Any tips from those who have paid off their house early or are on track to do so?

[aprilchem]

The only bad thing about paying off early is losing a huge chunk of your tax deduction.

This isn't actually a savings - you come out ahead monetarily when you don't get the tax deduction but also aren't paying thousands a year in interest on your home.

I am 38 and DH is 43, and we only have about 3 years left until we pay off our house. For us, the key was getting a 15 year mortgage instead of a 30 year, and then paying extra on top of that. It will be SO nice when we no longer pay a mortgage payment each month, and it will allow DH to quit working, homeschool our kids, and start a small business out of our home. We are very much looking forward to it!

 

[Disneefun]

This isn't actually a savings - you come out ahead monetarily when you don't get the tax deduction but also aren't paying thousands a year in interest on your home.

Yep. Plus, once you dip below a certain balance, you no longer get the deduction, anyway. We've been at that point for a few years now. Even when we itemize, we no longer pay enough in interest to get anything more than our standard deduction. Might as well get rid of the house payment.

 

[100AcreWood]

The only bad thing about paying off early is losing a huge chunk of your tax deduction.

DR talks about this a lot on his talk show. I found this quick explanation on the net:
"Another line they’ll throw out is that you don’t want to lose your tax deduction. This one’s really silly! If you have a $200,000 loan at five percent interest, you’ll pay about $10,000 a year in interest. Now, let’s also say you make $70,000 a year, and you’re in the 25 percent tax bracket. That $10,000 tax deduction is saving you $2,500 in taxes. In essence, you’re sending $10,000 to the mortgage company to keep from sending the government $2,500. That’s pretty stupid! You’d be better off to be debt-free and give $10,000 to some charity or your church. That way, you’ll save on taxes and do some good with the money."

 

[summersalt]

We did it! We made our last payment on January 1st and our DD starts college in August. It's a wonderful feeling! We financed our home for 15 years but then refinance back to 10 years when the interest rates dropped. We sent every available dollar to our mortgage company so we could get rid of that payment. I feel like a huge weight has been lifted. Knowing that we can pay cash up front for our daughters education is also an AWESOME way for her to begin adult life! Life is good in the Jones' home.

 

[sweetdana]

We paid every extra penny we could to principal. If I got a 5K bonus at work.. I sent a payment of additional 5K to loan company. Nearly every bonus I got went there. I would pick up every bit of OT/extra jobs I could to get as many extra $$ as I could and paid them down.


If you do not get any OT or bonus, I would try and make every extra penny you could Ebay/craigslist/crafts/second job/ ect and put that towards it. ..

 

[ptlohmysoul]

Dh and I have been following Dave Ramsey for 8 years. We are determined to pay off the mortgage early. We have 18 years left and are trying to be done in 10. Any tips from those who have been there/done that?

The thought of having no mortgage payments when our kids go to college is an awesome feeling.

I am debt averse, so I paid off my mortgage on my townhouse when I was single. Every extra penny went to pay off the mortgage and I enjoyed using a spreadsheet to see the $$ I was saving in not paying interest, plus seeing how soon I wouldn't have to pay a mortgage any more. I even limited my favorite past time at the time (eating out at restaurants), but didn't eliminate it.

I never switched from a 30 year loan to a lower number of years, because I felt if any emergencies came up, I could always use the extra money I was paying on the mortgage for the emergency. I paid my townhouse off in 12 years.

 

[seasheller]

Make out an amortization schedule (how to is online). We print out one for any loan we have ever taken out - which has been three times for houses and twice for cars in the 50+ years we have been married. You will be amazed at how much is considered a principal payment in the first few years of the loan since most all of it goes toward your interest payment. At the beginning of a loan, it is very easy to add on extra principal payments for as many months as possible, and then you can just forget about the interest payments for those months. All of our houses were paid off in less than half of the time of the loan and we hope to do the same with the car we just bought.

 

[KennesawNemo]

We bought our last house in 2006 with $0 down. First mortgage rate is 6.x% and second mortgage rate is 8.x%.

When we had the 2nd mortgage, all my paycheck went to extra principal payment until it was paid off. Then with 1st mortage, we first paid 10% extra every month. Anytime I have $5000 in extra savings, it went there too. We also refinanced twice during that time.

I would have paid off my house in 8 years. However, we just moved to a more expensive house last year or better school district and better commute.

