Author: Mary Ambrose CPA/MBA
It’s a no-brainer that you want to own your home instead of paying rent for the rest of your life provided that you got a reasonable purchase price for the home. Remember, rental payment is always a negative cash outflow that will never provide any financial return.
On the other hand, being tied down to high monthly mortgage payment for 15 or 30 years is not the best arrangement, either. After all, no one wants to be “enslaved” by the lender and have a “lien” on the residence.
Follow my personal tips and experiences below on how to master the mortgage payoff process and truly own your dream home in just a few years.
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Why You Should Pay Off Mortgage Early
There are multiple reasons supporting the decision to be mortgage-free faster. Here are just a few:
- “Trump Tax Law” impact on mortgage interest deduction limitations
Due to the new tax law enacted by the Trump Administration, there’s more limitation on how much mortgage interest tax payers can deduct starting from the 2018 tax return.
For married couples, mortgage interest paid on less than $750,000 of loan principal (down from $1 million) can be deducted. This cap only applies to homes purchased on or after December 15, 2017. For married-filing-separate tax filers, the limit is only $375,000.
Even though the cap is set pretty high, it is still something to think about if you happen to live in an expensive area.
- If there’s no better investment alternative due to “opportunity cost”
Assuming you don’t have other investment choices that will guarantee higher rate of return, using the extra cash sitting around to pay off your loan faster is not a bad move.
Investment in stocks can be super risky especially when we’re already at historical highs. At the time of this article, the recent bull market in U.S. stock market has been over 10 years old while the normal economic cycle is roughly 7 years.
If you’re a rational investor, now is not the time to jump in and buy stocks. I may be wrong, but that is one of the main reasons I decided to pay off mortgage faster instead of buying more stocks.
- No “Lien”
As long as there is still unpaid principal amount on your loan, your lender has a lien on your property. And that’s not a good feeling.
Unexpected events happen in life. You don’t want to give the upper hand to the lender after you’ve worked so hard for your dream home.
- Sense of ownership and freedom
Believe me, you’ll have a great sense of financial freedom after you’ve paid off your mortgage, the largest debt most people would ever have in life.
Then, and only then can you be called the true “owner” of the house, in every sense of the word.
Trips to exotic destinations can be done more frequently than before, at least that’s the case for me. 😊
After all, we’re here to enjoy life to the fullest. Be sure to give yourself some treats once you’re accomplished this big milestone!
How I Paid Off My Mortgage In 4 Years
First and foremost, I want you to know that the only reason I’m sharing these tips here is to help you achieve your own home ownership goal fast.
It is not to brag, and it is not to boast. None of that.
That said, let’s break down the ways through which I did it, one by one.
First of all, you might be asking: Why 4 years? Why not 3 or 5 years?
Great question! Well, I wanted to get rid of the mortgage and “lien” quickly, but at the same time be able to keep a good pace and catch my breath.
I could have paid it off sooner than 4 years, but I chose to just stick to that time frame. It’s really just a personal preference.
Let’s take a quick look at how I did it:
- I bought a house well below my means in early 2015
The purchase price of the house is only about quarter of a million, which is less than double the amount of my average annual income in the past four years. I do make comfortable six-figure income.
By the time I bought the house, I had already been working for almost a decade. I could have bought it in cash if I didn’t lose some money in the stock market (check out my story here about an investment disaster ).
I live in Southern U.S. where the cost of living is relatively affordable. That’s why that price point still landed me a five-bedroom single family (detached) house close to 3,000 square feet with spacious front and back yards to entertain gardening.
As of May 2019, based on recent comparable sales in my neighborhood, the current fair market value of the house increased by over $100,000 compared to the purchase price – thanks to the prolonged U.S. economic boom in this cycle.
Check out the collage of roses, wild flowers, fruit trees and veggies that I planted and grew over the past four years.
Yes, you might have guessed it by now. I love gardening.
I’ve turned myself into a “part-time” farmer in my spare time. During the harvest season, I don’t have to buy veggies because the backyard supplies fresh produce for the kitchen, way more than enough.
I don’t have to buy fresh flowers because roses of various colors and fragrances provide non-stop supplies of fresh flowers from April to late November.
I’m happy to report that there are almost twenty different varieties of roses in my front yard, and plenty other flowering shrubs and fruit trees on the deck and in the backyard.
They bring me so much joy and happiness that money cannot buy.
You have every reason to own your own home and garden. Read more for how you can get your dream house, too!
