How to Pay Off Your Home Loan Early

This week we will be making our final mortgage payment on our home. It's the only debt we have and at 42 and 43 years old respectively, it feels like quite an accomplishment. Sharing about this came after hours of conversations with my husband during our final year of mortgage payments. These types of conversations actually make my husband and me very uncomfortable. My grandma never wanted to talk about money. She would have rather people thought she had no money than people knowing the truth - that because of her frugal lifestyle she actually had a lot of money. 

This doesn’t come from us wanting to brag but instead comes from a place of humility and wanting to help others be financially free because being free is a pretty amazing feeling. We felt like this could be beneficial information for others to know. And as I've shared our countdown to the final payment with all of you, many of you have reached out asking us how we did it. Today, I'm going to share how we paid off our home in 10 years and are now completely debt-free. Did you even think that was possible? It is, and you can do it too!


How to Pay Off Your Home Loan Early


A Little Background

We purchased our first home when I was 22 and my husband was 23 and we lived in that house for 10 years. We went from a family of three to a family of five in that 1800 square foot home and the walls started to quickly close in as the kids became lumbering teenagers. We purchased a 3300 square foot home as a short sale in December of 2010. 

I know short sales aren't really a thing right now because the housing market is hot, but you can read this post I wrote to see how well we were received into the quiet gated neighborhood having gotten essentially a 40% discount just three years after the rest of the neighbors invested in custom homes that came with a hefty price tag. We got a good deal on our home when we bought it and that came from being in the position to wait out the market and buy when it was a buyer's market.

When we bought our home, we were able to put a fair amount down because we had made money on the sale of our first home. We took out a 30-year mortgage, but after 5 years the rates dropped and we refinanced to a 15-year mortgage, which we then paid that off in 5 additional years.

It is worth noting that we have been beyond privileged to have generous family members who have gifted us money over the years and parents who paid for college. We started our family when we were still college students ourselves, and graduating without college debt was the best foundation we could have had for our family. It's why we feel it's so important for us to do the same for our kids. 


A Legacy Conversation

This is a legacy conversation. If you are the first person creating this legacy, you are going to have a harder hill to climb because you will be scraping your way to the top on your own. We have had generous family members who have helped us continue in creating this legacy so we can continue to be generous for future generations. We also had examples of parents and family members who didn't have home mortgages and who made paying off your home seem normal. I learned that it's anything but!

According to Census Bureau data, over 38% of owner-occupied housing units are owned free and clear. For homeowners under the age of 65, the rate goes down to only 26.4%. This rate is higher in areas where the average home price is low {like West Virginia and Mississippi}, but even then, the rate is only about 40%. 

Why would someone pay off their home?

The majority of homeowners have a mortgage. It's part of being an adult and living the American dream, isn't it? Most people never even think about paying off their home. By the time they have equity in their home, many people take out a second mortgage and use it to fund their lifestyle or a major purchase. 

In sharing our experience, I've had a few people reach out who were unaware that they could even pay extra towards their home mortgage. I guess I get that. If you are paying rent, you'd never pay extra towards that, so why would you pay extra on a house payment? Many people see their home mortgage as "rent.". 

But what if you didn't have a house payment?

What could you do with the extra money each month? 

So the real question is this...

Why would I not want to pay off my mortgage?

If every month you are paying the bank $2000 for a place to live, imagine what you could do every month with an extra $2000 in the bank. You don’t owe anyone anything so you are free to do with your money whatever you want. You are no longer tethered to a monthly payment. There is freedom in that that may feel unattainable if you've never really given it a thought or if you are burdened with debt that feels insurmountable. Financial freedom can be a reality! So...


What Motivated Us to Pay off Our Home Mortgage

The biggest difference in our desire to pay off our mortgage was by actually visualizing how this all worked. I’m not talking about visualizing living in a paid-off home, because that just feels weird. Honestly, it doesn’t feel that different. But if I plugged in an extra $50 a month I could be adding onto our mortgage payment into an amortization chart and see that it actually saves us over $15,000* and pays off our mortgage almost two years early...that’s what made the difference. You get $100 for your birthday from grandma or a bonus at work, or heck, even a tax refund, and add it to that month's mortgage payment. Anything extra that goes towards the principal can save you hundreds or even thousands of dollars in interest in the long run.

