Only a true fan of leveraged investing looks at a mortgage as anything other than one of their largest bills that they would love to eliminate from their life. Just think of it—what could you do every month if you didn't have a mortgage payment? If you're like most docs, with a paid-off mortgage, you could buy a new car every year. You could go on several very nice international vacations. Perhaps you could reach financial independence half a decade earlier by investing what you were paying.
Long-term readers know that we paid off our mortgage in about 7 years and are currently debt-free. This was a major financial goal for us and one we are happy to have accomplished. If you would like to do the same, consider these 10 strategies to pay off a mortgage quickly.
# 1 Don't Get a Big Fat Mortgage
There is a reason this “technique” is listed first—because it is the most effective! Want to know the best way to pay off your mortgage early? Make it a very small part of your financial life. You can start by buying a house you can actually afford. My usual guideline is to keep the mortgage to less than 2X your gross household income. But guess what? Nobody says you HAVE to get a 2X house. You could get a 1X house. Or a 0.5X house. Even if you want that 2X (or 3X or 4X) house, you could just put down more money and keep the mortgage to income ratio low. That would mean you would have to control your spending, of course. But the less you spend and the more you put down, the easier it's going to be to pay off the mortgage. And if you think you can stretch that guideline because you live in NYC, DC, or California, please only go 3-4X and make changes elsewhere in your financial life to make up for it.
# 2 Don't Get a Big Long Mortgage
Guess what? If you get a 15-year mortgage, never refinance, and make all of the mortgage payments, you'll have it paid off in 15 years. You could even get a 10-year mortgage if you want. Want to pay off your mortgage quickly to reduce interest? Reduce it even more by getting a lower interest rate for committing to a shorter mortgage period.
#3 Make Biweekly Payments
This is one that people think is pretty awesome. Instead of paying your mortgage once a month, pay half your mortgage every two weeks. Instead of making 12 full payments a year, you'll make 26 half-payments, the equivalent of an additional payment every year! On a 30-year 5% mortgage, just doing this knocks 3 1/2 years off your mortgage.
# 4 Pay a Little Extra Each Month
You know what else pays off your mortgage faster? Throwing more money at it. Imagine you have a $500K 30-year 5% mortgage. The principal and interest payment on that is $2,684. What if you threw an extra $500 a month at that? Well, you'd knock almost 9 years off the mortgage.
#5 Refinance Your Mortgage
What's the best way to pay off your mortgage early? Never get a big fat mortgage!
If you've got an above-market mortgage, this can help a lot too. Just be sure you don't “reset” the payment period to 30 years! Take the difference between your old payment and your new one and pay it as an extra principal payment each month. To make this even more powerful, refinance into a SHORTER period (like from a 30 year to a 15 year) AND throw any extra cash into the loan.
For example, let's say you've been paying on a 5%, 30-year, $500K mortgage for 3 years. You've paid off $23,282. Let's say you're ready to go to a 15-year mortgage and you're able to refinance into a 3.5% 15-year mortgage AND that you have $50K sitting around that you're going to throw into the mortgage as part of the refinance. Your mortgage payment only went from $2,684 to $3,051 and you knocked 12 years off your mortgage.
# 6 Mortgage Acceleration
This one has made the rounds out there, mostly by people hoping to profit from selling you this “system”. The bottom line is that you use a HELOC as a checking account. This saves you a little money by allowing your “checking money” to be earning at a higher interest rate (the rate of the HELOC), but mostly just tricks you into putting more money toward the mortgage. It works, but not nearly as well as the system sellers would like you to believe. Watch those fees!
Recommended Reading
Does Mortgage Acceleration Really Work?
# 7 Sell the House
Just because you bought a big house with a big mortgage in a high cost of living area at one point doesn't mean you have to stay there forever. If you sell the house, the mortgage goes away. If you buy a cheaper one, you may not have a mortgage on it, or at least should have a smaller one that you can pay off more quickly.