I have been evaluating my options. I could pay a little bit more each month and paid off my house in 15 years, but my mortgage rate is only 3.375%. I have much more investment options than that. I decided to to invest as much as I can in 401k, roth ira, and 529 rather than paying more principal. Granted, these investments are not risk free, but historically, in long run, on average, even including the down time, the return is 5-8%.

Now if I ever make more money than now, I would start to pay off more mortgage.

 

[chicagodisneyfan]

I have been evaluating my options. I could pay a little bit more each month and paid off my house in 15 years, but my mortgage rate is only 3.375%. I have much more investment options than that. I decided to to invest as much as I can in 401k, roth ira, and 529 rather than paying more principal. Granted, these investments are not risk free, but historically, in long run, on average, even including the down time, the return is 5-8%.

Now if I ever make more money than now, I would start to pay off more mortgage.

If one has an interest rate lower than 5%, I believe it is silly to pay off the mortgage. I have investments that paid more than 30% last year alone. Others have average 11% for the past 10 years.

Why would you pay off the mortgage when you could be plowing all the money into investments?

I have no advice OP other than to say I think it is a bad financial idea for most folks.

 

[Gumbo4x4]

DR talks about this a lot on his talk show. I found this quick explanation on the net:
"Another line they’ll throw out is that you don’t want to lose your tax deduction. This one’s really silly! If you have a $200,000 loan at five percent interest, you’ll pay about $10,000 a year in interest. Now, let’s also say you make $70,000 a year, and you’re in the 25 percent tax bracket. That $10,000 tax deduction is saving you $2,500 in taxes. In essence, you’re sending $10,000 to the mortgage company to keep from sending the government $2,500. That’s pretty stupid! You’d be better off to be debt-free and give $10,000 to some charity or your church. That way, you’ll save on taxes and do some good with the money."

Yup, there is no such thing as good debt. There is bad debt and worse debt. Mortgage is the least objectionable for many reasons, but you're still far better off without it.

Let me put it this way, I have two friends who paid their homes off VERY early, as in still in their 20's. Neither has had a loan of any kind since. 20+ years for one, 30+ for the other. And neither makes big money. They're just both able to buy everything cheaper, because they don't pay interest EVER. And they have more disposable income due to decades of no mortgage payment. It's amazing what that can do for you. Wish I was in that boat!

 

[Judique]

If one has an interest rate lower than 5%, I believe it is silly to pay off the mortgage. I have investments that paid more than 30% last year alone. Others have average 11% for the past 10 years.

Why would you pay off the mortgage when you could be plowing all the money into investments?

I have no advice OP other than to say I think it is a bad financial idea for most folks.

Agree with this. Also, as far as your equity, the market will determine the value of your house, not whether it is paid off or mortgaged. All that paid for 'equity' could evaporate in a severe market down turn.

 

[A_Princess'_Daddy]

DR talks about this a lot on his talk show. I found this quick explanation on the net:
"Another line they’ll throw out is that you don’t want to lose your tax deduction. This one’s really silly! If you have a $200,000 loan at five percent interest, you’ll pay about $10,000 a year in interest. Now, let’s also say you make $70,000 a year, and you’re in the 25 percent tax bracket. That $10,000 tax deduction is saving you $2,500 in taxes. In essence, you’re sending $10,000 to the mortgage company to keep from sending the government $2,500. That’s pretty stupid! You’d be better off to be debt-free and give $10,000 to some charity or your church. That way, you’ll save on taxes and do some good with the money."

The problem with this is that while it is an attractive sound bite, it is only one side of the equation and, frankly, just terrible financial advice in a vacuum.

The tax deductibility of mortgage interest lowers the effective APR of the mortgage, and can do so quite significantly, but even if interest was not deductible, paying off a loan rather than investing the extra income in the market at a much higher rate of return is just bad financial advice.

For example, my wife and I have a rather large mortgage at a 4.5% rate for 30 years. After the mortgage deduction and our tax bracket the effective APR is reduced to approximately 2.88%, so we borrowed money at less than 3%. Therefore, if I pay it off quickly, I save 3% a year. If I invest what I would have paid extra in principal and earn 10% on the money over time, I am more than 7% ahead on my money, and over time that money compounds, year over year and grows faster and faster. So rather than having a paid off house in 15 years I'll have significantly more in assets that I can use to pay off my house, if need be, or to finance other endeavors while I continue to use the bank's money at 3%. It is the definition of penny wise, pound foolish.

