Paying off your mortgage in 5 years seems like crazy talk. Most people never even pay off their house in 30 years due to refinancing or buying a new house.
Even for people on 15 year mortgages, paying off your home in 5 years seems unachievable. Recently, we refinanced to get a lower interest rate and moved our mortgage to a 15 year note.
I got curious the other day and stared running some numbers. I was wondering what kind of an impact making extra mortgage payments would make. During the process I found some interesting things.
I’m going to go all math-nerd here so bear with me…
Let’s take an example mortgage of $221,800. That was the median home price in the United States in 2010. On a 30 year fixed rate mortgage with a 5% interest rate, your monthly payment would be $1,190.67 per month (not including taxes and insurance).
If you paid $1,190.67 each and every month, year after year for 30 years you would finally have your home paid off. You would have also paid $206,841.20 in interest – nearly as much as your house cost in the first place.
The 15 Year Mortgage
Now, let’s look at a 15 year note. At a 5% interest rate, your payment increases $564 per month. That may seem like a big increase, but check this out.
You save $113,072.41 in interest!
That’s just over $7,500 per year over 15 years. On top of that you would have an extra $1,700 per month to play with after your mortgage was paid off.
Let’s keep going…
The 10 Year Mortgage
Keeping the same assumptions, what would it take to pay off your home in 10 years?
First, you would need to find an extra $1,163 per month. Again, that’s not pocket change by any means, but if you can find a way to do it…
You save $146,377.49 in interest!
That’s nearly $15,000 per year over 10 years. If you look at those savings over a 10 year period you are essentially paying an extra $1,163 per month but you are saving $1,220 per month in interest.
How To Pay Off Your Mortgage in 5 to 7 Years
Here’s the big one. Can you do it? Can you actually pay off your mortgage in 5 years? Here’s what it would take.
To pay off a $221,800 mortgage at 5% over 5 years you would need to pay an extra $2,996 per month or $4,185.64 all together. If there is any way at all you could find the money to do that the results are amazing:
You save $177,511.22 in interest!
Essentially, you are paying an extra $2,996 per month but you are saving $2,958 per month in interest at the same time.
An Extra $3 Grand Per Month Seems Impossible
I have no doubt that most people would say that. Very few people have an extra 3 thousand dollars sitting around each month.
Think about this though…
Instead of buying the biggest house you can afford, what if you looked for something a little less expensive.
Instead of a $220,000 house what if you bought a house for $150,000 and then put 20% down – leaving you with a mortgage of $120,000. You may balk at that idea, but keep reading. This is some of the best mortgage advice you can get.
$120,000 at 5% over 30 years is a monthly payment of $644.19 – nearly half of the original payment above.
Assuming that you could afford to make the payment for the $220,000 mortgage – if you applied that to this $120,000 mortgage you would knock 19 years and $76,000 in interest off the note.
To pay off this mortgage in 5 years, you would only need to come up with an extra $1,000 per month over the original mortgage payment.
For $2,264.55 per month you could pay off your $120,000 in 5 years and save nearly $100,000 in interest.
If an extra $1,000 per month seems like a lot, take a look at my post on how to get out of debt. You might be surprised that it’s not as difficult as it may seem to find that kind of money.