More than likely, your mortgage is your largest expense each month. And, you're not alone. December of this past year saw a massive surge in home purchases, most likely related to the incredibly low interests rates. Single-family home purchases alone were 17% higher than in 2019, according to the Iowa Association of Realtors (IAR). Low interest rates (2.8% average!) no doubt helped home buyers get more house for their money, encouraging tremendous growth in the market even amid the pandemic. While we are still in the thick of Covid, interest rates remain strong, propelling 2021's market even further ahead.
IAR stats also show that December saw a massive surge in home purchases with an average of only 48 days on the market, crushing 2019's average of 66 days. That's incredible! But, it's been tough for buyers. With homes flying off the shelves, there's more pressure to pull the trigger, which can be scary when thinking about procuring a sizeable loan.
Easing the Burden
Even with the great rates and awesome yields for home sellers, mortgages can still hang heavy, occupying the bulk of our budgets at an average of $1275/month for a 30-year fixed loan.
Just imagine if the burden was lifted faster than you had imagined. Have you considered paying it off early?
My husband and I purchased our home in the fall of 2014 and the idea of mortgage payoff seems so far off in the distance. With a 30-year mortgage, how could this even be possible?
But, there are many strategies to consider when looking at the long game. And that's just what it is- a long game. It's most likely not possible to pay off your entire mortgage today, this year or even in the next few years. But, there are many small steps you can take to move the process along even further.
The Ramsey Way
Dave Ramsey, financial guru and mentor to many, has proven himself a powerful asset for all, including home owners. In his article, '7 Easy Ways to Pay Off Your Mortgage Early,' he overviews, yep, you guessed it, seven ways you can challenge yourself to push your 30-year term up. But, no one is asking you to enact seven potentially drastic lifestyle changes today. There are a few small switches, however, that you can make.
Eat In, Not Out
Busy schedules make it incredibly easy to cave when it comes to saving time no matter how we can get it. My husband and I are guilty of this so often. We have a refrigerator full of options, yet we see fast food and eating out as tremendous time savers.
Press the pause button! Is that fast food cheeseburger once a month really worth an entire year of no mortgage payment?! That would have to be one tasty burger.
According to Ramsey, a measly addition of $20 a month added to your monthly loan payment can make a big difference- 1 year early payoff. An additional $100 per month bumps that number up even further to three years!
So, next time you pull into the drive-through at your go-to fast food joint or pick up the phone to order pizza, consider where those dollars could be much better spent. I say put the cheeseburger aside, open the fridge, and live a year of your life mortgage-free from a beach in Tahiti fanning your face with those extra Benjamins.
If you're ready to make a bigger financial commitment to knocking years off your loan, consider making an extra mortgage payment each quarter. Based on the average monthly payment of $1275, $400 per month could make a huge difference. If putting your daily coffee aside will knock a year off, consider just how much $400 a month will help in the long-run.
It boils down to this: putting more money toward your mortgage each month (or quarter) equals early payoff. Seems common sense... and simple enough... yet many homeowners never consider the extreme benefits of making such a financial move. Afterall, there's plenty of sunshine on that beach in Tahiti just waiting for someone to soak it all in.
Mortgage Payoff Mistakes
Not everything is peachy-keen when looking into early mortgage payoff. Mistakes can be made if you're not careful and don't do your research ahead of time.
Where is Your Money Going?
The biggest mistake absolutely has to be not making sure your extra payments are going toward your loan principle. Be sure to specify with your lender that your extra payment should be applied to the principle balance. If this isn't made clear, your extra payments may not be helping as much as you think they are. They could instead be going into interest, either partially or fully.
And, speaking of talking with your lender, it is always a good idea to keep them in the loop. Talk with them regarding your options and the best way to proceed in early payoff. In fact, you may learn that there is actually a penalty for paying off your loan early. There are several ways this penalty can be calculated, including equaling a percentage of your mortgage loan amount or even months of lost interest income for them. Clearly, this could cost you more than it would save, rendering all of those extra months of blood, sweat, and tears useless.
Rainy Day Fund
Putting everything you've got into your mortgage, while an aggressive strategy, isn't necessarily a great idea. In fact, if you don't have any sort of cushion in your savings account, this should more thank likely be your first priority (Dave Ramsey suggests, "three to six months of expenses in an emergency fund"). No one wants to be strapped for cash and backed into a tight spot. Having this cushion in your savings covers you when, inevitably, your furnace goes out in the dead of winter or you completely forgot about your car registration until it's sitting on your counter, haunting you and your empty account...
Make sure you're covered when times get tight and, for instance, a pandemic hits leaving you cash poor as you've sunk everything into that early payoff.
So, do your research. Call your lender to get the green light before adding those extra dollars and be sure you've prepared a snag-free safety net to cover the unexpected.
With All of That Said...
In the end, it's never a bad time to sit down and evaluate your monthly expenses- mortgage or not. Even small changes can make a tremendous difference.
While paying off a mortgage early may not be the right choice for you, re-evaluating your finances can help you see where your dollars are going each month, and, more importantly, that they're going to the right places to keep you financially stable for the long-term and able to enjoy life to its fullest both in the future and in the now.
Want to know more about how paying off a mortgage really works? The Consumer Financial Protection Bureau offers many great resources worth looking into!