What if you've reviewed the compromises required to pay your mortgage early and the idea still appeals to you? You might pay a bank to set up a bi-weekly payment plan or a money merge account. But you can do just as well by taking mortgage acceleration into your own hands. Here are three options I've considered:
- Rather than pay my mortgage, I could deposit my money into a high-yield savings account earning roughly 5% interest. Though this earns the lowest possible rate of return on my money, it gives me the greatest flexibility. I could withdraw the money to pay down the mortgage at any time. Or I could save for other goals.
- On the other hand, I might make extra payments on my mortgage each month. This would effectively earn me a guaranteed rate of return equal to my mortgage interest rate (6.25%). This would also help me spend less on interest. Doing this, however, ties up my money, making it difficult to access if I decide I want it for something else.
- My third choice is to invest the money in low-cost index funds. This would, in theory, provide the highest possible rate of return for my money, but as with any stock market investment, there's an element of risk. If my goal is to pay off my mortgage, a bear market is going to make me sweat.
Kris and I will decide what we intend to do by early next year. Initially, I thought we'd make payments directly on the loan, but after previous discussions here at Get Rich Slowly, I'm leaning toward placing the money in a high-yield savings account until we know better what our long-term financial goals are.
Meanwhile, I was curious: How long would it take to pay off my mortgage using the HELOC I already have? Would using the HELOC actually save time over applying payment directly to the mortgage itself? To play with the numbers, I developed a mortgage amortization spreadsheet. (This spreadsheet doesn't account for inflation — that's beyond my Excel acumen.)
Here are the four scenarios I examined:
- Make no extra payments. If I simply continue to make my monthly mortgage payment, it will take me 324 months (27 years) to repay the loan. I will pay $231,938.86 in interest.
- Make an extra payment every month. If I were to make extra payments of $1750 every single month, the mortgage would be paid off in 86 months (or just over 7 years). I would pay $52,424.73 in interest on the mortgage.
- Implement a “do-it-yourself” money merge account. If I were to take $21,000 from my HELOC and put it toward my mortgage right now, pay the HELOC off over the course of a year, then repeat this process every September, my mortgage would be paid off in 85 months, or just over 7 years. I would pay $47,087.76 in interest on the primary mortgage, and about $7,264.39 in interest on the HELOC. That's a total of $54,352.13.
- Make lump-sum payments every year.If I were to save $21,000 every year and then use the money to pay down the mortgage, it would be finished in 92 months (just under 8 years). I would pay $57,838.29 in interest on the mortgage, but earn about $3,070.13 on my savings, for a net cost of $54,768.16.
As you can see, there's not much difference between the three mortgage acceleration scenarios. Using the numbers I've chosen, they each take a little over seven years and $50,000 to complete.