# 8 Sell the Rental Properties
Are you burdened with not one but two, three, or even four mortgages? Why not sell off all those rental properties and use the proceeds to pay off your mortgage? Yes, you may come out ahead holding on to your properties and maximally leveraging up your life (especially if appreciation works out well for you). But, by selling rental properties you'll have a rapid way to eliminate a lot of debt from your life in one fell swoop.
# 9 The Mortgage Side Fund
This is one that Katie and I tried for a while. Instead of putting extra money toward our 2.75% mortgage (more like 1.6% after-tax), we invested it in a taxable account (after maxing out our retirement accounts). The plan was to wait until the taxable account equaled the mortgage and then liquidate the investments and pay off the mortgage. The idea was to borrow at 1.6% and earn at 5%, 8%, 10%, 12%+! You can read more about it here. We never actually ended up liquidating the investments because we found an even better way to pay off a mortgage quickly.
# 10 Toss Wind Falls at the Mortgage
This is what Katie and I actually did. When we earned more income than we expected or otherwise had a windfall, we threw it at the mortgage. The bigger or more frequent the windfalls, the faster the mortgage goes away. Again, imagine you have a 5%, 30-year, $500K mortgage and you get a $50K windfall every three years you will throw at the mortgage. How long until the mortgage is paid off? 15 years. Luckily for us, our windfalls were larger and more frequent than that. We were 6 years into our 15-year mortgage and used three large windfalls over the course of about a year and a half to finish it off.
So if you're sick of your mortgage, use one or more of the above techniques to get it out of your life! If you don't like it, you can always go back into debt but if you're like me, you're never going back to that.
What do you think? Have you paid off your mortgage? How did you do it? What do you think is the best way to pay off a mortgage quickly? If you're working on paying your mortgage early, what are you doing and how is it working? Comment below!
We bought a new house last fall. 15 year fixed at 4.375%. Rates fell this year and we refinanced to a 3.375% at the same end date.
This reduces our payments by about 200 a month. We decided to keep paying the original payment and it will now be paid off in less then 14 years total. The fact that I am lazy and did not want to figure out how to change the auto pay amount might have influenced the decision.
When I got this mortgage everyone involved acted like they never saw a 15 year fixed before. I figured since it was a standard choice it must be somewhat common but it did not seem to be.
When I refinanced to they were also surprised that I did not want to take equity out of the home.
I wonder what percentage of house holds actually ever achieve a paid off mortgage? Based on my recent experiences it would seem not too many.
This is what we did as well, except our timeline started a little sooner. Started with a 15-year mortgage in 2014 at 3.875% and then refinanced a couple of years later at 2.875%. Kept the mortgage payment the same, which means there’s an extra $400 going straight to principal every month. Sure I could have diverted that extra money to investing, but we are already putting away 6 figures annually towards retirement. This will also help us to be able to divert the (former) mortgage payment to cash flow kids’ college expenses in case the amount we will have saved in 529s isn’t enough. We will have two in college at the same time for 4 years, with another 2 years on either end of only one kid in college, assuming they all go o schedule of course.
Our mortgage guy actually asked us if we wanted to do a 30-year or a 15-year and didn’t seem too fazed when we opted for the 15-year option.
Yes, normal is to revel in your debt and pay interest to others your entire life. You’re weird.
When I bought my “forever home” back in 2005, the price of the house was 1.67x my guaranteed base income (because my income has grown substantially through the years, that initial price is now closer to 0.5x my income).
I did not have much financial accumen so I decided to go with a 30 year fixed mortgage at a 5.625% rate (which was considered good for the time). I could have saved interest rate points if I had gone with the 15 year setup but was not as comfortable with the monthly payments back then.
When I finally decided I wanted to become debt free I threw everything extra each month towards that mortgage balance and rapidly took it down (at one point I was sending $20k+/mo towards the principal). All told I paid off my mortgage in 9 years and calculated that there was over $350k interest saved by doing so.
I know I would have made much more money if I kept all those dollars invested in the market but this is because it is easy to see in hindsight. Who knew what the market would do but I knew I was guaranteed a 5.625% return by paying it off (slightly less if you factor in tax deductions).
I would advise not using mortgage accelerator companies because anyone can essentially do it on their own without any fees. As you mentioned, even paying bi-weekly instead of monthly will accelerate your payoff without any extra fees incurred.
