Paying Extra on a Mortgage – Why & How to Get Ahead
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Paying extra on a mortgage? Us too!
Or maybe you’re not, but you’re considering it.
Some financial “wisdom” says not to pay down your mortgage principal. Why eliminate “good debt”?
Other gurus say to pay off the mortgage – get rid of it! – at all costs.
We are in the thick of our mortgage pay down, and are here to offer you tips and tricks to help you do the same. Here’s the why and the how of our approach.
Why Pay Extra on a Mortgage?
Reasons to Pay Extra on a Mortgage:
- Interest. We hate looking at the amount of interest paid each month – even with our pre-2021 low rate – and just can’t wait to get it out of our hair.
- Profit. Once we pay off our mortgage, our house hacking strategy will turn a profit, instead of funneling rental income to cover the monthly payments.
- Peace of mind. We will also own our house. Outright. As in, no one can take it away from us. This will also free up a significant amount of money every month to quickly save up for whatever is next.
Reasons Not to Pay Extra on a Mortgage:
- There’s a small tax benefit to having a mortgage.
For us, it’s not big enough to warrant any significant savings. (Also, the more Uncle Sam is out of our business, the better my life is, ya heard?). - It’s possible to earn a higher return elsewhere.
Not untrue. Traditionally, the stock market (though NOT LATELY!!) yields a 7-10% return.
That’s a math problem, and it’s a valid one. However, the peace of mind we seek is more important to us than the difference in rate of return.
Maybe you have considered these things, maybe not. You’ll have to do what’s best for you and your family.
How to Afford Extra Mortgage Payments
Start With a Budget.
You need a budget.
No successful monetary operation functions without one.
You need to know where your hard-earned money is going.
Need help? Here are 9 Best Budgeting Resources for your Investing Journey.
Be Honest – Can You Cut Something Out?
We are ruthless – utterly ruthless when it comes to unnecessary spending. Granted, we have spent a small fortune on renovation expenses, but after that – we don’t do it.
For example, the favorite category to pick on – TV subscriptions. It’s not the cable bill anymore – especially not for our generation – it’s the subscriptions. How many do you subscribe to? Netflix, Hulu, HBO, Peacock, Disney Plus, etc. etc. etc. – seriously, how many?
Do you even know?
We might have just found your extra mortgage payment funds.
Or maybe it’s subscription boxes, or magazines, or that gym membership you rarely use.
Scour your bank statements. Delete “autopay” from your Amazon account. Get in control of the money coming into your life.
Our Plan
Personally, we don’t have any subscriptions anymore. Nada. After watching every single episode of the Office during the pandemic, we decided it was time to call it quits and spend our time doing something more constructive.
If there’s something we really, really want to watch – we either subscribe for one month (like for the Olympics) and delete it immediately, or we head to a local establishment for a treat night out to watch (for example, the World Cup). We don’t care about the Superbowl (see our Old House Kitchen Renovation for what we were doing that year it went into double OT), and we live with it if we miss a water cooler conversation about the latest plot twist on Tiger King.
Paying extra on a mortgage will require small sacrifices. I’m cool with it – we’ll be mortgage free by the time our eldest hits the third grade.
Not a bad trade off just for missing Yellowstone.
Do you see? It’s all mentality. It’s how you think. You can think “woe is me” or you can think “I’ve got control of my money.”
The Most Brilliant Way to Pay Off Your Mortgage
No gimmicks, tricks, weird offset payments, or BS. No biweekly schedule. No extra payment every 11th month.
Just pay it.
Each month, we straight up manually pay down the principal. That’s right. I check on the budget, log in, and carefully “make payment to principal.”
That’s it. It’s a different amount every month – anything is better than nothing. Off it goes.
What Is the Secret to Paying Off Your Mortgage?
The zero-based budget.
For years I’ve been tracking where our money goes, carefully savings for expenses like vacations or renovations, and never feeling like it made sense.
Until the zero-based budget entered my life.
Thanks to my dedicated listening to The Ramsey Show, I caught wind of the zero-based budget.
At the end of every month, I assess each category in our budget, and if there’s money left over, I move it to a different category – namely, the extra mortgage principal category.
For example: We keep about $75/month aside for gas. (We drive a 15 year old Honda Fit at 35mi/gal, and we love it dearly, and we are both hybrid for work, so we don’t commute much). If, at the end of the month, that line item in our budget has more than $75 available, we move the extra money from there to our mortgage principal payment category.
