Then she cried. It was a moment I will never forget.
Without a mortgage, my grandmother managed on a small pension and Social Security.
When I got married some 30 years ago, the plan was to follow her lead: Become mortgage-free before retirement.
We achieved that goal this year, a month before my husband retired, after 30 years of working for the federal government.
Our plan drove how we handled multiple mortgages over the years. Together, we’ve owned two homes, selling one to buy the other. We took out our last mortgage in September 2016. We refinanced from a 30-year loan into a 15-year term with a 2.75 percent interest rate.
Here are three strategies we used to clear a 15-year loan in just seven years.
Make extra principal payments automatic
Let me say this. The steps we took won’t work for everyone, because they require having more funds than you need to maintain your household. If you can’t pay off your mortgage early, it’s okay, because I would rather you prioritized other financial goals.
As a money-saving strategy, paying your mortgage off early should come after amassing a solid emergency fund, saving for retirement or paying for your children’s college education.
With two incomes, and living below our means, my husband and I were able to make extra principal payments every month. Starting out, the additional outlays weren’t very large.
But, as soon as we had enough to send our three children to college with no debt, we increased the monthly amount directed to the principal. We also were able to max out our retirement savings, while also accelerating our mortgage payoff.
If you want to stay consistent, make the principal payments automatic. If you do this, be sure to check with your lender about the process, to ensure extra payments made online or by check are in fact being applied to the principal.
You can find a mortgage payoff calculator on the Bankrate website, at bankrate.com.
Using Bankrate’s calculator, let’s say you have a 30-year fixed-rate mortgage for $400,000, with an interest rate of 6 percent. If you make your regular payments, your monthly mortgage principal and interest payment will be $2,398.20 for the life of the loan, a total of $863,354.
If you pay an extra $200 a month toward the principal, you can cut your loan term by more than 5½ years and save $98,277 in interest.
If you increase the extra payment by $400 per month, you not only shorten your mortgage by nine years, you save $159,602 in interest.
Here’s why we made monthly payments as opposed to occasionally throwing lump sums of extra money at the principal.
We wanted to create a discipline of not incorporating all of our salary raises, bonuses or windfalls over the years into our budget. In our minds, the extra principal payments were as fixed as the regular mortgage.
As we got close to my husband’s retirement, I cashed out two workplace retirement accounts from a former job. (I did not incur an early-withdrawal penalty.) All those extra principal payments reduced the payoff amount so that the money in those accounts, after taxes, was enough to finish off the mortgage.
Be strategic about refinancing
When mortgage rates fall, it can create a refinance frenzy. Many people refinance because they want to lower their payments.
But if you’re not doing the math, refinancing can increase your overall interest costs, even if you have a lower monthly payment. This is especially true if you’re several years into your mortgage and a lot more of your payment is already going toward the principal.
My husband and I also never used a refinance to tap our home’s equity. We didn’t want to use home as an ATM.
We refinanced a few times to lower our interest rate when the difference was at least two percentage points. However, instead of incorporating the savings back into our budget, we kept making the same monthly payment. We directed our lender to use the extra funds to reduce our principal.
An online calculator can help you figure out how to attain a lower effective mortgage interest rate without refinancing.
We stuck with a 30-year fixed rate mortgage until we had accomplished certain financial goals. It gave us the flexibility to pull back on the principal payments if we encountered any major cash flow issues.
When mortgage rates dipped below 3 percent in 2016, we refinanced from a 30-year fixed rate loan to a 15-year fixed term, accelerating our payoff plan.
Take advantage of the little-known ‘mortgage recast’
With a mortgage recast, you make a lump-sum payment toward the principal. Your mortgage is then recalculated based on the new, lower outstanding balance.
Your remaining monthly payments reflect the new amortization schedule. However, the interest rate and loan terms stay the same.
The recast lowered our monthly payment. But again, we used the savings to continue paying down the principal. It also was much easier than refinancing. Because you’re keeping the same mortgage, there’s no credit check, no new appraisal required, nor closing costs. Some lenders will require a flat processing fee of a few hundred dollars. Our lender did not charge for a recast.
Your lender may require a minimum lump-sum payment to process the recast, typically $10,000.
Not all lenders offer a loan recast. You can’t recast loans obtained from the Federal Housing Administration, the Agriculture Department or Department of Veterans Affairs.
Carefully consider a mortgage recast. Ask yourself whether there are more-immediate needs for the money. Don’t deplete your savings to do it, because you might be tapping funds you’ll need later for an emergency.
There will be many who question our strategies, arguing that with a low interest rate the additional principal payments could have been better used to invest. This is a personal decision, but for us, in addition to freeing up a lot of money every month, the guaranteed psychological return has been worth it.
