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10 HACKS To Pay Your Mortgage Off Early - YouTube
Channel: Malcolm Lawson - REALTOR
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- For many people, paying
off their home mortgage
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is a lifelong goal.
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And rightfully so.
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A large portion of your mortgage payment
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is nothing but interest that
you are paying to the bank
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for the privilege of
taking out that money.
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On a $350,000 loan at 4%
interest over 30 years,
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you are gonna be paying that bank $250,000
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just on interest on that loan.
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And that's assuming
that you never took out
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a home equity line of credit
or refinanced your loan.
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In which case, you may be paying the bank
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a whole heck of a lot more.
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So by paying off your mortgage
early, you may be eliminating
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tens of thousands of dollars,
if not hundreds of thousands
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of dollars that you would be
paying the bank in interest
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and you'll be eliminating another
one of your monthly bills.
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And for many people,
eliminating this monthly expense
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is the difference
between retiring and not.
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So today, I'm gonna
teach you 10 strategies
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to pay off your mortgage
in the next five years.
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So strategy number one
is bi-weekly payments.
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Now you've probably heard
of this strategy before
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but you may not fully
understand how it works
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or the impact that it can
have on your mortgage.
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So typically, you make a
mortgage payment once a month
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and that works out to 12
mortgage payments a year.
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Now, if your bank allows
you to make a half payment
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every other week instead, that
works out to 26 half payments
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or 13 whole payments a year.
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So in the end, you're making
one extra mortgage payment
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every year but because you're
paying it every other week,
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you're not really seeing a big difference
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in your monthly expenses.
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Now, you're probably
saying right about now,
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but how big of a difference
can one extra payment
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a year actually make?
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And the answer is a big difference.
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With a $350,000 loan at
4% interest or 30 years,
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you would pay off your
mortgage four years early
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and save over $35,000 in interest
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just by making a bi-weekly payment
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instead of a monthly payment.
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Now if you wanna see
how big of a difference
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bi-weekly payments make on your mortgage,
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follow the link down to the description
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to my favorite online
calculator to figure this out.
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It's over on daveramsey.com.
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Now I don't agree with
Dave Ramsey on everything
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that he teaches, but I do
really like his early mortgage
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payment calculator on his website.
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So my second strategy is pretty
similar to the first one,
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but it's just structured
a little bit differently
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and it's what I personally do.
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And that is to keep your monthly payments
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but make extra payments to
the principle every month.
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Now, if you wanted to
keep the same benefit
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as the previous example, what
you do is take one month's
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mortgage payment and
divide that amount by 12
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and then add that amount
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to each of your 12
monthly mortgage payments.
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Personally, I found it
just a little bit easier
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to track this in my head
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rather than making the bi-weekly payments.
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So, in our $350,000 example,
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your monthly payments would
be about $1670 a month.
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If you divide that by 12 months,
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that works out to $140 a month.
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So by adding $140 a month
to every one of your monthly
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mortgage payments,
that'd be the equivalent
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of making one extra
mortgage payment a year.
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Now, you don't have to stop at making
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just one extra mortgage payment a year.
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Instead of adding an
additional $140 a month
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to every mortgage payment, if
you just bump that up to $200
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a month, you would save
$52,000 in interest
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over the lifetime of the loan
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and pay off your mortgage
five years six months early.
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Now, if you really wanted to hustle,
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and could make the equivalent
of one extra mortgage payment
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every quarter instead of every year,
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you would save over $105,000 in interest
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over the lifetime of the loan
and pay off your mortgage
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11 years five months early.
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And what I love about this strategy
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is that it's completely optional.
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You can turn these extra mortgage payments
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on and off whenever you choose.
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So as an example, when
I was in the military,
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I was paying extra towards my
principle every single month.
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When I got out of the
military and started my career
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as a real estate agent, actually
turned those extra mortgage
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payments off for about a year
until I kinda got established
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in this new career.
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Now if you contrast that to, let's say,
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getting a 15-year mortgage
instead of a 30-year mortgage,
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on a 15-year mortgage,
you are stuck paying
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those higher mortgage payments.
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You don't have the option to
turn that off and on at will.
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So personally, I love the
flexibility of going with
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a 30-year loan and making
extra payments to the principle
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every month, just because
I have the flexibility
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to turn that on or turn it off,
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or ramp it up or ramp
it down as I see fit.
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So my next strategy may
seem like common sense
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but it's the truth.
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And that is to simply not take
out a large mortgage payment
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to begin with.
