Let me ask you something – How do you feel about paying every month on your mortgage for the next several decades? I know how I would feel and that is why I try to pay off my mortgage as quickly as possible 😊
In this blog post, I will uncover how to live mortgage free.
Let’s dive into it…
Table of contents
Where to start? How to live mortgage free?
I have made my own 7 steps plan to reach financial independence. You should complete the first 4 steps before you focus on how to live mortgage-free.
In steps 1 to 4, I was primarily focused on creating a strong emergency fund for myself and pay off loans, aside from my mortgage loan.
Paying off my mortgage loan (in step 5) is a separate objective and I recommend that you pay off your mortgage within 8-10 years. Personally, I aim to do it in only 4 years.
Maybe you would be interested in knowing why I didn’t include this loan in step 2 or step 4. Well, the answer is that the mortgage loan has a much longer maturity period, and even more importantly, it is a much bigger loan. In the beginning, we need to focus on minimizing risk and create a financial foundation.
Hence, it is essential that you can focus on paying off your mortgage loan after you have paid off all the other loans. Keep in mind that the amount of money used for monthly payments on your other loans can be used as an additional payment for your mortgage payment. Before going to the ways of how to pay off your mortgage earlier, let’s consider the effect of this type of loan on our finances.
How does mortgage loan affect your finances?
First and foremost, the mortgage loan is a long-term loan, which means that your repayment obligation will not end in a couple of years. They will last for a couple of decades (unless you pay it off early like me 😉) and you need to pay the agreed money every month!
This is a constant, perhaps unconsciously, pressure on you to make enough money so you can make the agreed payments.
If you fail to pay on time it can have a costly consequence because the lender can charge you with a late payment fee. Accordingly, the monthly payment is decreasing the available cash you have at hand every month until the full loan repayment.
Moreover, if, for one reason or another, you are not able to pay your mortgage payments on time for a prolonged period, you may lose your home since it is the collateral for the loan, and the lender can initiate a foreclosure. This happens every day as many people are not prepared for bad times.
You should not neglect the mortgage loan cost as well and you should try to find a way to lower the interest amount. The monthly payment is composed of principal amount and interest amount.
But, hey, don’t worry :-), everything is not as bad as it “looks”, the mortgage loans come in handy to most of us when we want to buy a home and don’t have enough capital.
Now we need to focus on paying it off!
Benefits of paying off your mortgage earlier
Before I dive into the different techniques and methods on how to live mortgage-free (pay it off before the maturity date), I want to quickly show you the potential benefits:
- The long-term pressure is gone, so is the stress – being mortgage-free means that you no longer have this monthly obligation 🤩
- You will be the 100% owner of your home – instead of “sharing” the ownership of your home with your bank, paying off your mortgage means that you own the entire equity in your home. That’s awesome!
- Save money on interest paid – this is self-explanatory, pay off your mortgage earlier, and you will save money on your interest cost.
- Ability to increase savings after you pay off the mortgage – this is in the sense that you will have more money at your disposal because you will no longer have a monthly payment. You can direct the amount toward your saving account, you could be investing, or you could have more fun and take more expensive holidays.
- Increased personal liquidity – being mortgage-free means that you don’t have a monthly payment. Hence, a larger portion of your income is available to cover unexpected expenses.
Along with the benefits that come from paying off your mortgage earlier, let’s see the difference between mortgage loans with different maturities.
15-year or 30-year mortgage
For instance, consider a 15-year and 30-year mortgage at 3.2% and 4% respectively, while the loan amount is €160,000:
Interest paid for the first 5 years
Total interest paid
You can see the effect of the length of the mortgages on your finances.
Therefore, with a 30-years mortgage, you will pay much more interest while you have a monthly obligation for 30 years.
On the other hand, a 15-year mortgage will make you substantial savings, but keep in mind that the monthly payment is higher compared to the 30-year loan.
I strongly recommend that you only buy a new home with a budget that can handle a 15-year mortgage. In this way, you make sure to pay off the mortgage early and be able to reach financial independence.