I know people will say "I lack the discipline to save the extra money" but then I want to ask, "how do you have the discipline to pay the extra money towards principal each month?" It's the same discipline, I'm just earning 7% more on my money. You can even set up with any brokerage house I know to do monthly automatic investments into a mutual fund, so it's no more difficult than sending the extra payment to the mortgage company.

Dave Ramsey, in my opinion, does more to harm his followers than he does to help them, because he doesn't explain how money works (the above example is arbitrage 101), he merely instills a shockingly intense fear of debt. As I've said before on similar threads, debt is neither inherently good nor bad, it is merely a tool. And like any tool, it can be used for good or bad purposes, but that is because of the actions of the person using the tool, not because the tool in and of itself has innate goodness or badness.

 

[A_Princess'_Daddy]

Let me try a simple but mathematically real example to see if it helps explain my distaste for Dave Ramsey's methodology:

Couple A & Couple B both take out $375,000 mortgages at 4.5% to buy a home worth $450,000 in 2014.

Couple A pays an extra $1,000 per month towards principal, thereby paying off the mortgage in almost exactly 15 years (14 years, 10 months to be precise). At that point, they have a home worth $600,000, no mortgage debt, so effective equity of $600,000.

Couple B pays the mortgage as scheduled and invests $1,000 every month in a brokerage account earning 10% per year. In 15 years, the brokerage account will be worth $401,000 and their home will be worth $600,000. They will have a balance remaining on their mortgage of approximately $249,000, giving them effective equity of $752,000.

Couple B is $152,000 ahead of Couple A in fifteen years and has $152,000 to keep working in the market, versus Couple A which is just getting started. Just as importantly, should Couple B decide at that time to pay off the balance on their mortgage, they are still $152,000 ahead of Couple A after paying off their mortgage in full.

I realize the world's not perfect, markets (both equity and real estate) fluctuate, but borrowing money cheaply and investing it wisely is mathematically always going to win in the long run.

 

[crisi]

We paid ours off in seven for the cash flow by applying bonuses for work.

When mortgage interests were 4%, I bought a second home for a year or so - resold it, and kept the mortgage. I put most of the proceeds of the home into the stock market (I did pay down the mortgage to a comfortable 'risk level' for me.) Currently, I have a lot of stock that is paying over 4% in dividends (ATT, British Petrolium, Verizon, a bunch of energy companies), and Uncle Sam gives me a tax break on the interest - its an extra $1200 a year in my pocket - not including any potential gains from the market. Granted, there is some risk, the market could crash and it could take several years to recover the principle, but I have several years.

 

[KennesawNemo]

If one has an interest rate lower than 5%, I believe it is silly to pay off the mortgage. I have investments that paid more than 30% last year alone. Others have average 11% for the past 10 years.

Why would you pay off the mortgage when you could be plowing all the money into investments?

I have no advice OP other than to say I think it is a bad financial idea for most folks.

I agree with you to some extent. All the funds in my retirement account or 529had a return from 15% to 40% last year. It averages out to be around 28%. In the long wrong, the lowest performed one would have an average of 5%.

However, no everyone likes to spend time and energy to actively manage his investment and the saving of mortgage interest is a no brainer. If my retirement is well funded and my kids college are well funded, I really can afford to be lazy. LoL

 

[supersnoop]

Let me try a simple but mathematically real example to see if it helps explain my distaste for Dave Ramsey's methodology:

Don't confuse Dave Ramsey with math. His entire basis is emotion. You'll feel better by achieving easier goals; at least that's his plan. It never stands up to the math.

 

[supersnoop]

The tax deductibility of mortgage interest lowers the effective APR of the mortgage, and can do so quite significantly, but even if interest was not deductible, paying off a loan rather than investing the extra income in the market at a much higher rate of return is just bad financial advice.

Did you include the opportunity cost of the standard deduction when calculating your effective APR?

The standard deduction for couples is $12,200 this year. If you have $10,000 in mortgage interest and a $4,000 property tax bill, you're only "saving" the tax on $1,800 beyond what someone with no deductions would save. For someone without a mortgage, they'll get the full benefit of the $12,200 standard deduction without paying a dime in interest.