*Over the life of the loan. Based on a 30-year, $300,000 mortgage at 4%. I know, I know, many of you think a $300,000 mortgage is just plain crazy. However, half of you think it's crazy big, and half of you think it's crazy small. I live in the Seattle area, so that's definitely on the low side around here, but your area may be different. Adjust accordingly.

Let me stop for a second and explain what Amortization is.

Disclaimer: This part is boring. I'm bored by it. Maybe you are bored by it. Maybe you are not. My husband is not. He likes spreadsheets and graphs. All that to say, you are an adult and if you have a mortgage or make payments of any kind, you should have a basic understanding of how loans work. So bear with me and we'll get through this together. I'll water it down because that's the extent of my knowledge. Ready? Let's go.

What is Amortization?

Amortization is the process of spreading out a loan {usually a car loan or a home loan} into a series of fixed payments where some of the payment goes toward interest and some go toward reducing the remaining principal (the loan balance). At the end of the payment schedule, your loan is paid for. Over time, each payment includes less in interest {banks want their money up front!} and more towards the balance, but your payment each month is exactly the same. An amortization table can help you understand how your loan payments are applied.

I looked around and this is probably the best tool to use right now that will show you exactly what I mean. 

You plug in your original loan amount, the date of your first payment, the loan length and your interest rate. Once you hit calculate, it will take you the next screen and you will type in any extra payment amount. Play around with it. Any extra payment will save you money and it might surprise you!

Stop Your Scroll

Let's do a quick one together. Let's assume you take out a $200,000 mortgage over 30 years with 3% interest starting this month. Over the course of the loan in 30 years, you will actually pay a total of  $303,554.47 

That's $103,554.47 in interest payments. You're paying that to the bank. Is anyone else standing there with their mouth open? That's a lot of money. That's college tuition for your kid for four years at an in-state university. That's money you could be investing and doubling, tripling, or quadrupling for retirement. And don't forget that the 3% interest rates we see nowadays are historically amazing rates, and certainly not everyone qualifies for them. Plug in a higher rate to see how much more interest you might pay. 

You guys know me. I'll do a lot to save even $1, but to save over $100,000?!? It's motivating alright.

So, now let's get to the next screen where we can plug in extra payments. Let's say you want to pay just $50 extra each month. Know what even $50 a month does? It knocks off  $10,044.30 and 2 years and 7 months (31 monthly payments!) off the life of your loan. 

mortgage calculator pay off

I write a lot of money-saving posts that I share for free with all of you. Go check out a few. If you aren't sure how you can squeeze an extra $50 out of your budget every month to pay extra on your mortgage, check those posts first

What to make a bigger dent? Let's go back to our original numbers where you are taking out $200,000 on a 30-year mortgage at 3%. Your monthly payments are $843.21. Let's double it. Know what you save now? You now save $66,034.10 and you knock off 18 years and 3 months from the life of your loan. That means you can pay off your 30 year home loan in less than 12 years. That means if you have a child in Kindergarten when you move in, you could have your home paid for by the time they leave for college, with tens of thousands of dollars in interest savings to boot! 

mortgage payoff calculator


See how using this amortization tool was motivating for us? Seriously stop and go play around with it for a second. But then come back because I've got more good stuff for you!

Your home loan can feel like a black hole that you are throwing money into. Many people have a hard time seeing themselves in 5 years, let alone 30 years down the road. It’s hard to imagine that by paying extra on your mortgage you can cut off years and tens or hundreds of thousands of dollars in interest. Seeing the numbers helps you visualize the difference that you are making in the life of your home loan.

Don't miss this...

The amount you owe in interest is recalculated each month based on the remaining principal. Your payment will always stay the same, but as the remaining principal goes down, the amount of your payment that goes toward interest also goes down. Conversely, this means that the amount of each payment that goes toward reducing the principal goes up every month! Did you catch that?

This is the secret formula you've been waiting for!!!

money saving formula to help pay off your home fast

At the beginning of your mortgage, most of your payment goes toward interest. That’s when you should dump as much as you can towards the extra principal.

