My wife and I purchased a home in 2013 with a $417,000 30-year fixed rate 4.625% mortgage. I paid it off in 2020 23 years ahead of schedule and saved about $250,000 in interest.
Owning a home without monthly payments gives you great peace of mind. There’s a lot of “sleep at night” value in not worrying about these payments. Even if I lose my job or lose my stock market tank, our haven is safe.
Of course, what worked for us may not be an option for everyone. And it certainly took some thoughtful sacrifices on our part to make that happen. But if you can change that, here’s what you get beyond these restful sleeps.
Let’s crunch the numbers
While the savings seem impressive, many financial experts would argue against our decision mathematically, pointing out that 4.625% is a relatively low borrowing cost. Some may say that instead of paying off the mortgage early, they should have invested the extra money in the stock market, which has historically returned an average of about 10% a year.
But besides peace of mind (which is quite a thing), opportunity calculations work better than some people think. Consider that we can now afford to take more risks with our investments. My wife and I are in our early 40s and our retirement plans are 100% invested in stocks. Conventional wisdom says that your stock allocation should be 100% minus your age, or perhaps 110% minus your age given that people are living longer these days. Under that guidance, you should invest about 60% to 70% in stocks and the rest in safer instruments like bonds and cash.
But with the mortgage paid off and a good deal of risk removed from other parts of our financial life, we can put the pedal to the metal with a riskier (and, hopefully, more profitable) equity allocation. Stock markets are inherently risky in the short term, but historically beneficial in the long term. You can lose money in stocks today, this month, or even this year, but over a 10-year period, you’re almost guaranteed to win.
Being mortgage-free not only has long-term benefits, but also means you have more freedom to spend on short-term opportunities, such as travel or after-school activities for your kids. You probably won’t be able to do all of these things if you still have a large mortgage payment left each month.
Finally, because our housing is secure, we can make do with a small emergency savings fund, which can then be redirected to other long- and short-term opportunities. The standard advice is to have 3-6 months worth of expenses in the bank. Without monthly mortgage principal and interest payments of $2,000 or more, you’ll have $6,000 to $12,000 less to put into your rainy day fund.
Hidden costs of homeownership still exist
Of course, housing costs are not completely free. First, there is the pesky issue of property taxes. We live in a New York suburb where property taxes are high (about $20,000 a year, or an average of about $1,667 a month). You also pay about $2,800 per year ($233 per month) in homeowners insurance. And then there are the inevitable maintenance issues. For example, this winter we needed thousands of dollars worth of plumbing and heating repairs, as well as a new dryer.
There are hidden costs to homeownership, so even if you pay off your mortgage, buying a home isn’t completely free. Still, doing so left more room in my monthly budget for other costs of homeownership. If we had kept our 30-year mortgage, we would have paid $2,144 a month in principal and interest, plus about $1,900 in property taxes and homeowners insurance, for a total monthly housing cost of about $4,000 (not including variable costs like maintenance and repairs).
By eliminating my mortgage, my monthly housing payment was cut in half. It’s like living in the New York City area while paying the cost of housing in a more affordable town in the South or Midwest.
So, how exactly were you able to pay off your mortgage early?
We were fortunate to be in a position to pay off our mortgage quickly. A milestone occurred in 2017 when Bankrate was acquired, accelerating the vesting of several years’ worth of stock options. I used most of that money to refinance my mortgage.
In the lesser-known recast of refinancing, you repay the mortgage principal in one lump sum, and the lender recalculates the remaining principal and interest fees over the existing term at the existing interest rate. I put $250,000 into my mortgage review and lowered my mortgage payment by $1,400 per month. It was a quick and easy process. I paid a one-time $250 fee and filled out a short form.
Refinancing, on the other hand, means taking out an entirely new loan. Refinancing pays off your old loan and lowers your monthly payments by switching to a product with a lower interest rate, so it’s a technique often used when mortgage rates drop.
I preferred the recast for several reasons.
- In fact, when it was reviewed in 2018, the interest rate was a little higher than the original loan.
- I didn’t want to take out another 30 year mortgage or even a 15 year mortgage and start the clock again.
- I didn’t want to deal with the huge amount of paperwork, closing costs, appraisal fees, and other hassles that come with refinancing.
In 2018, we didn’t have enough money to pay off our mortgage, but we knew we would benefit from a recast by lowering our monthly payments. I figured if I had the discipline to pay a little extra every now and then, I could pay off the rest of my mortgage principal in two to three years. For example, by putting in additional funds when you receive a tax refund or bonus. Alternatively, you could pay more when cash flow allows, including the idea of trying to continue making your old payments, at least for a while, even if the recast means your payments would be $1,400 lower that month.
We couldn’t keep up with Mr. and Mrs. Jones.
There’s one thing we didn’t do. That means replacing your home with a more expensive one. Since we bought our home in 2013, our income has increased significantly (and of course, many of our expenses have increased significantly as well; with two kids, that’s to be expected). Still, you can qualify for a mortgage on a much more expensive property, at least on paper.
We have resisted that temptation. We got out of the predicament of monthly mortgage payments and have no desire to pay again. We also really love our home and have customized it in many ways over the years. Is it the most luxurious home in the most luxurious neighborhood? Not likely. But it works for us.
The math behind mortgage prepayments
If you’re attracted to the idea of getting your mortgage forgiven sooner than expected, consider this mortgage prepayment example.
Making just one extra monthly payment a year can reduce a 30-year loan to a 24-year repayment cycle.
If you borrow $400,000 for 30 years at a fixed interest rate of 6.44% (the current average according to Bankrate), your monthly principal and interest payments will be $2,513. Paying an additional $2,513 in principal each year will pay off your loan almost six years faster and save you nearly $110,000 in interest. It’s incredible, but it’s not that difficult to do.
If you get paid every two weeks, there are two months each year where you get three paychecks. Consider using some or all of that money toward your mortgage principal. You can also consider other uses for your found money, such as tax refunds, bonuses, and gifts. Taking on a side hustle is also a great way to make extra money. The same goes for looking for ways to cut expenses or squeeze additional savings out of your monthly cash flow.
conclusion
Let me be clear: paying off your mortgage early is a luxury. If your credit card debt is paying 20% interest and your mortgage is 6%, put the extra money into your credit card. If your emergency savings are dangerously low, save for a rainy day before prepaying your 30-year loan.
But if you have a little extra money now or in the future, paying off your mortgage early can provide not only tangible financial benefits, but also great peace of mind.
Have questions about managing your money? Email us at [email protected] We will be happy to assist you.