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SHOW NOTES FOR EPISODE 442: 8 WAYS TO PAY-OFF YOUR MORTGAGE EARLY
As you build your rental property portfolio, getting low interest mortgage rates is critical for leverage, cash flow and tax savings. However, as your portfolio reaches its desirable size, you need to start thinking about paying off your mortgages for increased cash flow and to pass down a debt-free asset. In today’s podcast, bill shares eight plus ways you can accelerate your mortgage pay-off and save tens of thousands of dollars.
Tip of the Week
- Get to know your market – When investing in real estate, it is important to learn about and become an expert in your selected market. Being well informed on the current trends, including any decreases or increases in the average rent, income, interest rates, and even unemployment/crime rates will allow you to recognize the current market status and plan for the future. Being able to constantly forecast and stay a step ahead of the market can help lead you to become a more effective real estate investor.
8 Ways to Pay-Off Your Mortgage Early
If you’ve read Kiyosaki’s book Rich Dad Poor Dad or Cashflow Quadrant, you know about good debt and bad debt – they’re directly related to assets. Bad debt – a boat loan, your personal home mortgage, a car loan. Good debt: rental property mortgages. A rental home is an asset. My personal car, boat or home is not.
And yes, we know the value of a rental property that generates income that can offset the debt, plus you add the tax write-offs of mortgage interest, depreciation, related expenses
Key Principles:
- Interest on your mortgage is calculated on your DAILY BALANCE
- All banks front load – get interest first!
I know that mortgage interest is tax deductible but you will pay a whole lot of interest if you hold on to a house for t’s full 30 years.
EXAMPLE:
- $250,000 mortgage
- Your payments $532,867
- $282,867 in interest alone
- Total paid in 30 years – over $730,000 – THREE TIMES WHAT YOU BORROWED! Could buy three houses!!!
Can I Pay Off My Mortgage Early?
Each time you pay extra on your mortgage, more of each payment after that is applied to your principal balance. But, before you start making extra payments, let’s go over the ground rules.
- Check with your mortgage company first. Some companies only accept extra payments at specific times or may charge prepayment penalties.
- Include a note on your extra payment that you want it applied to the principal balance—not to the following month’s payment.
If you want to get serious about paying off your mortgage quickly, check out our mortgage payoff calculator. It will help you estimate how quickly you can pay off your home.
The concept of a biweekly mortgage payment is pretty simple. You make half of your mortgage payment every two weeks. That results in 26 half-payments, which equals 13 full monthly payments each year
That extra payment can knock eight years off a 30-year mortgage, depending on the loan’s interest rate.
How to Set Up a Biweekly Mortgage Payment
Locate the principal and interest portion of your payment on your monthly statement and simply divide that number by two. For example, if the principal and interest portion of your payment is $1,500, your new biweekly mortgage payment is $750.
Don’t forget to include the tax and insurance portion of your payment each month. In this $1,500 payment example, the $750 biweekly payment only covers principal and interest. You’ll have to pay the tax and insurance portion of your payment in addition to that.
Find out how or if your mortgage company handles biweekly mortgage payments. Some lenders will process biweekly payments while others refuse to accept partial payments at all. In any case, do not pay a fee to initiate a biweekly mortgage plan.
If your lender isn’t open to biweekly payments, open a new bank account exclusively for your mortgage payment. Deposit your half-payment every two weeks and use that money to make your full mortgage payment (either by check or automatic payment) on every second deposit.
A biweekly payment is not a substitute for gazelle intensity. Once you reach Baby Step 5, start putting as much money as you can toward the mortgage to pay it off even faster.
1. Maximize Your Down Payment
The best way to buy a home is with 100% down. Paying cash for a home may sound weird, but imagine all the fun you could have without a mortgage payment weighing you down!
If you can’t postpone the purchase until you can pay cash, plan to put at least 10% down at the closing table. Of course, 20% is even better because then you’ll avoid paying private mortgage insurance (PMI). PMI typically costs between 0.5% and 1% of the loan amount annually. For example, on a $250,000 mortgage, PMI will cost you $1,250 to $2,500 a year.(4) Why give the bank extra money each month if it doesn’t pay your mortgage down faster?
Keep in mind that the more cash you put down on the front end, the less money you’ll need to finance. That adds up to a lower mortgage payment each month, making it easier to pay off your mortgage early.