If you are in the first 10 years of a 30-year mortgage, it’s an awesome time to make extra payments, because it makes the biggest difference to pay extra early. When you are 2 years in, it makes a massive difference over the life of the loan. If you are 25 years in, it matters less because relatively little of your payment goes toward interest at that point. It's not that it doesn't matter at all, so don't be discouraged, it just means it matters less.

What Does This Mean?

practical tips to help pay off your mortgage

Buy a Home You Can Afford

It means that you should live in a home that you can afford. It's almost comical sometimes to see how large of a home loan banks will approve you for. That's because banks know you will skip vacations, or meals, or whatever to make sure you have a place to live. Set a budget for a home that you can comfortably afford and maybe even one that you can comfortably afford making extra payments towards.

Plan to Put Extra Toward Your Home Loan From the Beginning

Remember...any amount you can put towards the principal, especially early on, will make a huge difference. Buy a home you can afford! You don’t want to be house poor. If you can only put $50 extra a month towards your principal, then only put $50 towards it. As you start to move up in your job and start making more money you can start paying even more on your home each month. 

Don't Have a Car Loan

Another way to add extra to your house payment is by buying a car you can afford. If you don’t have a car payment, you can add all that extra toward your home. Car loans don’t have to be part of adulthood. We’ve known plenty of people who as soon as they pay off their car, they trade it in for another new car (and car loan) because having a car loan is just part of their life. But once that car loan is paid for {or you pay cash for your car}, then use that extra money each month to pay off your home early. 

Drive a car you can afford and then keep driving it. The cheapest car to own is most likely the one (that's paid off) in your driveway.

Pay Off any Debt

This should go without saying, but it doesn't, so I'm saying it now. You should pay off your credit card debt. If you're paying 20% interest on your credit card, then you are paying the bank a relative fortune every month for the privilege of having that thing you never wear hanging in your closet (or maybe even already donated). If you are looking for extra money you can put towards your mortgage, pay off your credit cards (and their much higher interest rates) first. All that extra money can then be put toward your mortgage to pay it off sooner. 

Check out this post: How to live debt-free without a budget

It's About a Mindset Change Not a Lifestyle Change

I’m not going to tell you to stop going to Starbucks. Your occasional $5 coffee splurge isn’t going to make a huge difference toward paying off your home early. Know what will? Getting rid of that $500 car payment, and applying it toward your mortgage each month. That will make a difference in the long run for building wealth. 

What's that you say? Rachel, you've shared posts time and time again about things you should stop wasting money on now. Yep. And I stand by those. It's important to do whatever you can to live within your means. In our family, I've always been the frugal one saving the money. I use coupons at the grocery store, buy things on sale and purchase used whenever I can to save money. I like to squeeze as much as I can out of our dollar, and it's helped our family live well on less. I've always had the mindset that every dollar is valuable.

BUT those changes are lifestyle changes.

The real money maker for long-term wealth isn't a change of lifestyle, it's a change of mindset. Lifestyle changes can be hard. Sure, you can save some money by not doing things you love like going out with your friends on the weekends or going to the movies. But people like their lifestyle, and it can be difficult to make those types of changes, especially in pursuit of a long-term goal. It takes a mindset change to want to be debt-free, including your home. The mindset of not paying interest to a credit card company or to the bank on a car or home loan is where the biggest changes in your financial life will occur, and those changes can often be made with relatively little impact on your lifestyle.

Some More Mortgage Questions

If interest rates are so low right now, why would I bother to pay it off?

A 3% interest rate sounds low, but over 30 years on a loan in the hundreds of thousands of dollars it really adds up. Go back and check out that mortgage calculator again and look at how much interest you'll be paying with that low interest rate and then tell me you want to keep making that payment each month.

Some financial gurus will advise you not to pay extra towards your home mortgage. If you are paying your mortgage ahead of schedule instead of putting money into investments, you are missing out on the possibility of a higher return. 

