A mortgage is probably the only debt I’d ever partially endorse, given that it’s a vehicle to obtaining a home. And a man’s (or women’s) home is their castle. But what if I told you that you could show you how to pay off the mortgage early, even in half the time? What is the best way to pay off a mortgage early?
If you’re a fan of Grant Cardone, you’ll know his views on buying a home and why you should avoid it. But, if having a home is really important to you and your family, then obtaining a mortgage to finance the purchase is unavoidable 99% of the time.
However, a mortgage is still debt and I really dislike debt. Though the thought of paying a mortgage down in half the time, given the sheer size of it compared with your other debts, may seem daunting at best, and impossible at worst. Plus, that would mean having to double the payment, wouldn’t it?
Nope, not at all. I can show you how to pay off a mortgage fast – without having to actually sell the house!
There’s a little known strategy called the Mortgage Accelerator strategy where you could pay off your mortgage in half the time, without having to double your payments.
Let’s get stuck in.
First, the basics…
This is the most important concept to understand if you plan to stay debt free forever.
And for you to understand exactly how it works, I’ll ask you a question: What would you rather have, a million dollars in cash right now, or one penny today, two pennies tomorrow, four pennies the next day, eight pennies the next one and so on for the next 30 days?
This is the magic of compound interest. A penny doubled every day may not seem like much, but the compounding factor is incredible. In fact, Albert Einstein was quoted as saying “The most powerful force in the universe is compound interest.”
As you can see in the table above, a penny doubled every day gives you over $5,000,000 in just 30 days. This is how powerful compound interest is. And this is what credit card companies are using against you.
If you own your own home you may not even think of your mortgage as debt. You may even believe that the house is really yours. You need to understand how mortgage loans work if you want to be truly debt-free.
Home mortgages operate the same way that credit cards do. The difference is that mortgage companies will never say that the interest on their loans is compounded daily (maybe on their fine print, buried among hundreds of pages that you sign). But now that you understand how compound interest works, you may start to realize that it only makes sense to pay off your mortgage as soon as possible. Below we’ll go through the process of how to pay off a mortgage fast.
Most people just assume that the interest on their mortgage is simple interest. When they get a 4% interest rate, they think that the interest they pay will be 4% of the total amount they financed, calculated yearly. But nothing could be further from the truth. In reality, if you paid off your whole mortgage in one year, then yes, the interest rate would be 4% (well, actually a little more because of the compounding effect, but I’m trying to illustrate a point here). But if it is paid over 30 years, then the actual interest rate is almost 100%! Think about it! You could buy almost 2 houses with the same money!
Mortgage acceleration versus investing
As far as investing your money somewhere else that could give you a higher return (higher than your mortgage interest), let me offer the following facts to you: whatever interest you pay on your mortgage, will be the GUARANTEED interest you will make by paying it off (or paying it down). You cannot guarantee the performance of any other investment, as you probably already know. Market conditions fluctuate and could affect your investments; however, paying off your 6% mortgage is a guaranteed 6% “return”.
And let’s face it, most people are not keen investors. Many will have a Mutual Fund or retirement account that they rarely review, and investing does take a lot of planning and research. Without proper planning and research you could be “throwing darts” at your financial future. When you consider this, then paying off your mortgage early does make financial sense due to its simplicity and high return. However, if you are a keen investor, then it may make sense not to pay off your mortgage and invest your discretionary income somewhere else. Below is what I believe is the best way to pay off a mortgage early.
If not though, let’s talk about the…
Mortgage acceleration method
This is essentially an over payment strategy, but one with a bot more thought behind it. It’s not a case of just throwing random spare cash at your mortgage, it’s more methodical than that. However, overpaying by any amount is never a bad thing!
First things first, you’ll know by now that compound interest stinks! And even with low mortgage interest rates, given the much longer duration of the term, the overall impact is almost on a par with shorter term, higher rate loans.
Firstly, get a hold of a loan amortization schedule from your mortgage lender. This is essentially a very long table that breaks down every payment over the life of the loan into its capital and interest elements.