2. Switch to a Biweekly Payment
Instead of making one monthly payment toward your mortgage loan, you can make a half-sized payment every two weeks resulting in extra payments during the year. In other words, if your usual mortgage payment is $1000 a month, you would instead pay $500 every other week. These extra payments will have nearly the same impact on your budget as paying one monthly payment, but because there are 52 weeks in a year, a biweekly payment schedule will result in 13 full-sized payments a year instead of the normal 12. You’ll be making an entire extra payment every year without having to scrounge around for the extra money. To look at some real-life numbers, if you have a 30-year $200,000 mortgage at an interest rate of 5%, making biweekly instead of monthly payments would save you $34,328 in interest, save you from extra mortgage payments, and allow you to pay off the mortgage balance almost five years early.
3. Make an Extra House Payment Each Quarter
You’ll pay your mortgage off 11 years early, and you’ll save more than $65,000 in interest.
4. Make extra principal payments
When you send in your monthly payment, most mortgage lenders will allow you to make an extra payment and mark it “principal only,” meaning that this payment will go to paying down the principal rather than both the principal and interest on the loan. Paying down even a little bit of extra principal early on in the loan can save you quite a lot in interest charges, not to mention getting you out of the loan several years ahead of schedule. So consider sending just a little extra to the loan holder every month as an extra principal payment. For example, if you have an odd payment amount such as $1046 per month, you can round it up to $1100 and dedicate the extra bit as a payment on the principal. Even if it’s only paying an extra $50 or so a month, the principal payments will add up faster than you’d believe, speeding up the mortgage payoff process
5. Refinance into a shorter-term loan
Got a 30-year mortgage? Refinancing it as a 15-year loan will blast you through that mortgage a whole lot faster, and will probably get you a better interest rate as well — shorter loan terms are typically paired with lower interest rates. And thanks to the shorter time frame, you’ll pay a lot less money in interest — so the payments on a 15-year loan are not double the payments of a 30-year loan; they’re significantly less.
6. Put your windfalls into your mortgage
Many taxpayers get a tax refund every year. If you use most, or all, of that money as an extra payment on your mortgage, you can make serious progress in getting your house paid off. Other potential windfalls include a bonus from work, a successful garage sale, or a gift from a relative. And if you get a raise, consider putting all the extra income into your mortgage. For example, let’s say your monthly take-home pay was $4,000 and your 3% raise means that you’re now getting $4,120 per month. Put the extra $120 into your mortgage every month and you won’t even miss the money, since you’re not used to having it.
7. Downsize
Downsizing your house could be a drastic step, but if you’re set on getting rid of your mortgage, consider selling your larger home and using the profits to buy a smaller, less expensive home.
With the profits from selling your bigger house, you may be able to completely pay cash for your new home. But even if you have to get a small mortgage, you’ve succeeded in reducing your debt. Now your goal is to get rid of that debt as quickly as possible. The smaller the balance, the quicker you can make it happen.
We all know hindsight is 20/20, but if you take advantage of the following tips before you purchase your next home, you will be in a great position to pay that mortgage off early.
8. Refinance—Or Pretend You Did
The only type of debt Dave won’t yell at you about is a 15-year fixed-rate mortgage with a payment that’s no more than 25% of your take-home pay. You’ll pay much more in interest on a 30-year mortgage—and, besides, who wants to be in debt for 30 years?
You can refinance a longer-term mortgage into a 15-year loan. Or, if you already have a low interest rate, save on the closing costs of a refinance and simply pay on your 30-year mortgage like it’s a 15-year mortgage. The same goes for a 15-year mortgage. If you can swing it, why not increase your payments to pay it off in 10 years?
Other Ways
- Pay-Off mortgage using 0% interest credit cards: https://www.youtube.com/watch?v=arRPpGlz1to
- Pay-off your mortgage in 5-7 years with Velocity Banking: https://www.youtube.com/watch?v=4qAmup4jEcM&t=1784s
The idea of being completely debt free in my retirement intrigues me. Buy the properties you need to reach your monthly income goal. Then, focus on paying them all off. When you’re done, you’ll just have straight income (yes a few expenses but nothing like your annual mortgage. Just kick back and enjoy the ride!
DISCLAIMER: Many of the above strategies take knowledge and have a higher degree of risk. You need to do your research and/or work with someone who is experienced to reduce your risk.
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