{"id":1609,"date":"2008-02-12T05:00:33","date_gmt":"2008-02-12T13:00:33","guid":{"rendered":"http:\/\/getrichslowly.org\/blog\/2008\/02\/12\/mortgage-prepayment-made-easy-own-your-home-in-half-the-time\/"},"modified":"2019-08-30T00:01:58","modified_gmt":"2019-08-30T07:01:58","slug":"mortgage-prepayment-made-easy-own-your-home-in-half-the-time","status":"publish","type":"post","link":"https:\/\/www.getrichslowly.org\/mortgage-prepayment-made-easy-own-your-home-in-half-the-time\/","title":{"rendered":"Mortgage prepayment made easy: Own your home in half the time"},"content":{"rendered":"<p>Because I recently <a href=\"https:\/\/www.getrichslowly.org\/free-at-last-saying-good-bye-to-20-years-of-debt\/\">eliminated all of my non-mortgage debt<\/a>, I have a significant <a href=\"https:\/\/www.getrichslowly.org\/the-power-of-positive-cash-flow\/\">positive cash flow<\/a>. The $1,000 per month I was putting toward debt can now be used for investing. I&#8217;m making maximum contributions to my <a href=\"https:\/\/www.getrichslowly.org\/how-to-start-a-roth-ira-and-where-to-do-it\/\">Roth IRA<\/a>, of course, but that still leaves several hundred dollars each month available for other purposes. This has forced me to evaluate my financial goals.<\/p>\n<h2>Mortgage Prepayment Options<br \/>\n<img decoding=\"async\" loading=\"lazy\" style=\"border: 0px;\" title=\"You house is probably the biggest thing you will ever buy -- should you pay it off early?\" src=\"https:\/\/www.getrichslowly.org\/wp-content\/uploads\/moneyhouses.jpg\" alt=\"\" width=\"250\" height=\"188\" align=\"right\" hspace=\"5\" vspace=\"3\"\/><\/h2>\n<p>For the past year, Kris and I have discussed making accelerated payments on our mortgage. I&#8217;ve written about this choice several times at Get Rich Slowly, and it seems clear that <em>mathematically<\/em> it makes more sense to invest the money. However, it&#8217;s also clear that eliminating a mortgage offers a <a href=\"https:\/\/www.getrichslowly.org\/the-thrill-of-paying-off-a-mortgage\/\">tremendous psychological boost<\/a>. <strong>I&#8217;ve never heard anyone say they regret owning their home outright.<\/strong><\/p>\n<p>I&#8217;ve researched a variety of mortgage acceleration schemes:<\/p>\n<ul>\n<li>Refinancing from a 30-year to a 15-year mortgage is appealing, but the interest rate drop (from 6.25%) isn&#8217;t enough to make this worthwhile.<\/li>\n<li>I could sign up for my bank&#8217;s bi-weekly payment program, but I don&#8217;t like the enrollment fee, and I don&#8217;t like the increase in paperwork.<\/li>\n<li>We could make an extra payment every year, or pay an extra $100 per month. But I feel like we could do <em>more<\/em>.<\/li>\n<\/ul>\n<p>Ultimately, we decided to use the method described by Charles Givens in his 1988 best-seller <a href=\"https:\/\/www.amazon.com\/dp\/0671694030\/?tag=grsorg-20\" rel=\"nofollow noopener\" target=\"_blank\"><em><strong>Wealth Without Risk<\/strong><\/em><\/a>:<\/p>\n<blockquote><p>You can pay off your 30-year mortgage in half the time without refinancing by making extra principal payments. On the first of the month when you write your regular mortgage check, write a second check for the &#8220;principal only&#8221; portion of the next month&#8217;s payment.<\/p><\/blockquote>\n<h2>Wealth Without Risk<br \/>\n<img decoding=\"async\" loading=\"lazy\" title=\"Our actual mortgage statement, which came in the mail today\" src=\"https:\/\/www.getrichslowly.org\/wp-content\/uploads\/mortgagepaymentsummary.jpg\" alt=\"\" width=\"250\" height=\"85\" align=\"right\" hspace=\"5\" vspace=\"3\"\/><\/h2>\n<p>For most of homeowners, the principal portion of a mortgage payment is quite small. For example, our February mortgage bill was $1681.79. Of this, $1119.16 was designated for interest, $295.19 for escrow (taxes and insurance), but only $267.44 for principal.<\/p>\n<p>Using Givens&#8217; plan, if I include an extra $267.44 with my payment, I&#8217;ll also knock off the next month&#8217;s payment from my mortgage. <strong>That $267.44 accomplishes the same thing $1681.79 usually does, but at 16% of the normal monthly cost.<\/strong> That&#8217;s a bargain.<\/p>\n<p>The advantages this method are:<\/p>\n<ul>\n<li>It has a sliding degree of difficulty. At first, the extra principal payments are lower. But as we pay down the mortgage, these extra payments increase. We have time to &#8220;grow into&#8221; these increased payments.<\/li>\n<li>It&#8217;s easy for us to back out. If we decide our money is better used elsewhere, we can simply stop making extra principal payments.<\/li>\n<li>Every time we make a payment, we&#8217;re essentially making <em>two<\/em> payments, cutting the term of our mortgage in half.<\/li>\n<\/ul>\n<p>After discussing the pros and cons, Kris and I have agreed to follow a modified version of Givens&#8217; plan. To make things simple, we&#8217;re using round numbers. During 2008, for example, we&#8217;re going to pay $2,000 toward our mortgage each month, which gives us an additional $318.21 against the principal.<\/p>\n<div><img decoding=\"async\" loading=\"lazy\" title=\"Regular payment: $1681.79, of which $261.41 goes to principal. Extra payment of $318.21 applied to principal.\" src=\"https:\/\/www.getrichslowly.org\/wp-content\/uploads\/mortgagestatement.jpg\" alt=\"\" width=\"478\" height=\"85\"\/><\/div>\n<p>Every January, we&#8217;ll adjust how much extra we&#8217;re paying. If our budget gets too tight, we can cut back at any time.