For those that swear by using arbitrage to their advantage to invest in the market instead of paying off a mortgage, the simple question would be this: If you had a fully paid off home, would you borrow against it and put it all in the market? If the answer is no, then you realize the peace of mind that comes with not owing the bank anything.
I’m sure it was unintended, but the humble-bragging is a little heavy handed here…
I am 80. We have a house valued at 675 k. We have a 7 yr interest only ARM of 325k at 3.75%, Monthly payments are $1021 . We have a nonqualified equity acct of $850k that we could use to pay off the Mtg, its return is averageing 7%.
When .mtg interest counted toward itemized deducton it seemed no brainer to regard the .mo thly pament as deductable rent payments. Now. We can’t reach the 20k standard deducton.
So earning 5 to 7 % but using someone elses money at 3.75 %. Still think we’d be better off to pay it off ?
I would have paid it off 40 years ago. Not much benefit there for all the risk you’re taking IMHO, especially at 80. But if you’ve also got $5M in an IRA or something I guess it doesn’t matter what you do. But if all you have is SS + that $850K….I’d probably pay it off.
I find 5.6% guaranteed pretty attractive actually.
That question about borrowing the full equity when the mortgage is paid off is a bit facetious, isn’t it? When the mortgage is paid off, we are older and less likely to take equity risk. Especially if FIRE is a goal. May have already won the game.
There is no age requirement to paying off a mortgage.
Good article. I agree and we are tying to pay our mortgage off as soon as possible. We are 38 and 33 years of age, and bought our home 6 years ago for $225,000 with 10% down payment. We refinanced 3 years ago to get rid of the PMI and save around 1% on our interest rate, which is now at 3.875%. Our incomes have increased since we bought the house, and we have made numerous extra payments each month, and have a $122,000 remaining balance. Our plan was to sell the stock options I had from my job, but the stock has hit a downturn, and might need at least another year to recover to the target price value of the options being worth around $50,000. So, in the meantime we are just adding to our savings accounts and trying hard to stay focused and make it all the way up the big mortgage mountain and down the other side. At this point, with what we have in our savings and investments (not retirement accts), we most likely will have it fully paid off in 18-24 months for now. It’s not at all easy, but we know it will be worth it as soon as we make it across the finish line. Thanks again for the great article.
We practiced #1, #2, and #4. Our current mortgage was just 1.8x our household income and was for a 15 year term. We’ve been aggressively paying it down and should have it paid off next, just over five years from taking it out. The savings from doing so have outpaced the returns we would have experienced by just buying more bonds. And once the mortgage is gone, our cash flow situation will improve and our need for liquidity will drop significantly. Win-win-win.
We have purchased two houses and are about to build a third one (down sizing now). The first two purchases were about 1.5X my income. We paid off the second one in 2001 and have not had a mortgage since. We used the snow ball method. Debt free is better than we thought it would be and we don’t intend to go back again. I’m a big fan of having a paid off house. It frees up so much money for other great things to do in life besides give the bank extra interest. I’m putting this post on Fawcett’s Favorites next week. Thanks.
Dr. Cory S. Fawcett
Prescription for Financial Success
We are in the process of refinancing- 4.49% 30 year fixed, home purchased 2.5 years ago –> 3.0% 15 year fixed. We will be saving nearly $300k on interest over the course of the loan!
Bonus: our oldest son is 3. 3 + 15 = 18. Mortgage will be paid off by the time he starts college.
Number 9 is another way of saying that one can profit from investing the mortgage payoff money as long as the interest rate is not too high. If you have a low interest rate mortgage it is not so clear that paying off a mortgage is that high a priority.
If you have a high interest mortgage then the solution is to refinance, not necessarily to pay it off quickly.
The tricky part comes when your remaining balance is too low to justify the expenses of refinancing. In that situation paying down a higher interest mortgage might be a good move.
Serious long term deflation would also mean that the value of the house is falling. Not sure one would be in a hurry to add more cash to that declining asset.