It might be only ten bucks. But if it’s ten bucks from 10 categories, well now, we’ve got an extra $100 to throw at the mortgage and we’re not going to even feel it.
A bonus from work? Mortgage principal.
Stimulus check? Mortgage principal.
The key – again, I cannot stress this enough – the key to paying extra on a mortgage is organizing your finances. It’s not always urgent, but it’s important to organize your money in a way you can funnel it towards your priorities.
Word of Warning
Check your statements.
We dig electronic statements for everything else in life, but for mortgage statements, we are old fashioned.
It comes in the mail, on paper, and we inspect it.
Why?
One time, we decided to pay an extra in an amount similar to a regular monthly payment. Our mortgage company neglected to put it towards the principal. They decided to save it for the following month’s payment or escrow or something incorrect.
Oh, did we call them right away and tell them what was what? YOU BET.
Read your statements. Triple check that your extra payment is going to your principal, and not escrow or interest or something else creatively stupid that the mortgage company might come up with.
How Can I Pay Off My 30-Year Mortgage in 15 Years?
Do the math!
Check out the mortgage payoff calculator at Ramsey Solutions for a great resource. Toy with the numbers to figure out a ballpark number for yourself.
Then, write it down, and get after it.
What About the Low Interest Rate…
Many of us who purchased homes before 2022 can honestly ask: If my interest rate is so low, wouldn’t I get a better ROI if I invested in the market instead of paying off this low interest?
Yes, technically, that math problem works. It’s valid.
We don’t care right now.
First– right now, the stock market is a little cuckoo for Cocoa Puffs. There is no telling what will happen. While we still invest consistently in retirement and college savings, we are not hot-to-trot to get trading at the moment.
Secondly – I want our house to be all ours. No bank. Banks make things complicated. Once it’s ours outright, no one can take it away.
Third – this return is guaranteed. $1,000 invested in the S&P could go any direction based on “market sentiment” (which is seemingly based on anything under the sun if you read the news often enough). $1,000 paid towards our mortgage principal comes back to us in the form of equity in our home.
Fourth – Imagine – just imagine with me – how *&($ing good it will feel to say, “I don’t have a mortgage,” and, “We own our home outright,” and “Yeah, if we sell someday, it’s all profit.”
Imagine.
Is Paying Extra on Your Mortgage Worth It?
We hope so. We can’t say first hand what it’s like to live without a mortgage.
However, there are people in our lives who have paid theirs off. They’re not mad about it.
Yes, there are articles which will warn against paying extra on a mortgage. These are often found on bank’s websites. (GUYS, wake up!! They want your money!! Of course, they’ll warn against you paying off your loan!!)
We wouldn’t pursue this if we didn’t think it’s worth it. We’ll let you know.
Is It Smart to Pay Extra Principal on a Mortgage?
Yes.
Thank you for coming to my TED talk.
When Should You Not Pay Extra on Your Mortgage?
Dave Ramsey has great advice on this (shocker, I know.).
First, you should have all your other finances in order. This means you are out of all other debt (credit cards, cars, student loans…) and have an emergency fund of 3-6 months’ worth of expenses at the ready. If you don’t have these things done, then you should not pay extra on your mortgage. This is just logical.
Second, you should not pay extra on your mortgage if you are in “Stork or survival” mode. (Ramsey applies this mostly to baby step 2 – debt payoff – but I believe he has said on his show that it also applies to mortgage pay down.).
“Stork mode” is when you are expecting a baby. Since a little one’s arrival has the potential for just about anything, his instructions are to pile up cash just in case something goes wrong. Once mom and baby come home from the hospital safe and sound, you pick up right where you left off.
As of this post’s publishing, we are in stork mode (yay!). We are carefully budgeting as usual, but instead of sending money to our principal payment, we are sending it to a high-yield savings account earning 3.75%. When little chickadee and I are cleared from the hospital, we’ll move the money into a big ol’ principal payment.
“Survival mode” is when there is a significant crisis in your family – job loss, health crisis, IRS problems, or something like a divorce. Any one of those things deserves attention before your mortgage principal payment.
Final Thoughts on Paying Extra on a Mortgage
We hope you’re inspired by our tactics for paying extra on your mortgage.
It may or may not be the right thing for you to do – that’s not our place to say. But some discipline, a zero-based budget, checking your statements, and pacing yourself will all pay off in the long run!
Best of luck and let us know how it goes!
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