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"the-drawbacks\"><\/span>The Drawbacks<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>To be fair, Givens doesn&#8217;t recommend this method for low-interest mortgages like ours. He clearly states, &#8220;Never pay off low interest mortgages \u2014 those under 9%. Instead, use the extra money in a better investment.&#8221; He wouldn&#8217;t advocate using this method on a 6.25% mortgage.<\/p>\n<p>The March 2008 issue of <em>Consumer Reports<\/em> has a brief exploration of this topic. Their conclusion?<\/p>\n<blockquote><p>Many people find peace of mind in paying off their mortgages and owning their homes outright, especially as they approach retirement. That can make an investment in your mortgage a worthy choice, psychologically if not financially.<\/p>\n<p>Still, the bottom line, according to our Money Lab, is this: Although there are exceptions, chances are you&#8217;ll be better off putting extra money into a good mutual fund, not into prepaying your mortgage.<\/p><\/blockquote>\n<p>&#8220;Did you see this article?&#8221; Kris asked me, after she finished reading it.<\/p>\n<p>&#8220;Yes,&#8221; I said. &#8220;What do you think?&#8221;<\/p>\n<p>&#8220;I don&#8217;t care&#8221; she said. &#8220;I want to do both. I want to invest <em>and<\/em> prepay the mortgage.&#8221;<\/p>\n<p>&#8220;So do I,&#8221; I said.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"financial-freedom\"><\/span>Financial Freedom<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>If we have a substantial emergency fund, if we&#8217;re fully-funding our retirement plans, and if we&#8217;re saving for other goals, <strong>I believe that paying down the mortgage makes sense <em>for us<\/em>.<\/strong> We understand that we&#8217;re sacrificing some theoretical (and probable) future investment returns, but we&#8217;re also working to create a financial situation that&#8217;s easier for us to maintain in the long run.<\/p>\n<p>If we have no mortgage, that&#8217;s $1400 less each month that we have to pay in expenses (we&#8217;ll still need to pay taxes and insurance). Since we split the payment, that&#8217;s $700 less per month that <em>I<\/em> have to pay. Without a mortgage, my fixed expenses would be about $600\/month. My total expenses would be about $950\/month. This would provide tremendous freedom, granting me an opportunity to try things that I might not otherwise be able to do.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"another-form-of-diversification\"><\/span>Another Form of Diversification<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Every investment book I&#8217;ve read says that <a href=\"https:\/\/www.getrichslowly.org\/investment-strategy\/\">a smart investor diversifies<\/a> his portfolio, putting some of his money into each of several different types of investments. I view prepaying the mortgage as diversification. Sure, the stock market will probably beat the 6.25% I&#8217;ll earn by doing this, but it&#8217;s <em>guaranteed<\/em> money. To me, it&#8217;s better to put my money into my mortgage than into bonds, <a href=\"https:\/\/www.getrichslowly.org\/best-cd-rates\/\">certificate of deposit<\/a> or a <a href=\"https:\/\/www.getrichslowly.org\/best-online-high-yield-savings-accounts\/\">high-yield savings account<\/a>. <em>Especially<\/em> if we&#8217;re entering a recession.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Because I recently <a href=\"https:\/\/www.getrichslowly.org\/free-at-last-saying-good-bye-to-20-years-of-debt\/\">eliminated all of my non-mortgage debt<\/a>, I have a significant <a href=\"https:\/\/www.getrichslowly.org\/the-power-of-positive-cash-flow\/\">positive cash flow<\/a>. The $1,000 per month I was putting toward debt can now be used for investing. I&#8217;m making maximum contributions to my <a href=\"https:\/\/www.getrichslowly.org\/how-to-start-a-roth-ira-and-where-to-do-it\/\">Roth IRA<\/a>, of course, but that still leaves several hundred dollars each month available for other purposes. This has forced me to evaluate my financial goals.<\/p>\n<h2>Mortgage Prepayment Options<br \/>\n<img decoding=\"async\" loading=\"lazy\" style=\"border: 0px;\" title=\"You house is probably the biggest thing you will ever buy -- should you pay it off early?\" src=\"https:\/\/www.getrichslowly.org\/wp-content\/uploads\/moneyhouses.jpg\" alt=\"\" width=\"250\" height=\"188\" align=\"right\" hspace=\"5\" vspace=\"3\"\/><\/h2>\n<p>For the past year, Kris and I have discussed making accelerated payments on our mortgage. I&#8217;ve written about this choice several times at Get Rich Slowly, and it seems clear that <em>mathematically<\/em> it makes more sense to invest the money. However, it&#8217;s also clear that eliminating a mortgage offers a <a href=\"https:\/\/www.getrichslowly.org\/the-thrill-of-paying-off-a-mortgage\/\">tremendous psychological boost<\/a>. <strong>I&#8217;ve never heard anyone say they regret owning their home outright.<\/strong><\/p>\n<p>I&#8217;ve researched a variety of mortgage acceleration schemes:<\/p>\n","protected":false},"author":3287,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[496,484],"acf":[],"_links":{"self":[{"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/posts\/1609"}],"collection":[{"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/users\/3287"}],"replies":[{"embeddable":true,"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/comments?post=1609"}],"version-history":[{"count":0,"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/posts\/1609\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/media?parent=1609"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/categories?post=1609"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}