Simple ways to pay off your mortgage earlier
To understand some of the techniques to pay off your mortgage earlier, you need to know that your monthly payment is composed of a part that goes toward the principal loan amount and the part which goes for interest payment. The interest payment is calculated on the outstanding principal amount of your loan.
- Bi-weekly payments – means that instead of the monthly payment, you will make a payment every two weeks. The notion behind this payment structure is that you decrease the principal every two weeks, and consequently, you will pay lower interest.
But before you chose this repayment structure, see if you have this option with your lender. To better grasp the benefits from this technique, let’s consider an example of a €140,000 mortgage loan at 4.5% interest to be paid in 30 years:
You can see that when you opt for a bi-monthly payment, you will save €20,327 in interest. That’s a lot of money!
Nevertheless, this repayment method cannot be as effective because you will slightly decrease the repayment period. The maturity period will decrease for approximately one month every year because there are 52 weeks, so you will make 26 payments.
Additional principal payments
This is the method I personally use 😊
You can also decide to make additional payments every month, quarter, biannual, or at the end of each year, or whatever is appropriate for you.
By making additional payments, you are speeding up the principal repayment, and you will decrease your interest costs.
Consider a 30-year loan with a value of €180,000 at 4.5% interest rate taken 5 years ago (25 years remaining). If you decide to make extra payments each month in the amount of €100, €200, €300, or €400, the following will happen with your mortgage loan:
Total money savings
4 years and 1 month
9 years and 2 months
10 years and 10 months
You can see that by making an additional payment each month, you simultaneously decrease the repayment period and make interest savings.
Pay extra earnings
You can use all or portion of your bonuses and extra income as an extra payment towards your principal amount. The logic here is the same as the example with the additional monthly payments, the difference being that you don’t make regular payments. You can put extra money when you want.
If you have an available room, you can always look for a way to make the most of it. Accordingly, you can rent it on a per month basis, or you can list your room on sites like Airbnb. The extra income earned goes toward your mortgage repayment.
Refinance the mortgage
Refinance your mortgage with a shorter-term loan, which can also offer better loan terms, such as a lower interest rate.
It would mean that you take a new loan and go through the approval process again and pay the costs associated.
Moreover, you have already paid certain interest on your existing loan (the early monthly payments have higher interest portion because of the higher principle, see your amortization schedule), so a new loan would mean that you start all over again and again, you pay higher interest amount at the beginning.
Nevertheless, if you are willing to go through the paperwork, you can remortgage every time the fixed-rate period is over (if you have such). Some mortgage loans offer a fixed interest rate period of a couple of years, after which the interest rate is adjustable.
The fixed-rate is usually lower than the adjusted rate, so remortgaging every couple of years will put you on the lower end of the interest rate charged by your bank.
Renegotiate your interest rate
If you see that there is a trend of falling interest rates in the economy or at your banks, you should definitely visit your bank to try and negotiate a lower interest rate.
I did this myself and got a great 1.2% interest rate cut!
I actually just wrote an email and compared it to another bank. It was reduced immediately the next day!
You can also ask for a better interest rate when you have a better credit score compared to the one you had when you applied for the original mortgage loan. When you have a lower interest rate, your interest payment also decreases, and you will have more money to pay off your mortgage 🙂
Sell your home and buy a smaller home
This is really a personal choice and should fit your circumstances and goals.
It means that you sell your home and use the proceeding to pay off your mortgage while you use the money from your equity to buy a smaller home.
You can also consider moving abroad or move to an area with lower house prices.
Things to consider
When you go through some of the ways, don’t think that you need to put all of your available cash toward mortgage repayment. Make sure that you still maintain 6 months of emergency funds.
I also suggest (in Step 5) that 40% should go to your mortgage and 60% should be invested.
Lenders can approve a mortgage, whose payment will not exceed 35% of your monthly income. Hence, if your mortgage payment is below this 35 % than you can still add extra payment each month.
The percentages should serve as a guideline; the final decision as to how much mortgage you can afford is surely up to you 🙂
I hope you liked this article about how to live mortgage-free. Paying off the mortgage before it’s maturity is a great step on the way to establish financial security and financial independence.
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