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Just because the bank says you can qualify
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for a $500,000 loan does not mean
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that you should get a $500,000 loan.
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If your goal is to truly
pay off your mortgage
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and live debt free, you
have to ask yourself,
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is that a higher priority
than having a large home
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or having a large yard or
having a two-car garage.
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And for some people, it's not.
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Some people, having that larger home
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is a higher priority than being debt free.
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So let's say you're
approaching retirement,
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you need to ask yourself,
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is downsizing an option for you
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so that you can reduce your mortgage debt.
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Can you go from owning a detached home
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to living in a townhome
that may be $50,000 cheaper
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or maybe even living in a
condo that's $100,000 cheaper?
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Can you move to another
area that may give you
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a longer commute into work but
has more affordable housing?
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Can you move to another state
like Delaware that may have
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lower property taxes, lower
school taxes or lower sales tax?
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Because if so, you could
then take that savings
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and put it towards the
principle of your mortgage.
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If paying off your mortgage
and living debt free
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is really your top priority,
then you will seriously
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take a look a few of these options.
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My next strategy is to
make a one-time payment
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to your principle.
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So let's say you come into some money,
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maybe it's a tax refund or
inheritance or bonus at work.
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You can put that money
straight towards the principle
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of your mortgage.
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With that $350,000 loan
example, just a $20,000 payment
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towards the principle at
the beginning of that loan
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would save you over $42,000 in interest
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over the lifetime of the loan
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and pay off your loan three
years one months early.
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So now that we've shown
how much of an impact
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additional payments to
your principle can have,
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my next strategy is gonna
seem like common sense
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but it's simply increase your income.
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Now the longer you work
with any given company,
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you're most likely gonna
get raises along the way.
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So one common strategy is that
every time you get a raise,
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you actually keep your living
expenses exactly the same
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but put that additional
income towards your principle.
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Another strategy that I like is actually
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use your property itself
to earn you more income.
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With websites like AirBnB,
you can rent out a single room
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or even an entire floor of
your home for a few days
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or a few weeks at a time.
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I've even heard of people
building sheds on their properties
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and renting them out as storage space
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or charging people to leave
RVs or boats on your property.
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I also highly recommend getting
some sort of side hustle.
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Now honestly, I think
everybody needs to get
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some sort of side hustle
if they expect to get ahead
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in this world.
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Now luckily for you, it's never
been easier in human history
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to get a side hustle than it is right now.
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For example, making YouTube
videos like this one
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is a side hustle for me.
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I make a few thousand
dollars a year off videos
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just like this one.
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There's also websites
like Etsy.com, Fiverr.com
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and Upwork.com that allow
freelancers to get paid
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for a wide variety of
jobs that they can do
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right in their own home.
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These jobs can range
anywhere from graphic design
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to woodworking to administrative tasks
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to writing blog posts,
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just about any skill that you have,
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you can monetize on websites like these.
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There's also services like
Uber and Lyft that allow you
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to drive cars on your own schedule
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and you may be able to bring
in a few extra hundred dollars
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a month with these.
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Now before we get to the
final five strategies,
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I wanna kinda give you a bonus tip.
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And that tip is that paying
off your mortgage early
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should not be the top
priority for everybody.
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There are some situations
where there's some other things
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that should be a higher priority.
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So just an example, mortgages are usually
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pretty low interest rate.
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Right now they're between three and 4%.
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If you have other debt at
a higher interest rate,
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that should be your top priority.
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Let's say a credit card
at 15 or 20% interest,
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you should be paying off your
highest interest debt first,
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and then focus on your mortgage.
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Luckily for you, a lot of the strategies
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that I'm teaching you will also apply
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to credit card debt as well.
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Another situation would be
if your employer is offering
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to match your 401K contributions
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and you are not already
maxing out that opportunity.
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So if you put $500 in your 401K
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and your employer also
puts $500 in your 401K,
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that is an instant 100%
return on your investment.
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So I really recommend that you max out
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that opportunity first before you start
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focusing on paying down your mortgage.
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So the last exemption would
be if you don't already have
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some sort of emergency
fund of three to six months
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of living expenses.
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And I know this doesn't
sound very exciting,
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but here's the truth.
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Unexpected expenses are going to happen.
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Your home's air conditioning
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is going to break down at some point.
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Your roof is going to have
a leak in it at some point.
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Your car is gonna need
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some sort of major repair at some point.
