How (and why) to pay off your house in seven years or less
by Emily Josephine
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I don’t like debt.
No, I need to tell it like it is: I hate debt. To be in debt means to be a slave. It means that you can never go to sleep completely free of worry.
That’s why my husband and I were so excited the day we paid off our mortgage. In our late thirties. Only five years after signing the closing papers.
You might think that we are a rare exception. But the fact is, many people who work hard to get out of credit card, student loan, medical, and car loan debt then turn around and use their newfound debt-pounding skills to pay off their mortgage. These are average Joes and Janes, just like you. They usually have children. They haven’t won the lottery. They haven’t hit the jackpot in Vegas.
How do they do it, then? How did we do it? And how can you do it?
In this mini-ebook, I am going to go through the five major steps you need to take in order to pay off your mortgage as quickly as possible. Here is a sneak-peek of those steps:
#1: Buy a house that is between one-half and two-thirds the price of the total loan amount for which the lender approves you.
#2: Get a conventional 15-30 year loan that requires a twenty percent down payment.
#3: Pay off every other debt you have before you start paying extra on the mortgage.
#4: Continue to live beneath your means as you learned to do when paying off all the other debts.
#5: Use the extra money you have at the end of every month to pay against the principal on your mortgage.
You may have read through those steps and realized that you have already failed with one or more of them. You may have purchased a house that cost almost as much as the amount for which the lender approved you. Or you may have purchased a house with the help of a V.A. loan, or an A.R.M.
If you have, do not despair. Your choices have made paying off a mortgage early more difficult, and you may not be able to do it within seven years. But if you keep reading, and determine to follow the other steps to the letter, your determination will lead to greater riches in the long run.
Now, before we get into the details of the five steps, I need to answer the argument that you may have heard from your financial planner or favorite financial “expert”…
Chances are good that you’ve heard some financial expert or other tell you that paying off your mortgage early is a waste. You should just invest any extra money you have at the end of the month; it will make a better return than the interest included in your mortgage payment.
There is only one explanation for people in the realm of personal finance to have hung on to that myth for so long: they never sat down and crunched the numbers.
Wait. There may be one more explanation: they never used logic.
But years ago, I didn’t think that an expert would blithely spout off advice without having done some figuring. Or thinking. So for a long time, my husband and I had no other debt than our mortgage. Because it’s stupid to pay off a mortgage early, right?
Then I heard Dave Ramsey, a radio show host famous for doling out personal finance advice – especially in the realm of getting out of debt – say that the opposite was true. He said that I would be further ahead financially if my husband and I paid off our mortgage ASAP. Then he said it again. And again.
Finally, one day I heard him say it one more time, and I couldn’t take it anymore. I got out a calculator and a piece of paper and I crunched the numbers. I wish I would have kept what I wrote down so I could repeat the exact numerical results here. But I didn’t, so you will have to be content with the following example. (I used the calculator at the following URL to get all the mortgage/interest numbers that I cite in this book: )
Say you take out a $250,000 loan at five percent interest. Your monthly payment will be $1342.05. If the loan is a thirty-year fixed, if you stick to that exact payment every month and never pay any extra against the principal of the loan, you will end up paying $483,139.46 for the house at the end of those thirty years. The total interest you will have paid is $233,139.46.
Gee, I can think of better things to do with $233,139 than give it away, can’t you? Things like investing.
In this example, the monthly interest would amount to a bit under $648, on average. Understand that the first few years, the mortgage payment is mostly interest, and then gradually decreases and becomes more principal. This is so that the lenders will be sure to make their money upfront.
Instead of giving that money away, let’s invest that interest instead. That $648 every month, getting a conservative eight percent annual return, after 30 yrs would accumulate to…wait for it, wait for it…
Hello, comfortable retirement!
Our numbers were a bit different, as at that time we only owed another $80,000 or so on our house. Still, after figuring out how much richer we would be in twenty years by paying off the mortgage, I got excited. I showed my husband what I had figured out when he got home from work. We talked. We agreed.
Within the next week, we owned our house, free and clear.
You might be wondering how we happened to have $80,000 sitting in a bank account. I detail our story in my book, Hatching The Nest Egg: How To Achieve Super-Early Retirement Without Gambling, Side-Gigs, Or An Above-Average Income. It is available from Amazon. In a nutshell, we had no other debts and had been living well beneath our means all our adult lives.
Of course, to pay off the mortgage we would immediately lose $80,000 out of our bank account. But this would be short-term. After five years of investing the amount that used to be our mortgage payment, we would make the money back – and then some. In the meantime, we would never, ever have to worry about having to foreclose, sell, or declare bankruptcy because a financial loss caused us to have to return our home back to the lender. We now owned the house free and clear!
