*Note: This was written by a Yahoo! contributor. Do you have a personal finance story that you'd like to share? Sign up with the Yahoo! Contributor Network to start publishing your own finance articles.
Before we sold our home, we were on track to pay off our 15-year, fixed-rate mortgage in under 10 years. While I never got the opportunity to see my goal through to fruition, I have no doubt that had we not sold our home, we would certainly have been well on our way to owning our home outright in well under the time frame outlined in our amortization schedule.
Here were some of the rules that I used to guide us in our early mortgage payoff process.
Utilize a Mortgage Calculator
Even for people like me, who spend a lot of time playing with financial figures and amounts, using a calculator to help them in their determination of various mortgage payoff times and amounts can make the process more exact as well as more efficient.
A mortgage calculator can help you to better explore various mortgage payoff times and amounts, and run a variety of scenarios relating to your particular situation. If nothing else, I enjoyed being able to run scenarios that incorporated additional payments to my mortgage in order to see how those extra payments would reduce my payoff time as well as my payoff amount over time.
Think Long-term
I found that I couldn't just consider the extra money it was costing me each time I made an extra payment, but had to look at the long-term effects that money was having on reducing my overall amount owed, especially when it came to interest amounts on the loan.
I agree that it's hard to shell out an extra $500 or $1,000 to put toward a mortgage when that money is then just gone. You really don't feel like you've gained anything in return. But by determining how much you've cut off your mortgage in interest over time by doing so, you might feel differently. That additional $500 or $1,000 over the course of 10 or 20 years or more could end up saving you hundreds or even thousands of extra dollars in interest owed to the lender. Actually understanding those savings can make the payment much more worthwhile.
This is where a mortgage calculator can be beneficial in helping you understand just how much you've saved, although I typically just adjusted the amortization sheet the bank had sent me to see where I was at and the savings I'd incurred.
Consider Your Sources
I can't tell you how frustrating it is when I read or hear someone try to tell me that paying off a mortgage early is a bad decision because you end up losing the deduction on your income taxes. My favorite response to this (I can't remember where I heard it) was someone saying, "That's like paying a dollar to save 35 cents".
Sometimes you have to consider who is telling you something and why or whether they are indeed a credible source of information. Now I don't consider myself the end-all and be-all of personal finance information -- far from it in fact -- and everyone's mortgage situation may be different. However, I do think it's a good idea to consider who is giving you information about your mortgage (is it a mortgage broker, someone who works for the lender, a well intentioned but uneducated friend or family member, or a financial expert?) and why they might be doing so.
Consider Interest Rates and Other Debt
In my case, during my period of homeownership, I never carried debt that had a higher associated interest rate than my mortgage. In fact, I didn't carry any debt other than my mortgage. However, if I had, I would have considered the interest rates associated with that debt before making extra payments to my mortgage.
Paying off a mortgage that sits at a fixed interest rate of 5% while you're carrying credit card debt of 18% really makes no sense to me. However, if I was carrying consolidated student loan debt at 4%, while my mortgage was at 8%, it might be worth putting some extra money toward the home loan. This is when you may want to consider other sources of debt, their associated interest rates, and then decide whether it's worth paying off mortgage debt quicker if you have other debt on your plate.
Find Motivators and Stick with the Process
Maybe the hardest part of working toward paying off a mortgage early is sticking with it. When you're talking about paying off a loan that could run a timeframe measure in decades or an amount measured in hundreds of thousands of dollars, putting an extra $100 here and there toward the loan may seem insignificant and could be a motivational killer.
In some cases, people make the extra payment process automated by using a bi-weekly payoff schedule or by having an extra amount drawn from their bank account each pay period so that they don't even have to think about it. Others -- like myself -- use the savings they're realizing in reduced interest over time as a motivator. Whatever works, finding a motivator or two to stick with the early payoff process may be the most important rule to achieving your early payoff goals.
2 comments