Want to pay off your mortgage in 3 years – here’s how to do it

Posted on 26. Nov, 2010 by in General

Here’s an interesting article from blogger, Million Dollar Journey on how he managed to pay off his mortgage in 3 years - some pretty impressive goals and strategies from a very focused and persistent individual.

There are a few significant points but one of  my concerns would be whether it really make sense to pay down a mortgage more quickly at today’s low rates?  What do you think?

 Read and enjoy. 

Written by FrugalTrader on Nov 24, 2010 filed under Financial Goals

In the October 2010 net worth update, I briefly mentioned that I was planning on paying of the mortgage balance this month and I’m happy to say that we’re mortgage free in 2010!  As this is a significant milestone in any financial journey, I thought that it deserved a post all on its own.

History

It all started when we purchased our first house in the summer of 2003, right after graduation.   The goal was to keep costs low, so we purchased a two apartment home to live in the upstairs while renting out the basement apartment.  I raided my cash savings for the down payment and went all-in on our first house.  Fortunately, 2003 was a time when houses were priced very reasonably, and combined with rental income from the apartment, our housing expenses were very low.  A couple years later, I found a great deal on an investment property, put a small 10% down payment and ended up being a landlord to another property.

With the principal residence, I wasn’t as motivated to pay off the mortgage as half of the interest was tax deductible.  While we did pay on a bi-weekly accelerated schedule, we didn’t do much in terms of annual lump sum payments.  As a result, when we did sell that house four years later, the balance didn’t decrease by a dramatic amount but combined with appreciation, we walked away with about $55k after fees.  We chose to move as we decided to expand our family, and the two apartment just wouldn’t work for us in terms of space and location. With that in mind, we built a house in kid friendly subdivision that is zoned for relatively good schools – we still live there today.  In hindsight, we should have held onto the first property as real estate has appreciated significantly since that time, but as you know, hindsight is 20/20.

Back on the topic of mortgages, we poured the proceeds of the sale of the first home, a fairly substantial cash savings amount, and the liquidated proceeds of my non-registered portfolio to put towards the new house.  With that hefty down payment, we managed to start with a 3-year open discounted variable mortgage with a balance of $150k.   As our careers were advancing, and business income ramping up, we felt confident in our income so we topped up our bi-weekly payments by about 50% in addition to making lump sum payments where possible.  What also really helped out was that  in early 2009, we decided to sell our rental property that netted us around $30k to put against the house.

All in all, the combination of savings generated from our frugal habits, increased bi-weekly payments, and putting any lump sums to pay down the house resulted in paying off our house in less than 3 years.  We are mortgage free in 2010!

Strategies for Paying Down your Mortgage Faster

As previously mentioned, we paid off our mortgage at a fairly rapid pace, here are some of the strategies that we used: 

  • Set a Goal – I had a goal to pay off the mortgage before the open term was up which was 3 years.  What works for me is to set the big goal, and take baby steps towards it.  The baby steps include some of the tips below.
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  • Establish Savings Habits – It’s pretty difficult to aggressively pay down the mortgage without establishing proper saving habits.  Having the ability to generate savings brings a lot of freedom and can ultimately lead to paying off the mortgage faster.  Here are some ways to save money.
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  • Accelerated Bi-weekly Payments – This is a common strategy that works!  By simply paying the mortgage during bi-weekly pay periods (instead of monthly) can result in an extra payment by the end of the year, which ultimately means less interest.  This strategy alone can reduce the mortgage amortization by 3-4 years.
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  • Topped up Payments – I like the strategy of topping up mortgage payments as it is forced savings.  Even an extra $100 per mortgage payment can make a  difference in amortization.  Most fixed mortgages allow payments to be topped up by as much as 100%.
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  • Annual Lump Sums – This goes back to having savings habits.  With strong savings, it enables the homeowner to use up some of those prepayment mortgage allowances.  I believe common practice for a fixed mortgage is 20% of the original mortgage balance can be paid down per year.  As our mortgage was an open mortgage, we took advantage and put large amounts when cash was available.  For example, when we sold our rental property and liquidated the non-registered portfolio.
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    Do you have a goal of paying off your mortgage in a short period of time?  What are your strategies?

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