing a home or plan to refinance soon, opting for the 15-year vs. the 30 can provide HUGE savings. As a bonus, generally interest rates are better on a 15-year loan as well.
Even if you are already locked into a 30-year loan though, there are several additional simple strategies for minimizing interest and paying off your mortgage debt FAST!
#1- Refinance
Recently (as of August 2020), prime mortgage rates have dipped below 3%, rivaling all-time lows. Refinancing could save you thousands per year if your rate is a few years old.
In our example mortgage above of $200,000, merely refinancing from a 5% rate down to a 3% rate would save $82,958.64 in interest over the course of a 30-year loan or $2,765 per year.
There are normally closing costs associated with a refinance though, so you’ll need to make sure that the savings you receive from your lower interest rate justifies the refinance expense.
Closing costs are the fees the mortgage company will charge up front for the administrative work associated with issuing a new mortgage loan.
You will need to determine how quickly the savings you experience after lowering you interest rate will allow you to recoup the money spent on closing costs for the refinance.
You can do this with a simple break-even analysis.
The formula looks like this:
Closing costs/annual savings = amount of time to break even.
In the above if example, if it’s going to cost you $5,000 to refinance but you will save $2,765 per year in interest, then it will take less than two years to break even.
If you plan to stay in your home for at least two years, it makes since to refinance.
Remember though, if you want to make financial progress, refinance to get a better interest rate not just a lower payment.
A lower rate means that you are saving money on interest and will have more freed up to throw at the principal of your loan.
#2- Drop the PMI
PMI stands for private mortgage insurance.
It’s insurance that your lender requires you to purchase but it protects them. It provides no personal benefit or protection to you as the borrower, so you will want it dropped as soon as possible.
PMI can range anywhere from .5% to 1% of your loan balance. In other words, on our $200,000 loan example, it could be costing you $2000 each year!
Typically, if your mortgage balance is less than 80 percent of your home value, you will be able to have this cancelled.
Check with your loan servicer to determine what would need to be done to make this happen. In some cases, it is necessary to have an appraisal of your home. This may cost $400-500.
If dropping the PMI saves you hundreds of dollars per month though, it’s a no-brainer.
Remember to reroute that monthly savings to principal reduction to help payoff the mortgage faster.
#3- Make an Extra Payment
It’s hard to believe how even small, additional principal payments can significantly reduce both the term and interest on mortgage loans.
In our above example, just one extra monthly payment per year pays off the loan nearly 5 years early and saves $34,092.68 in interest! That’s less than $90 per month extra!
The simple truth is that mortgages are designed by lenders to keep you in debt a very long time. They want to ensure that payments keep flowing from you to them perpetually.
But you have a lot of weapons at your disposal for escaping this cycle and catapulting your family toward financial freedom.
There’s no way around it, extra principal payments are the ultimate solution.
Imagine if you were to employ all the strategies which we have outlined – shorten your term from a 30-year to a 15-year, reduce you interest rate, eliminate unnecessary PMI, and use all of that savings to throw large payments at principal.
All of the sudden, 30 years of mortgage bondage looks a lot more like 7-10 years until freedom.
And once the mortgage is eliminated, not only do you have a paid-for house (less risk, more stability), but that monthly payment is now freed up to build wealth for you family.
As of 2018, the average house payment in America was $1029. That amount invested every month will make your family financially independent VERY quickly.
What can you do without a mortgage? Just about anything you want.
And that freedom is the ultimate financial goal.