If you’re reading this book, I’m assuming you want that wonderful sense of freedom, as well. In that case, let’s delve a little deeper into those five steps to paying off your mortgage that I mentioned earlier.
When we were approved for a loan on a house, we were approved for something around $300,000. The house we bought ended up costing $172,900. And we did not feel deprived. There were two of us, and a baby on the way, and the house was 2,159 square feet with three bedrooms and two-and-a-half bathrooms, in a nice neighborhood.
Before I go on, may I remind you that the lender has an ulterior motive for approving you for a dangerously high loan: the more money you borrow, the more money they will make off of you. Do you want to be used in that way?
Let me explain it another way. Remember how much interest you end up paying on a house over thirty years? Sure, it’s much less on a fifteen-year fixed loan, but you still give a lot of money to the lender in the form of interest. And the bigger the loan you take out, the more money goes into the lender’s wallet.
We’re talking over $100,000 that you could have built up in a retirement fund (or used to help with your kids’ college, or whatever) landing inside someone else’s pocket because you bought way more house than you really needed.
Not wanting to throw away your hard-earned money is only one reason to spring for a less expensive house. Here are three more.
#1: You can pay off the mortgage more quickly.
If we had purchased a house that cost closer to the amount for which the lender approved us, we would not have been able to pay the mortgage off nearly as quickly as we did.
#2: Lower mortgage payment, which equals more security.
When you buy less house than the lender says you can afford, your monthly payment is lower. This means that if your household experiences some kind of financial crisis, coughing up the payment will be much less difficult than if you had maxed out your loan. This means that you are at a much lower risk of having your house foreclosed on you.
#3: A less expensive house often (but not always) means a smaller house.
And a smaller house means less housework and less maintenance. It also means you will not have as much space for furniture and hoarding clutter, which will help keep you from buying material goods that you don’t really need. So buying a smaller house helps you not only to save money on the mortgage payment, but also in other areas of your budget.
Now, onto the second step of becoming mortgage-free…
I am sorry we sold our suburban house to the people to whom we sold it. The reason is that they ended up taking out a V.A. loan to purchase it, which means they really couldn’t afford the house. If you don’t already know, with a V.A. loan a person can purchase a home without putting any money down. No money down equals a larger mortgage payment, which equals more money worries and a much longer time enslaved to the lender.
So for a while, I actually felt guilty for enabling the couple who bought our house to get themselves in over their head – especially since we had another offer right after theirs by someone who was going to use a conventional loan.
Anyway, if you want to buy a house, save up enough to put twenty percent of the cost down. This is doable if you have no other debts and live beneath your means, but you may have to wait a little longer than you want to buy a house. And when you do, go for a conventional fifteen- or thirty-year loan.
If you choose to ignore this step and go for a V.A. loan, don’t blame me if it takes you much longer than seven years to pay off your house.
If you think this step is hard, wait until you get to the next one…
Before you start paying extra against the principal on your mortgage, get rid of all your other debts. Pay off your car and any recreational vehicles (including motorcycles and boats). Pay off all your credit card debt and student loans. Call the hospital about your five-year-old medical bill and ask them to work with you to cut it back.
Why pay off all the other debts first? Simple: as long as you have the other debts, you have that much less money to pay against the principal on your mortgage. But as soon as all those other debts are paid off, you have a lot more extra money for paying down your mortgage.
Honestly, in the ideal world this would be the very first step in paying off a mortgage. In the ideal world, you would have zero debts – not even a car payment – before you even started looking at houses. You would rent a modest apartment or house and save up for the down payment with the money that would otherwise be used to pay off debt.
But we don’t live in an ideal world, and chances are good that if you are reading this book, you purchased a home while you still had other debts. Because I wanted this to be a realistic plan, I made “get out of debt” the third step instead of the first one.
However, if it just so happens that you have not yet purchased a home, pay off all your debts first, then get busy saving for a down payment.
If you are unsure of how exactly to pay off your debts in a systematic, effective way, get online and search “debt snowball.” Any number of websites list the steps involved with the debt snowball. I also go through them in my book, Hatching the Nest Egg.
One of the best things you can do during this process is to obtain other sources of income beyond your primary job. Sell furniture and other items you don’t need. Start an e-Bay business. Take on extra part-time work in the evenings or on the weekends. The more money you can get into your hands, the faster you can pay off your debts…and so the sooner you end up with a debt-free house.
But, there is one critical step to being able to continue to have plenty of money at the end of the month…
Once you have gone through the debt snowball, this should be a piece of cake. If it’s not – if you still find yourself overspending and having too much month at the end of the money – you need professional help. I’m serious. Shopping can become an addiction for people who are suffering emotionally, and a trained counselor can help you break the spending habit by helping you uncover the root of the problem.
In other words, if you need healing, seek healing. Don’t be embarrassed; we all have our own issues we have to struggle through.
