Paying off the Mortgage Part 2

In my first post on this topic I described my decision and how I weighed the pros and cons. In this post, I describe the thought process and strategy I used to actually pay off the mortgage.

Paying off early, the long approach 

In researching how to go about paying off the mortgage, the most common method I came across was a long-term approach to paying off early. Here are just two examples:

1. 13^th Payment – in this instance you make one extra payment per year (a 13^th payment). This method can allow you to pay off a 30-year mortgage in say 22 years.
2. Lump sum – make extra lump sum payments at random times of your choosing. Could be because you get a bonus, inheritance, big tax refund, whatever. Like example 1, this method most likely take a few years off of a 30-year mortgage. 

There are other similar tactics out there, but for me it boiled down to this… I think you are making a big expensive mistake if you implement one of these long term plans to pay off your mortgage. Would you invest $10,000 right now and not receive any benefit whatsoever (no interest, no dividend, nothing) for 20 years? Or even 10 years? I believe that is what most people are doing when they decide to make a payment against their principal without a plan to pay off a mortgage within a short timeframe.  Those thousands of dollars put down against your mortgage principal are essentially gone for the foreseeable future, and in this scenario, the money would be much better off in a savings or investment account.

A really helpful tool I found was a spreadsheet at the Mortgage Professor website. He has several helpful spreadsheets for different scenarios. I used the one tiled Extra Payments on Monthly Payment Fixed-Rate Mortgages. He has it set up so you can easily model the effect of extra payments on your mortgage.  I spent a considerable amount of time entering in extra monthly payments and lump sum yearly payments, and probably a few other scenarios. For me, this spreadsheet was a good exercise in perspective, in that I could see if I went about the long approach, there would be a lot of hard earned money tied up in the house. I’d go years with still having to pay a mortgage and earning less interest and dividends on our hard earned money.

Bottom line – we decided to pay off the mortgage quickly so we could realize the benefit quickly – for our situation, it made the most sense to take our 30 year fixed mortgage and either pay it off quickly or just stick with monthly payments for 30 years. 

Paying off early, the quick approach

So how quick is quick?  Looking at our finances, we could pay off the mortgage with one check, however we would be left with only a few thousand in the bank.  By paying it off in chunks throughout the year, we would be able to gradually pay down and increase the amount of cash we would have left over. After running our numbers we actually ended up ditching this strategy and waiting one more year so that we could pay it off in a shorter, four month period. By starting in January 2018, we could have the mortgage payed off in April and then have the rest of the year to save up for our next tax bill due by February 1, 2019. This way, the benefit of putting down all that money could be quickly realized, and would allow us to get past this one milestone and quickly shift to our next financial goals.

In the four months we paid off the mortgage, I routinely visited my tracking spreadsheet and made little changes here and there. I second guessed myself, and would even sit and stare at the numbers hoping a miraculous pattern would jump out of my screen into my head and give me the stroke of genius to see the whole thing through…..in other words, there was some amount of emotion in this process. Seeing your accounts draw down so quickly after all the hard work building them up was not easy.

Take aways

I wrote this post because when we were considering paying off the mortgage we saw so much confusing and conflicting advice on the internet. I realized this was because the experts out there tend to provide canned advice meant to appeal to the largest segment of the population. This is where I tuned all of that out, revisited my principles, and decided to custom design an approach that suited my wife and I.

There are experts on both sides of this decision, however most that I have come across, do not think you should pay off early and cite compelling reasons to do so. I’ll write another post on this later.

For those of you that are like me and don’t like debt… you are not crazy and you should pay off your mortgage, but set high standards for yourself, think it through and do it right. I’m hoping this article helps your decision, if nothing else just pick out a few ideas and then tailor your own solution.   

Parting thoughts

• This isn’t for everyone. 
• I didn’t find a trick or “hack”, it’s hard work, saving, investing and learning…and discipline
• My wife and I developed our own strict rules for how we wanted to pay off the mortgage and stuck to them.
• Tools used
  • Mortgage professor spreadsheet: Extra Payments on Monthly Payment Fixed-Rate Mortgages
  • Spreadsheet model I created