Like many, I wanted to live the American dream of homeownership. I knew I could not afford to pay cash and would need to take a mortgage. The thought of borrowing that much money scared me, but like many, I had 30 years to pay it off. I always think of the worst-case scenario: if I can’t pay the mortgage, I can always go back to renting, but if I can keep up with payments, I would become a homeowner!
It never crossed my mind that I can pay off the 30 years loan early! My goal was to make the monthly payment until the end of the term. Five years ago, I became more intentional about my finances and started reading about the F.I.R.E movement (Financial Independence, Retire Early) and how people are choosing to do life differently than the norm. One of the things that stuck with me was debt-free living. I started by paying off my student loan; now I’m working on my mortgage.
Reason #1: I do not like debt
I’m not allergic to debt. I took loans before and paid them off. But I’m also not in favor of taking unnecessary debts or holding on to debt when I can pay it off. I know the feeling of emptying your bank account to pay off debt is not a pleasant one, but it is necessary for the long run.
I just don’t want to owe anyone if I have the means to pay. My strategy is to pay extra principal every time I can, even if it is a small amount. The additional principal payment reduces your loan by the payment amount, while your regular mortgage payment reduces the principle only by a fraction.
Reason #2: The interest cost
If you have a mortgage and you have not calculated the interest you will pay over the life of the loan, please do so as soon as possible. Spoiler alert: it won’t be a good surprise! Depending on your interest rate and the size of your mortgage, your interest cost over 30 years can purchase another home. You are paying for two houses but only getting one.
My loan doesn’t have any “pre-payment penalty” (and I think most mortgages don’t, but please check your specific loan). The interest cost is so high that I would do anything I can to minimize it.
Reason #3: I don’t want to have a mortgage when I retire (hoping to retire early)
One of the largest expenses for a household is mortgage/rent. If you don’t rent, you won’t need to make much to live comfortably. My goal is to have a paid-off house as soon as possible. That way I don’t have to worry about retirement expenses exceeding my retirement income. Even if I don’t retire early, it’s a great feeling to work because you want, not because you have to. Also, life happens, and sometimes people are “forced” into retirement due to sickness; it’s good to be prepared.
Reason #4: More investing opportunities
Just imagine for a second that you get paid, and you don’t have any mortgage to pay! It’s like getting a bonus every single month. As your monthly expenses go down, you have more disposable income to invest, give back, and do more things you want. There are more investment opportunities that I would like to explore (real estate being one). But I can’t right now because it requires capital or using leverage (which I don’t want to use while I still have a mortgage on my residence).
If you can, I would recommend taking a 15 years mortgage instead of 30 years. If you already have a 30 years mortgage, nothing says you can’t pay it off early. Don’t underestimate how small extra payments can help. Go ahead and send that $50 or $100 extra whenever you can. You will be surprised by the impact if you can do it consistently.
“Some debts are fun when you are acquiring them, but none are fun when you set about retiring them.” Ogden Nash