Most people who go through the debt snowball, however, will be in the habit of living beneath their means. So this should be a no-brainer step. The trick will be not to take the money you’ve been using to pay down your debt and treat it as extra spending money.
And that leads us to the last step in paying off your mortgage early…
Most of the extra money that you have at the end of every month, as a result of paying off all your other debts and living frugally, you use to pay down the mortgage principal. Whether you do this via mail, online, or over the phone, you need to make sure that the receiver of your money understands that the extra is to pay down the principal. The principal on a mortgage is the actual price of the home you agreed to pay. The reason is that the faster you pay off the principal, the less interest you will have to pay.
Now, if you happen to win the lottery, inherit some money, or otherwise come by some unexpected money, use it to pay against the principal, as well. If you are one of those rare birds who has no other debt when you buy a house, and you happen to have some non-retirement investment money, go ahead and pull it out to pay off as much of the mortgage as you can in one fell swoop. Remember, this will mean more money for you in the future.
Let me illustrate the power of paying extra principal every month by going back to the previous loan example, a thirty-year fixed for $250K at five percent interest. If you were to pay an extra $500 per month, you would pay it off in sixteen years, rather than thirty, and pay only $119,270.63 in interest. This is almost half the interest that you would have paid, than if you had just paid the regular mortgage payment every month.
What if you made an extra monthly principal payment of $1,000? You would pay it off in eleven years, and have only paid $81,406.20 in interest.
Keep in mind that if you currently have other debts than the mortgage, it will probably take you between six months to two years to pay them off in full, depending on the debts and your income. In the meantime, you will have kept paying down the mortgage.
Besides that, there’s a good chance that you took out a loan that was under $250,000. Between that and the fact that your house will have developed equity while you pay down your other debts, do you see how you have an excellent chance of being able to pay off your mortgage within the next seven years after getting rid of all your other debts?
Let’s say that you bought a house for $200,000. You put 20% down - $40,000 - and so your mortgage ends up being $160,000. By the time you read this mini-book and pay off all your debts, you still owe $120,000. Paying an extra $1,000 a month on the principal on top of your regular mortgage payment, you would own your house free and clear in about five years!
If you think that’s exciting, keep on reading!
Once your mortgage is paid off, you get a sudden pay raise of, on average, $1200 to $1500 a month. What if you invested $1300 a month in a portfolio that returned about eight percent annually? After ten years, it would have grown to over $244,000. After fifteen years, your nest egg would be worth $457,458.82. After twenty, $770,997.57.
Can you say, “Retirement, here I come!”?
Actually, all of these investments are coming out of your take-home pay, which will already have had the money for your career retirement taken out of it. So with your retirement funds added to what you invest outside of retirement, you may end up retiring much earlier than you ever dreamed possible!
What would that be like, retiring ten, even twenty, years earlier than you thought you would? Think it’s an impossible goal?
Think again! My husband and I retired in our early forties, just by working hard at normal jobs, living frugally, and investing wisely (actually, we learned about the “wisely” part late in the game). I tell you our story, and give you the exact steps to achieve super-early retirement, in my book, Hatching The Nest Egg: Achieve Super-Early Retirement Without Gambling, Side-Gigs, Or An Above-Average Income. Look for it on Amazon.
I provide loads of tips on how to save money without living like a pauper. I take you step-by-step through the debt snowball, and warn you away from one of the biggest financial mistakes people make. AND…, and therefore more lucrative because we never have to worry about losing a third of our wealth (as what happened in the 2008 crash).
Interested? Then search for it by title at Amazon.
I hope the information in this book has helped you. If it has, would It will help get the word out, and therefore help other people who want to break out of the chains of debt. Thank you so much!
To your future wealth!
Wouldnâ€™t it be great to pay off your mortgage years before it is due? How about paying it off in seven or fewer years? Yes, that is possible â€“ and yes, it is possible if you only make an average income and have never won the lottery or inherited money. How to pay off a mortgage early? In just about 3,000 words, this no-fluff mini-ebook provides you with the five steps to do just that. It includes sample number-crunching to show you just how much lenders rip off home buyersâ€¦as well as how much richer you could be in ten or twenty years after paying off your home loan. Not only that, but also it shows how utterly and completely WRONG financial â€œexpertsâ€ are when they advise people not to pay extra on their mortgage, and to invest the money instead. This personal finance book is a quick read, but it has information critical to your financial future. BUT I WARN YOU OF THIS: If you are living in a fantasyland hoping for some magical formula to help you quickly pay off your mortgage, donâ€™t bother with this book. There is no quick and easy way. Nothing of great value ever comes quickly and easily. However, if you have a realistic view of life and would like to pay off your mortgage years before it is due, but canâ€™t wrap your mind around how you might do so, you need this book.