I get, sort of, that for some people there is a psychological reward. Otherwise there may well be better to things to do with the cash than paying off the mortgage.
I constantly struggle with this mortgage payoff vs. invest question. Took out a mortgage of about $510k in 2016 (after having had a little bit of time to enjoy being free of my student loans). 2.7%, 10/1 ARM (doing the ARM rather than a 15-year set rate saved me about .3% on the interest). 20% down.
Have gone back and forth over time about how aggressively to pay it down. This year, I adopted an approach where I’m doing 50% investing in taxable account and 50% mortgage (including both standard P&I and extra payment) every time I have money to “invest.” That includes monthly checks and all windfalls (i.e., end-of-year bonus). That said, the 50/50 split only starts after I have fully-funded 401(k), his and her backdoor roth, HSA, and kiddo 529 plan ($30k/year). In the past two years, I’ve fully funded the advantaged accounts by Feb and expect that to continue.
Have about $380k left on the mortgage, and it’s nice to see it steadily being chipped away, despite the fact that I know that I would have done MUCH better had I put everything into the market. For that matter, I’d have done a heck of a lot better if I had never bought the house at all–it’s basically flat in value since I bought it (I overpaid) and, obviously, that $100k+ downpayment (and initial renovations) would have done a heck of a lot better in the market. But it is what it is, and I’m not doing all that badly on my other financial goals, so I’ll continue with this approach until this particular monkey is off my back.
It’s also comforting that I have more than enough in a taxable account to eliminate the mortgage, if I wanted to, though that would require liquidating more than 50% of my taxable account (and paying a lot of tax in the process).
Unfortunately, I went a little above the 2x income amount but part was based on expect future income (which is now not going to happen due to sale of the practice) and a little b/c I wanted to be in a certain area that is better for for my lifestyle (meaning closer to thinks I like to do so I don’t have to deal with longer commutes). I got a 10 year ARM even though I’m generally against them, but I knew one way or another I will not have this mortgage by year 10. I’ll thankfully hopefully be done with the mortgage in less then 4 years of ownership with aggressive payments. I think the thing that is also very important and not mentioned in this article since that is not what the article is about, but what you do with that extra money once the mortgage is paid off. I plan to put the that money I was using for my mortgage including extra payments towards investments so that I can hopefully achieve FIRE. Look forward to not needing to work.
Impressive to pay it off in 4 years given the ratio.
This article is a bit misleading. All ten “ways to pay off your mortgage early” are really just one: throw extra money at your mortgage to pay it off early. Some of the suggestions may actually be counterproductive, as I will explain.
Options #3, 4, and 10 are just direct variations of “throw more money at it” and need no further comment.
Option #1 ignores that getting a larger mortgage may help pay it off earlier. A larger mortgage may free up cash to use for things that will save money, e.g. solar, paying credit cards/student loans, car loans, or investing [ala Option #9]. With VA loans now down into the mid-2’s, there are so many safe options with higher returns, it is hard to justify not taking the biggest loan available.
Option #2 ignores the inherent danger of committing to a higher 15-yr payment. Any unexpected financial reverse places the 15-yr borrower at greater risk of foreclosure than a 30-yr borrower. Worse, the option fails to recognize that some 15’s now have higher rates than their 30 year counterparts.
Of course borrowers should utilize refis [Option #5]. But the refi should reflect the borrower’s financial plan and not automatically use a 30 or 15-fixed. E.g., a client planning to downsize in five years got a 7/1 at 2.25%, much lower that a 30 or 15, giving him even greater equity when he sells.
Unless it has changed, Option #6 was only available with adjustable rates. To me that poses an unacceptable risk for long-term borrowers.
Selling [Option #7] needs to consider the double transaction and moving costs, as well as the emotional cost of a forced move. Those factors may render savings illusory.
Selling rentals [Option #8] may trigger unnecessary capital gains taxes. Moreover sales may not be an option if the plan is to retire to a rental or leave rentals to children or a charitable remainder trust.
The Side Fund [Option #9] is a good strategy. But why would you pay off a [e.g.] 2.75% mortgage if you are safely earning 5-6%+?