Friends, you should probably be doing both, especially if you have tax-advantaged accounts, like a 401(k) or an IRA. However, remember that the stock market is never a guaranteed investment. Your home being paid off is. Whatever your interest rate is, you will make that rate when you pay extra toward the principal on your home loan. Sometimes you make some money (or a lot of money) in the market, sometimes you lose some money (or a lot of money). Paying off your home is a guaranteed investment. No bank can take your home away from you once it's paid for. It's a huge asset. And beyond that, there is a comfort level in knowing that you no longer are burdened by a monthly payment. 

pay extra on mortgage

How Do You Pay Extra on Your Mortgage?

I’ve talked to a lot of people and they don’t even know that this is a) a thing or b) how to do it. I get it. We already talked about how you wouldn't pay extra on your rent and many people look at their mortgage like a rent payment. But, you are a homeowner and you need to think like you are going to own your home in the long run. It’s what you signed up for! 

Every mortgage lender is different, but I’ve heard that it’s not difficult. Total confession: I've never made one mortgage payment. This is my husband's department.

You will want to get a loan that allows you to pay extra. There are some loans that have prepayment penalties. Banks want your money and they want it guaranteed for as long as they can! So read the fine print and make sure you get a mortgage loan that allows you to make extra principal payments.


You also want to make sure that there aren't any restrictions on how and when you can make additional payments. Some loans have terms that encourage you to pay on the payment schedule and they don't want you to deviate from that. If you make an extra payment, they may take that money and put it toward your next month's payment (which includes principal and interest) instead of applying it all toward reducing the principal. 

You don't want that. You always want anything extra you pay on your mortgage to go toward reducing the principal. 

Let me say it again. Any extra payment you make on your home loan should always go entirely toward reducing the principal.

What’s Better, a 15-year Mortgage or a 30-year Mortgage?

You’ll certainly pay less interest over the life of a 15-year mortgage vs. a 30-year mortgage (and can often get a slightly better rate) but if you can’t make the stretch to the higher payment, it’s not better. You want to have flexibility. You don't want to be maxed out on your mortgage, you want to live a life, take a vacation, and enjoy your family. 

When you pay extra you can just do that. Pay extra. 

You can treat a 30-year mortgage like a 15-year mortgage (by making a monthly payment equal to what it would be with a 15-year mortgage) while retaining the flexibility of making payments based on your life situation. You control how much extra you pay towards your mortgage and you can change that each month based on your situation. If a 15-year mortgage is a real stretch, get a 30-year mortgage, pay extra each month, and enjoy the flexibility.


What To Do When Your Home is Paid For

Anything you want! 

I say that assuming you've also taken all my above advice and are currently living debt-free.

Personally, not much in our life is going to change. Will the grass feel different under our feet? Maybe. But probably not. The extra money we will have each month will mainly go towards investments. We also want to live generously. Our families were generous with us and we want to be generous to our future generations. 

We have been able to pay for college for our kids so that they haven't had to take on a mountain of debt. Our oldest son just purchased his first home at the age of 22. Just like his parents did. Our daughter will graduate college with an RN degree and without any debt. Any money she starts making will immediately be money she can invest in her future very early on. And as we saw with the amortization calculator, investing money early on is the best way to build wealth. 

We are frugal. Some might even think we are boring. There is nothing flashy about our life, but most people who are financially stable aren’t flashy. I'm just thinking of the freedom and the fun we can have now that we are completely debt-free. 

Did this inspire you to live any differently? What would you do if you were totally debt-free?

disclaimer: this post may have affiliate links. By clicking on them and purchasing through them, I may receive a small commission. These small purchases help me to continue to keep writing content and creating at Rachel Teodoro. Thank you!


Gary said...

You are spot on about wise money management and many of us are fortunate to have had family support in numerous ways over the years, including paying for college which you noted. When we bought our first house for $65K, I borrowed the down payment from my Dad and paid him back with interest (low) within a few years. Selling and buying houses over the following 48 years was a great learning experience in how fickle the real estate market can be. Remember 2008? It hurt a lot of people. And then there are those who have not ever been able to afford buying a home, so there are lots of variables in the bigger picture. That said, your good work is sound and right on target from my perspective. Well done!

Betsy Hunter said...

I didn’t read your entire post because your “story” is unusual and frankly, it was a slap in my face.

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