Any financial savvy person will tell you that you need to eliminate all your debt (good and bad), if you are on the path to achieve financial independence.
Our primary goal is to fully pay off our mortgage and turn our condominium into a consistent cash flow stream which in turn is going to free up future money for other uses. Plus imagine all the fun we could have without having to worry about a mortgage payment!
Why Now
I wanted to understand the process of breaking down our monthly mortgage payments so I started looking into couple of possible scenarios and found that that each mortgage lender distributes extra money applied towards the monthly mortgage payment differently.
For instance, if your current monthly mortgage payment is $1,000 and you round up that payment to $1,100 the extra $100 does not get applied to your monthly payment of $1,000 but instead it is saved and counted towards next monthly payment. Now if you take a closer look you can see what the mortgage lender is doing here, making sure they received their cut of interest with every payment you make. So it does not make much sense to increase your monthly payments knowing that the extra money isn’t applied directly towards the principle amount.
So I ended up calling our mortgage lender to find out more about the extra payment options and it turned out that any extra payments we make, are directly applied towards the principle loan amount.
Sometimes around June or July this year I started rounding up our monthly payments from $1,350 to $1,370 and could see the extra $20 being applied towards the principle portion of the loan. Going forward we plan to make even bigger payments knowing that if we make extra monthly payment of $100.00 we can save $17,342.98 in interest and reduce the payoff date by 3 years.
However, an extra monthly payment of $711.88 is going to pay off our loan by 2033 and save us $65,767.99 in interest.
Our Strategy
To honor our commitment we decided to stick to a combination of the these strategies.
- Make extra monthly payments
- Make biweekly payments
- Rightsize
- Refinance
- “Found” Money
Make Extra Monthly Payments
When we purchased our condo, we financed less than 80% of the conventional mortgage so we did not have to pay into the private mortgage insurance (PMI). Instead of paying PMI which is usually 1% of the total loan amount annually, we have redirecting this 1% to the principal of our mortgage.
Right around 2019 is when we started applying our tax refund and any extra money we came across towards the loan principle. This happens once a year and I look forward to make larger payments at least once every quarter.
Finally, this year we started rounding up our monthly payment and any amount over $1,350 is applied towards the principle portion of the loan.
Based on our research, a combination of this strategy alone can set us mortgage free in roughly 12 years.
Make Biweekly Payments
By mid next year we plan to split our monthly mortgage payment in half and send our payments every two weeks. To be more specific we are looking at $675 payment every two weeks.
In return we are going to end up making 13 payments annually and reduce 6 years of our 30 year conventional loan.
Keep in mind, every lending institution has different set of rules and regulations in place. Be sure to contact your lending institution before you start making biweekly payments so that you have general understanding how these payments are being processed. Remember, if your institution does not accept biweekly payments, then start making fewer payments but bigger ones.
Rightsizing
You think 1,200 sqft. for a family of five is a tight fit, think again. We just purchased a motorhome and are about to move into even a smaller space, more like half the size of 1,200 sqft. This is a drastic change but we are set on creating consistent cash flow stream so we are considering to rent or sell our apartment. Going with the latter, we are likely to eliminate our mortgage much faster. Then buy a smaller place, pay cash for it and rent it out.
On the other hand going with the former, we can achieve the same goal but at a slower peace. This is simply because we still have a mortgage that needs to be paid, except this time we aren’t the ones paying the mortgage the tenants are. So technically, we do not have worry about a mortgage payment!
It goes without saying, the best way to buy a home is to pay for it in cash like 100% of it.
Refinance
Currently we have a 30 year fixed rate (4%) mortgage and are looking to make the switch to 15 year fix rate depending on our comfort level. If we are going to start making biweekly payments mid next year, I want to see how that is going to shake out in the long run.
One can argue that interest rates are so low right now (~2.5%) that it might be better to refinance sooner rather then later.
Looking at the other options above, refinancing looks very attractive simply because you pay lot less in interest on a 15 year mortgage and you get to be mortgage free in 15 instated of 30 years.
The way I look at it, any combination of these strategies are going to set us on the right path to pay our mortgage off early.
“Found” Money
I love this strategy because anytime we come across extra income such as tax refund or a bonus check, we get to allocate good chunk of it towards our loan principal.
About 6 years ago we made very big life style adjustments which yielded in extra income for us to invest or apply towards living expense. Some of those strategies included, bringing lunch to work, switching mobile phone providers, trimming down car, motorcycle, and home owners insurance.
You are going to be surprised how much extra cash you end up saving and most importantly how quickly your mortgage balance is going to start shrinking.
I love this strategy because it doesn’t put a strain on our monthly budget.
Conclusion
Seeing the results of paying our mortgage off completely is what gets me excited and keeps us focused. We had to make some tough decisions and lifestyle adjustments along the way but who can argue saving on interest.
If you embark on similar quest, I would say choose the option that fits best with your current financial situation and don’t deplete your cash reserves on a quest to be mortgage-free.
But if you can save, invest and get rid of your mortgage then you know you are on the right path to achieve financial independence and weather economic uncertainties.
You want to know how fast you can pay off your mortgage, check this mortgage payoff calculator.
