Ask Plain Finances: Paying Off Your House - In 15 Years or Less

We as Americans have been conditioned to accept mortgage debt (and debt of all kinds!) as a way of life.  We have been conditioned to believe that debt-free home ownership is something that only happens to people that have been making faithful payments for 30 years.  

However, things weren't always this way!  In the 1930's and 1940's, the typical term of a home mortgage loan was 10 years!  (Yes, you heard that right!).  In the 1960's, it was 20 years.  Now, in the year 2000, the overwhelming choice of home buyers is a 30-year mortgage loan.  

Why have things progressed to this?  Why do we accept the idea that we have to be saddled with debt our whole working life, especially mortgage debt?  I think that there are 2 reasons.  First, as I stated before, we have been conditioned to accept this, by often well-meaning people within our society.  Second, we seem to want everything now...and more of it!  We often aren't willing to wait or accept the "compromise" of a smaller home or a home in a slightly less desirable location.  The only problem is, "easy lending" does helps us get the "house of our dreams"...but this debt fills our lives with worry and anxiety...all due to having debt hanging over our shoulders during times that we should be happily raising our families, contributing to our chosen professions, and...most important...building up our relationship with God!  

So, what is the solution?  How do you pay off your house early?  The answers are actually very simple...but sometimes not easy.  The first step is to not buy more than you think you will need for the next 5-10 years!  II say 5-10 years because no one can really predict if they will get married...or have kids...or have their parents in...support a needy person...etc.  Or, what if you decide to open a business in your home?   Whatever your situation, do some thinking about what you will really need for the next 5-10 years.  The object of this is to not buy "too much house"!  If you already own your own home, that may mean selling the house that you are in now!  I know these might be hard words to some, but think about it...is your house payment a burden to you?  Is it creating stress in your marriage?  Is it really worth the worth the worry?  Life is just too short!

Second, make the decision to pay off your mortgage quickly!  Too often many of us (including myself!) have the greatest intentions of doing things that sound good, but we don't follow it up with any action!  However, there is a powerful effect that happens when you make a decision and start acting on it...things start to fall in place and align with your decision, especially if it is a wise one! I had read about the possibility of paying off my mortgage 6 months before I actually did something about it.  One day, I started just playing around with the numbers...and was shocked at how quickly I could pay this "monster on my back" off!  

Third, do the math and figure out how quickly you can really pay your house off!  Now, let's examine a scenario.  Let's say that you have a current house debt of $100,000.  You are paying 8% fixed interest.  And, according to your bank, you have 27 years of "minimum payments" left to pay off this debt.  Your minimum payment is $1,000, but that includes $245.72 in escrow charges (property taxes and insurance)...so your "real" mortgage payment is $754.28.  You will then need to "play around" with the amount that you can add to determine how quick you really can pay off the mortgage.  If you have a financial calculator (you can get one for about $30 or less), the calculating part will be easy.   Just in case you don't, I have included an Excel spreadsheet to help with this part!.  If you don't have Excel, you will need to get this file to help you at least view the spreadsheet so that you can see how I did it and thus create your own with whatever tool you will use.

The final and most important step is to MAIL THE BIGGER PAYMENT!   I remember when I mailed my first larger check, I added $200 or so dollars to the "minimum payment."  Honestly, it gave me a sense that I was gaining control over my mortgage debt...that I was not a slave to it anymore.  That feeling alone was enough to continue the bigger payments!  But, it only happened when I actually mailed it...not before.  Then, I reviewed my statement next month to see the amount...and found out that the mortgage company had applied it to my next month's minimum payment...instead of applying it to pay off my current principal!  Apparently they aren't used to pre-payments either!  In fact, I have had trouble several times with this...and have had to check my balance every month to make sure they apply it right!

So, what do you need to add to your monthly payment to pay it off your home mortgage in 20 years?  15 years?  What about 10 years...or less?  See the very exciting results below for this scenario!

To determine what your "real" payment is, you must determine what part of your monthly payment is "escrow" (if that is applicable).  (Escrow payments don't affect your payment on the mortgage.)  If your payment does include escrow, you must take that amount out of your standard monthly payment to really determine what you are paying that actually contributes to wiping out your debt.  If you don't have an escrow account, the calculation is much easier.   Again, consult my spreadsheet for help on that.

So, I hope that helps...let me know what you think!  I look forward to you joining me on the journey to a debt-free life!