Paying off your mortgage early will forever be a debated topic between financial experts, by the masses. However, I’ll always default to a few different factors to consider when deciding whether or not to focus your efforts elsewhere. There’s a lot of different ways to look at mortgage debt—how to attack it, strategies to use, thought processes, etc. In general, let’s just look at a no-new-money strategy that can implement today to be that much closer to your debt free day, tomorrow.
1. Refinance your mortgage
Personally, when I see the word “refinance” all I really see is the concept of restructuring. Refinancing alone won’t eliminate your mortgage debt completely, but rather restructure how your mortgage debt to be more favorable. So, whether you’re using a cash-out refinance to restructure your non-mortgage debt or simply utilizing a traditional refinance to shorten the loan and get a better interest rate, really what you’re doing is restructuring your financial outlook. This is where a careful consideration of monthly cash flow should be considered and realized. If the refinance—whichever you choose (cash-out or traditional)—is beneficial to your active cash flow and helps you reach your end goal of being debt free sooner, then that’s a big win-win! However, being debt free (specifically when we look at healthy debt less than 4%) should never come at the expense of hurting cash flow, in my humble opinion. All that said, it’s important to be honest with yourself and ask yourself the real question: “does refinancing my home get me closer or further away from my goal?” If the answer is yes, great, roll with it. If the answer is no, maybe it’s time to look at the whole picture in order to find what you’re really looking for.
2. Make extra payments
This is usually where the argument among financial professionals begin. Because in one corner you’ve got your money managers that don’t want to see an extra dollar go towards anything other than investments with them. In the other corner, you’ve got the stay-at-home mommy or daddy bloggers who are almost always Dave Ramsey zealots that follow his advice as law and say “all debt is bad debt, get rid it, NOW!” My point isn’t to say either is inherently correct or inherently wrong—there’s only strategies to consider and execute. Keep in mind, most everything in finance is completely situational, so take each strategy of making an extra payment with the understanding that it may or may not fit your particular situation!
***Be sure that your lender doesn’t penalize you for paying off your mortgage early.
a. Make one extra mortgage payment each year (and do it in chunks!)
Believe it or not, making just one extra mortgage payment every year can make a significant dent in the overall balance of the loan long term. Of course, you can approach this in a number of different ways:
***Example: Let’s say that your monthly payment is $1,000 for reference.
- Add 1/12 of your monthly payment monthly ($83.33 + $1,000= $1,083.33 new monthly payment)
- Add 1/4 of your monthly every quarter ($250 + $1,000= $1,250 quarterly)
- Or just have one month where you pay $2,000 on your mortgage
b. Round up your mortgage payment
This one is fairly straight forward and would require a bit of additional math to have a clear vision of when your debt-free date is, but simply rounding up your monthly payment to the nearest $100 dollar amount is a great way to overfund your mortgage payment. Not to mention, in most cases, simply rounding up won’t break-the-monthly-bank by any means.
***Example: Your mortgage payment is $978 per month—round it up and pay $1,000. Pretty simple but certainly can be effective!
c. Dollar-a-month
I’ve actually never met someone who has implemented this strategy, but I know it exists! The dollar-a-month strategy involves adding just $1 every month, for every payment, for the duration that the balance of the loan exists.
***Example: You have a 30-year fixed interest loan at $900 per month. The first month you pay $900, the second month you pay $901, the third month you pay $902, the fourth month $903…
This strategy can actually reduce the term of your mortgage by about eight years, in most cases. However, my main concern with this particular strategy is that it's reliant on the fact that your income increases year over year, which isn’t always the case.
d. Use unexpected (and expected) income
Any time there is unexpected (or expected) funds that pass through your finances, it’s always my recommendation that you assign some sort of job to those funds. Whether it be going towards your savings or knocking out a low-balance, non-mortgage debt, even if it’s throwing it into the vacation savings fund, assign some sort of job to it. Unexpected or expected additional income would be holiday bonuses, tax returns, or credit card rewards, as an example. Put that lump sum to good use, don’t allow it to be in your pocket one moment and out the next (without purpose).
Wrap Up
If you’ve read anything I’ve written or I’ve worked with you, you know I don’t usually fret over mortgage debt. When I see mortgage debt, I see leverage and leverage is something to keep, not get rid of. That being said, it’s my job to meet people where they are, use the money they currently have, and help them get to their objective as quickly and efficiently as they possibly can. As with everything, take what I say with a grain of salt: financial strategies are just that, strategies. There isn’t one particular train of thought that is dominant to others, only systems to implement and execute!