While a paid-off home is emotionally appealing, there are many reasons why it may not make sound financial sense. Always look at the overall financial plan and examine all available mortgage options to determine the best fit for that client. Unfortunately, loan originators are not required to have any financial education or training, which means that most borrowers [and their other advisors] are never aware of the full range of mortgage options available.
Of course most of them boil down to throwing more money at it. There’s no magic here.
I disagree that you should borrow as much money as possible, even at low rates. It leads to bad behavior and you get caught without swim trunks when the tide goes out and you can’t cash flow.
If there is higher danger of foreclosure committing to a higher 15 year payment, there is certainly higher danger of foreclosure having a mortgage for an extra decade and a half. And obviously if you do find a higher than appropriate 15 year rate, don’t take it.
While adjustable rates may be an unacceptable risk to you, it has been the RIGHT move for the last 1-3 decades as rates have continually fallen over that time. Certainly, an adjustable rate and a relatively short period of exposure to the possibility of rapidly rising rates isn’t a terrible bet.
One reason I paid off a 2.75% mortgage is that there was (and still isn’t) an equally safe 6% return available anywhere.
Your comment that ARMs are the right choice is dangerously wrong. I tried to post a full explanation, but your blog choked.
Not sure what you’re referring to, but ARMs are only dangerous if rates rise dramatically early in the course of the loan and one cannot handle the consequences of that happening. Basically, a fixed rate mortgage is an ARM plus an insurance policy bought from the bank against rising interest rates. Don’t buy insurance you don’t need.
As I re-read your reply, I recognized a serious error. You state that an adjustable rate loan “has been the RIGHT move for the last 1-3 decades…” That is incorrect and dangerous, and that belief was a major cause of the mortgage crisis. You appear to embrace Alan Greenspan’s famous quote that many borrowers would be better off with ARMs. But that quote was decades ago. Since then, huge changes to ARMs made that advice a recipe for the disaster that occurred in 2007-09.
Greenspan referred to ARMs that had both start rates and fully-indexed rates lower than fixed rates, with payments that were fully-amortizing. But thereafter we began to see the explosion of much different types of ARMs than those to which Greenspan referred.
The first category was subprime – typically fixed for 2-3 years – but the margin would cause the rate to jump sharply thereafter. These helped temporarily less qualified borrowers who could be expected to qualify for FNM/FHLMC within the 2-3 years. Unfortunately, many borrowers were given these loans by unethical originators who knew they would not qualify for better loans and then could be repeatedly refinanced every 2-3 years, a churning process known as “equity stripping”.
The second category of problematic ARMs was the explosion of the neg ams. Pioneered by World Savings with relatively conservative underwriting, these had an initial payment that was less than the interest on the loan, causing the balance to grow (“negative amortization”). However, the old World loans still had a true (“fully-indexed”) rate that was less than fixed rates. These loans were appropriate for borrowers with fluctuating, seasonal income, but few others.
However, as lenders such as WaMu and Countrywide entered the neg am field, any advantages disappeared. The new neg ams had massively-discounted “teaser rates” for 1-3 months, followed by fully-indexed rates higher than fixed rates. This caused sharp negative amortization almost immediately, often surprising borrowers, who were not told of the predictable neg am. Investors loved these for their promise of future payments of deferred interest. The popularity with investors led lenders to abandon responsible underwriting in a rush to fulfill investor demand. Many such loans went to inappropriate borrowers; e.g. WaMu and Countrywide allowed 100% financing with the 80% 1st being a neg am. So within 1-3 months, the loans were over 100% of the value of the home. California found that 80-90% of neg am borrowers paid the minimum (“teaser”) payment.
During this era traditional, lower rate ARMs with fully-amortizing payments disappeared. Essentially no true ARMs are now available, only hybrid ARMs (3/1, 5/1, 7/1, 10/1); their rates are higher than fixed.