- Negotiated a good price for the house
When I bought the house, it was still early 2015 during the winter months.
I remember very vividly that there was still snow on the ground the day my real estate agent and myself went and checked out the house.
Typically, the housing market is relatively quiet during the cold months and more active during spring and summer times.
As you can imagine, there wasn’t a whole lot of buyers at the time and the U.S. economy was still in the process of recovering from the housing crisis that started in 2008.
After couple rounds of negotiations and counter offers, the purchase contract was signed that reached a happy medium for both the seller and myself.
For a two-story, five-bedroom, half an acre land, granite/marble countertops, brand new paint throughout the interiors, additions in the backyard such as the shed and fencing, I’d say I got a good deal.
- Low mortgage interest
Because I am a banker myself, employee discount interest rate was something that I took advantage of.
My credit score is also well above 800, so I qualified for a 15-year fixed mortgage rate of 2.875%, lower than what most people would be able to get. In fact, my real estate agent said this is the lowest rate she’s ever seen among all her clients over the past few years.
You don’t want to miss this complete guide on improving your credit score so that you can qualify for the best possible interest rate as well.
- Paid over 30% down payment
With only less than 70% of the purchase price left to pay, naturally it wouldn’t take too long to pay off the remainder of the principal amount.
- I lived a frugal life style
Even though I don’t have a budget per se, I don’t buy luxury goods and always try to be frugal. I’d rather donate the money to the poor and needy instead.
And that’s exactly what I’ve been doing.
Remember, managing finances well and practicing the virtue of giving are keys to achieve financial independence and success.
How You Can Pay Off Your Mortgage Fast
Not everyone wants to pay off their home loan too fast even if they could. Just in case this is something that you want to do, read on for ways you can achieve that.
The formula for paying off loans sooner is like this:
The numerator is straightforward. If your take-home income is much higher than expenses, then you have more disposable income to pay down additional loan principal if you choose to do so.
The denominator indicates how big of a mortgage payment you have in relation to your monthly income.
For most lenders, the maximum debt to income (pre-tax) ratio is 40%. For example, if your monthly salary is $5,000, then your monthly total debt amount including credit card outstanding balances, student loan payment and mortgage payment cannot exceed $2,000.
If you want to pay off your loan faster, then it’s necessary to leave much more wiggle room rather than bumping up to the maximum debt to income ratio.
Ideally, you want to carry much less debt as a percentage of your income. Mine was probably less than 15%.
Now, let’s break this formula down to more actionable steps, shall we?
- Improve credit score
As explained in the Comprehensive guide to improve credit score, for most lenders, a FICO score of 740 or 760 is the minimum score you should have to qualify for the best possible interest rate.
Once you reach that level, you can easily get a loan “pre-approval” letter from your lender before checking out potential houses.
Be sure to go through this in-depth guide about credit enhancement that tells you everything there is to know about how to get a high credit score.
- Increase income
Remember the numerator of the “debt-free sooner” formula? The foundation and main goal of QueensDomania is to help you make more money and master your finances well.
There are many ways to maximize take-home income and be financially independent. If you currently work for a company, then you don’t want to miss the tips and shortcuts you can download below to potentially double your salary in a few years. If I’ve achieved it, you can do it, too!
- Live below your means and stay away from irresponsible financial practices
Now, the second component of the “deft-free sooner” formula’s numerator is to reduce monthly cash outflows.
No matter how much you make, if your spending habits are out-of-whack, you’re not going to have much money left for emergencies, let alone paying down mortgage fast.
- Get best mortgage deal
The last piece of the puzzle is to get a good deal on the purchase price of the house, or at least buy a house cheaper than what you can actually afford.
I myself qualified for a loan more than double the price of the house I bought. But I chose to be modest for my first house. There’s really no need to go all out just because you can afford it.
Get a 15-year fixed mortgage if possible because this type of loan will typically give you the lowest interest rate.
Stay away from variable-interest loans. They will wreak havoc on your finances because you may end up paying a lot more interest in a higher-rate environment such as today.
As an extra tip, the mortgage and payoff calculator from Wells Fargo is a good tool to calculate how long it’ll take you to pay off your home loan based on your income and debt levels.
Managing finances well is the way to go and paying off mortgage in a few years is just a natural by-product of that.
If you do want to take on this lofty goal that’s not necessarily within everyone’s reach, subscribe to QueensDomania and join the tribe to achieve this sooner than most peers!
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