 

[100AcreWood]

Let me try a simple but mathematically real example to see if it helps explain my distaste for Dave Ramsey's methodology:

Couple A & Couple B both take out $375,000 mortgages at 4.5% to buy a home worth $450,000 in 2014.

Couple A pays an extra $1,000 per month towards principal, thereby paying off the mortgage in almost exactly 15 years (14 years, 10 months to be precise). At that point, they have a home worth $600,000, no mortgage debt, so effective equity of $600,000.

Couple B pays the mortgage as scheduled and invests $1,000 every month in a brokerage account earning 10% per year. In 15 years, the brokerage account will be worth $401,000 and their home will be worth $600,000. They will have a balance remaining on their mortgage of approximately $249,000, giving them effective equity of $752,000.

Couple B is $152,000 ahead of Couple A in fifteen years and has $152,000 to keep working in the market, versus Couple A which is just getting started. Just as importantly, should Couple B decide at that time to pay off the balance on their mortgage, they are still $152,000 ahead of Couple A after paying off their mortgage in full.

I realize the world's not perfect, markets (both equity and real estate) fluctuate, but borrowing money cheaply and investing it wisely is mathematically always going to win in the long run.

So first, thanks for everyone for responding. I appreciate all the great stories of how you paid off your mortgage early. And Princess Daddy - I really appreciate the time you took to explain your reasoning for investing vs. paying off the mortgage. This is something I plan to explore further with my accountant. So I assume couple B invested their extra cash into roth IRAs with the thought of paying off their mortgage when they retire?

 

[AnnaS]

Pay as much as you can extra, every month, and specify that the extra is to be applied to the principal.

Good luck! Financial freedom is a great goal to have.

This is what we did. We sent a "minimum" of $100 each month. We also refinanced once to a lower interest. We kept our payment the same and did not add the closing costs to our payment to do this. Much more money went into the principal. I would not pay to have papers set up for a bi-monthly mortgage. If you are disciplined, you can just send the extra payment.

Three kids in Catholic schools and same for high school. When mortgage was paid off - one started college and the money was put into what we feel good use again.

Good luck!!!!

 

[A_Princess'_Daddy]

Did you include the opportunity cost of the standard deduction when calculating your effective APR?

The standard deduction for couples is $12,200 this year. If you have $10,000 in mortgage interest and a $4,000 property tax bill, you're only "saving" the tax on $1,800 beyond what someone with no deductions would save. For someone without a mortgage, they'll get the full benefit of the $12,200 standard deduction without paying a dime in interest.

That's not germane to the example I gave, as I did not impute the lower APR and the delta between the mortgage rate and the return on invested assets was more than sufficient to make the example work (and I was in an airport lounge and not particularly interested in developing the more complex model), but in my family's actual example, yes I do factor it in (but it's still not relevant due to our other itemized deductions).

So first, thanks for everyone for responding. I appreciate all the great stories of how you paid off your mortgage early. And Princess Daddy - I really appreciate the time you took to explain your reasoning for investing vs. paying off the mortgage. This is something I plan to explore further with my accountant. So I assume couple B invested their extra cash into roth IRAs with the thought of paying off their mortgage when they retire?

In my example, which is admittedly too simple, Couple B simply put their investments into a general brokerage account that they could access at any time, should they need to (as early withdrawals from qualified retirement plans would generate ordinary income plus the 10% penalty). As a result, I did not factor in taxes on the capital gains and ordinary income within the brokerage account, which would impact the effective yield, but I also did not factor in the value of the mortgage interest deduction in increasing net income to Couple B, and I assume for most people who are not churning their investments but rather investing for the long term it would essentially wash or come out slightly to the better for the investor. I'm not familiar with the contributory limits of the Roth IRA right now, but I'm fairly certain that $12,000 in a year would exceed the limits on what two people can contribute, but you could increase your 401(k) or 403(b) savings, or split them amongst those and an IRA (Roth or traditional) if you don't want to open a traditional brokerage account to buy and hold whatever investments (most likely diversified mutual funds) you purchase with your excess income.

What you want to be sure of, however, is that you are investing the extra with the same diligence and commitment as you would if you were sending the extra to pay down your mortgage. If you don't, and just end up spending the extra, then it won't work and you would have been better paying off your mortgage early. What I have found, however, is that followers of Dave Ramsey have incredible diligence, but because he doesn't actually explain how money works but rather just instills a fear of debt, they use that diligence to make financial decisions that are not as wise as they otherwise could have made.