For example, if your monthly repayment is $1,163.85, an interest rate of 4.2% and 27 years (324 months) remaining term of the loan, your amortization would look like this:
Over the term of the mortgage (27 years or 324 months), you’ll be paying $151,759.90 in interest alone. The below screenshot shows what the monthly capital repayment amounts are. So in month 1, your repayment of $1,163.85 is only repaying the loan balance by $375.20, the other $788.65 is paying interest that’s been accrued!
Now, essentially the mortgage acceleration strategy requires an over payment each month, but it’s strategic. Additionally, if you’ve followed my Debt Destruction method, you’ll have more than enough to cover the additional payment in question.
The over payment you’re going to make, each month, is the NEXT month’s capital repayment. You’re bringing your capital repayment portion forward by 1 month.
So, if we were starting from Month 1; you’d pay $1,540.37 ($1,163.85 routine payment PLUS $376.52 which is the capital repayment portion for Month 2). Your monthly payment is $1,163.85, but by sending $1,540.37 you are effectively paying 2 months!
What you are actually doing here is that in Month 1, you are paying the Month 2 capital repayment in full with only $376.52. This way you won’t have to pay interest on that $376.52 when making the Month 2 payment. Now in Month 2 you still have to send a payment, so you send the Month 3 payment (you already paid for Month 2) and also include the capital repayment of $377.83 for the Month 3, to be applied towards the principal. So again, you are paying one full month (Month 3) with only $377.83.
I’ve illustrated the above scenario – take a look below.
What should be getting your spine tingling with excitement (or am I the only one who gets their jollies from awesome financial models that show $000s in savings?) is the box at the top right that I’ve highlighted in yellow outline:
- A term saving of 162 months (50%) – that’s 13.5 years! Literally half the time.
- An interest saving of $75,683.13 (49.9%)! Cha-CHING ? ?
So there you have it. A mortgage paid off in half the time, but without having to sell any vital organs to subsidise the payments. You’re on your way to Financial Freedom.
Have any of you tried this or used this method before? Is this the best way to pay off a mortgage early? What were your results and findings? Please leave a comment below to let everyone know.
To your financial future.
6 thoughts on “How To Pay Off The Mortgage Early”
Very interesting article! It’s all true about Compound Interest.
I have used the Rule of 7 (which is basically Compound Interest) with my investments. In 10 years, I doubled my money with an annuity paying 7% interest which I left in the account without annuitizing it. At the end of 10 years, I had doubled my money. The “rule of 7” states that the amount of time required to double your money can be estimated by dividing 72 by your rate of return. 1 For example: If you invest money at a 10% return, you will double your money every 7.2 years. … If you invest at a 7% return, you will double your money every 10.2 years. Very true, and most people don’t even think of it.
Thanks for this awesome contribution Monique! Yes, it’s incredible the power of compound interest when it works in your favour – just avoid having it work against you.
I have to say this is very helpful. We’ve been paying on our mortgage for 10 years now and I’ve never refinanced or done anything to pay it off quicker. I will be applying these techniques as soon as possible due to also the market being excellent right now to do so. Thank you for sharing this valuable info.
You’re welcome AJ. The sooner the debt is gone, the sooner Financial Freedom can be obtained.
All the best!
I basically dislike debts, even more so if with banks, exactly for that reason. I will rather wait some time and put together the money needed for what I want. I do understand, however, that sometimes, especially with huge purchases they are difficult to avoid. Also, very rarely, though, but you can run into a favourable loan with some subsidies, when I can justify it, if you can make a good use of the money.
But, this…what an interesting and clever reasoning! In my home country banks require you to stick to schedule and actually do charge you a separate fee if you want to pay off the loan earlier than planned. I wander whether this way how you described it would be qualified as non-sticking to the plan.
Thanks for the message 🙂
You’re correct that early repayment charges exist. I’m based in the UK and if you settle the loan early, some banks can charge up to 5% of the balance. However, you ARE entitled to overpay up to 10% of the balance every year without penalty. I think with this approach, you may only start reaching that limit in the outer years, however by then the balance should be much lower and any charge would be exponentially smaller, and additionally if you’re outside of the fixed rate period (normally 2,3,5 or 10 years), there’s no early repayment charge.
Hope that helps.
All the best,