At PAX Financial Group, we incorporate Dave Ramsey’s philosophies into our coaching, and one of those philosophies is paying off debt. Typically, a mortgage payment is the biggest debt a person has.
A mortgage can be a big expense, and many people struggle every day to stay on top of hefty payments and avoid foreclosure. If you’ve found yourself in this situation, you may think it’s impossible to be a debt-free homeowner. But there are steps you can take to chip away at your mortgage, pay it off early and live that debt-free life you dream of.
Why should you pay off your mortgage early?
For one, it frees up cash flow.
Experts say you’ll need 80 percent of your pre-retirement income to maintain your current lifestyle in retirement. So think about this. Could you comfortably live out your retirement dreams and pay your current mortgage on 80 percent of your current salary? If that doesn’t seem possible, it may be time to reduce your expenses. Paying off your mortgage early creates extra breathing room in your budget that you can then use for other, more enjoyable things.
Secondly, paying off your mortgage early can help you save thousands of dollars on interest.
It makes mathematical sense for most homeowners to get rid of their mortgage payments as soon as they can. It can put thousands of extra dollars back in your pocket and help you build equity quicker.
Ready to have a real conversation about your future? Contact PAX Financial Group to schedule a free, no-strings-attached retirement checkup.
5 Steps to Paying Off Your Mortgage
1. Make Sure You’re Financially Prepared to Own a Home
Many lenders use the 28/36 rule to determine how much mortgage you qualify for. This rule states that:
- Your mortgage payment should be no more than 28 percent of your pre-tax income, and
- Your existing debt plus your new mortgage payment should equal no than 36 percent of pre-tax income
This can equate to a lot of mortgage to be carrying around for 30 years.
If you’re hoping to pay off your home some day, consider taking on a mortgage that is no more than 25 percent of your take-home pay (that’s after taxes, not before).
This may seem low, but it can create space for a stress-free living experience and may allow you to pay your mortgage off earlier than expected.
2. Save for the Biggest Down Payment Possible
Another thing to think about when you first purchase a home is supplying a down payment.
There are plenty of loan providers who will accept down payments as low as 3 percent, but can you do 10 percent? Or more?
When you’re able to put down at least 20 percent as a down payment, you can avoid paying Private Mortgage Insurance (PMI), which typically costs between 0.5 percent and 1 percent annually. PMI on a mortgage of $300,000, can run you $1,500 to $3,000 a year. That’s a lot of money you can save over time.
Making a bigger down payment in the beginning also means you’ll need less money to finance the loan and you’ll have lower monthly mortgage payments. When you have lower monthly mortgage payments, it can be easier to double up every month, meaning you may be able to pay your mortgage off quicker than expected. (See next step.)
3. Make Extra Payments Each Year
When you can pay extra money toward your mortgage, it can make a huge difference.
Going back to our example above, if you have a $300,000 mortgage with a fixed, 4 percent interest rate for 30 years, and you paid an extra $100 per month toward your principal, you’d pay the balance off 3-½ years earlier and you’d save $28,746.23 in interest.
There are many ways to make a few extra mortgage payments per year. Could you pick up a part-time job? Pack your lunch every day instead of going out? Use your tax refund for your mortgage instead of a vacation? The options are endless.
4. Refinance
Nearly 90 percent of mortgages have 30-year fixed terms. But do you really want to be paying a mortgage for three decades? Probably not. Also, these loans have higher interest rates than their 15-year counterparts, so you end up paying even more in interest over the long-run.
Is a 15-year fixed-rate mortgage financially feasible for you? If refinancing isn’t an option, could you increase your current payment so you pay your 30-year mortgage off in 15 years? Even cutting your mortgage down to 20 years can save you thousands in interest.
5. Downsize or Relocate if Necessary
This last one is a bit extreme, but it’s worth mentioning. If you live in a larger home or in a high cost of living area, downsizing or relocating can be one way to become debt-free.
For example, West Virginia has an average home price of $96,300. For that price, you can settle into a nice, 3-bedroom home. But if you live in a state like California, $548,000 could get you a 3-bedroom home or a studio apartment depending on what city you live in.
(Here are 8 reasons why San Antonio is good place to retire.)
What if you sold your home and used the funds to purchase a new house outright? If you’re not tied to a particular location, you may enjoy the smaller monthly payment that comes with owning a smaller home in a cheaper area.
The Bottom Line
Paying off your mortgage early can not only help with your cash flow, but it can help you live a more enjoyable retirement – think of all the extra money you could have to do things later in life!
It’s never too late to become a debt-free homeowner. At PAX Financial Group, we can look at your finances, draft up a plan based on your specific goals and help you stick to the plan you put in place. Contact us to get started.
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