Your claim that ARMs are the RIGHT choice is clearly disproven by the history of the last 20-30 years:
1. 90%+ of ARMs over the last 20-25 years had fully-indexed rates higher than fixed;
2. The large majority of foreclosed loans were ARMs;
3. Fixed rate borrowers were able to “ratchet down” as rates dropped, often with no points/fees;
4. ARM borrowers saw rate increases when rates increased, even in an overall down trend.
While millions of ARM borrowers lost their homes, my clients rode out the recession in low, fixed rates, maintaining their equity and well-positioned to take advantage of low rates after the recession. Your comment fails to understand the true nature of the ARM marketplace over the last 20-30 years.
What happens to your ARM rate when rates go down? Do you know? That’s right, it goes down. And what have rates done over the last 2-3 decades? That’s right, they’ve gone down.
Now if rates go up, especially early in the loan and especially if they go up a lot, then you can come out behind.
Now if you can’t get an ARM, then sure, get a fixed. If you can’t afford an ARM if rates go up, then sure, get a fixed. But saying “there are negative amortizing loans out there” or “there was a subprime problem” or “there were too many NINJA loans” are dumb reasons not to get an ARM over a fixed loan.
But the fun thing about personal finance is you get to make your own decisions and live with them. Willing to pay extra for a fixed loan? You totally can! Don’t want to run interest rate risk for 15-30 years, you don’t have to!
I’ve had ARMs and fixed loans over the years. If I had it all to do over again, I would have given an ARM more consideration.
You don’t address my fundamental point.
Why would anyone get an ARM with a higher rate than a fixed rate loan?
You are thinking about ARMs of 25-30 years ago. Those are gone. Yes, those still in ARMs are seeing rates go down. But those rates are still the same or higher than fixed rates. Today, there is essentially no ARM product pricing that makes sense for residential borrowers.
Look at today’s ARM market. What ARMs were 25-30 years ago does not exist and comparing fixed to them is meaningless.
I certainly would not get an ARM at a higher rate than a fixed loan.
When I look briefly today it looks like a 5/1 ARM is 3.47% and a 30 year fixed is 3.69%. So it’s lower. Is that enough lower for me to buy it? Certainly if I plan to be in the house less than 5 years or so. But I probably wouldn’t run 30 years of interest rate risk for a mere 18 basis points.
Have a nice day. Thanks for stopping by.
You don’t say whether those were equal cost. So I checked the major national search engine that surveys dozens of lenders. 30- year fixed was available at 3.25% with no points, no origination fee. The best 5/1 was available at 3.875% with 1/2 pt cost or the same 3.25% at 2.5 points, much worse.
The old ARMs you love are gone at least for now.
Then obviously one shouldn’t buy them.
I also support the 30 year mortgage over the 15 year mortgage. 30 year mortgage does not mean get a bigger house, it means get the same house you were going to get for a 15 year mortgage, and instead do 30 year and benefit from a lower monthly payment. The idea that a 15 year mortgage is at lower risk of foreclosure is a fallacy. Lower monthly payment means your emergency fund lasts longer and are at less risk to losing your home. In regards to the later 15 years, 15 years of inflation have made the mortgage payment much less significant and the difference between property tax + mortgage vs property alone is smaller after all that inflation. The person with a paid off house could still lose their home to the government once their emergency fund runs out. Take the difference of those two monthly payments (15 year vs 30) and toss it into your index fund/etf. The amount gained with greatly outweigh interest. 8% return vs 3% mortgage. This person also is in a safer position as they could always sell their stocks if their emergency fund runs dry.
This strategy only works for those who are financially disciplined to invest the difference. The majority of people would do better with a 15 year mortgage vs a 30 year.
A 15 year does mean you have lower risk of losing your home after 15 years. 😉 Although probably a little higher during that 15 years.
It takes a lot longer to lose your home to the government (years) than a bank (months).
I am refinacing to get a lower rate and pay off taxes. It is registered as legal 2 family and I am applying for the same. After the appraisal was done, the refinancing company is telling me I can get a better interest rate if I apply for a 1 family, since the home has one stairs and we use it as a 1 family. Does this affect the COO? Does this change the status to 1 family as is currently registered or it remains the same and only the mortgage is affected? What does it affect positively or negatively on my end. Thanking you in advance!
Sounds like a no-brainer.