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And when these expenses do occur,
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you do not want to have
to resort to a credit card
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with a 15 or 20% interest
rate in order to pay for them.
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That is a real reason why you
need to have an emergency fund
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to keep you from going
further in debt in the future.
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So we talked about increasing your income
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and now we're gonna talk
about my number six strategy
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which is reducing your expenses.
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Every dollar that you
save is another dollar
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that you can put towards your principle
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without really affecting your
quality of life all that much.
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So you need to ask yourself,
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do you have any monthly expenses
that you can live without?
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Could you live with a
slightly slower internet speed
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and save $20 a month?
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Could you live without
Netflix or Hulu or Disney+?
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Can you go a few years
without upgrading your phone
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rather than upgrading it every year
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and then paying it off monthly?
[553]
Instead of eating out once a week,
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can you change that to
only eat out once a month?
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You need to take a long hard look
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at all of your monthly expenses
and once again ask yourself,
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is this expense a higher priority
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than paying off my mortgage early?
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So my number seven strategy is
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to maximize your credit card rewards.
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So generally speaking, I'm
against credit cards at all.
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But here's the truth.
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If you are not taking
advantage of credit card
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reward programs, you're essentially paying
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for those people who are
taking advantage of them.
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There are cards out there that
offer you up to 5% cash back
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on things like grocery stores,
gas stations, Amazon.com.
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And if you're already
spending this money monthly,
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you might as well put
it on your credit card
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and earn 5% back.
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The trick is that every
time you redeem your points
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for cash, you need to make an
equivalent one-time payment
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to your mortgage for
that exact same amount.
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And if you put all of your living expenses
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on a credit card like this,
this could easily add up
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to several thousand
dollars additional payments
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to your principle every single year,
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which could save you tens
of thousands of dollars
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on interest and pay off your
mortgage a few years early.
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Now this can be a dangerous game to play
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and you really need to make
sure that every single month,
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you are paying off your entire balance
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before they charge you
interest on your balance.
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What I personally do is I
have two reoccurring reminders
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on my calendar to go into my credit card
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and pay off my entire balance.
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So my next strategy ties in
to the last two strategies
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and that is to create a household budget.
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Now they say that 90% of all diets work
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because no matter what
diet you're following,
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it's just making you
more conscious and aware
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of how much food you're actually eating.
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And I think creating
and following a budget
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has the exact same effect on people.
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And after you track your
expenses for a month,
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you may be very surprised
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of where your money is actually going.
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No matter what you budget
for yourself for things like
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entertainment or eating out or clothes,
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just having that budget in place
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will really make you think twice
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about every single purchase that you make.
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And set a goal that if
you stick to your budget
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for the entire month, you'll
then make an extra payment
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towards your principle.
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So my ninth strategy
is to get to 20% equity
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in your property as soon as
possible to eliminate any PMI.
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So for many loans, if you
put less than 20% down
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on the property, your
lender is gonna charge you
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private mortgage insurance,
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which is an additional monthly payment
[688]
and it covers the lender in
case you default on the loan.
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In our $350,000 loan example,
your PMI payment may be
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anywhere from $150 to $300 a month.
[697]
And this is a big chunk of change
[699]
but the good news is once
you get to 20% equity
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in your property,
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your lender will eliminate
your PMI payment.
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And if this is the case for you,
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you wanna get to that 20%
mark as soon as possible.
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So when your lender does eliminate
your monthly PMI payment,
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you wanna actually keep
your mortgage payment
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exactly the same, but put that funds
[717]
towards paying down
your principle instead.
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So my tenth strategy is do
not refinance your property
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every time the bank offers it to you.
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So here's the truth.
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Offering you an opportunity
to refinance your property
[728]
every few years is one of
the scams that the banks run
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to make more money off of you.
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So banks usually wait until
interest rates drop a bit
[736]
or you build up equity in
your property to offer you
[739]
the opportunity to refinance.
[741]
And even if your monthly
payments become lower,
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in many situations,
it's still not worth it.
[746]
So first off, your bank's
gonna charge you an upfront fee
[748]
of several thousand dollars
to refinance your loan
[751]
into another 30-year loan.
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But more significantly, if you remember
[754]
when you purchased your property,
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your lender probably showed you
[757]
a 30-year amortization
schedule of your loan.
[760]
And what that schedule showed
you was at the beginning
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of your loan, the majority
of your monthly payment
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goes straight to interest to the bank
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and only a little bit of it
goes towards your principle.
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As you move along that 30-year
schedule, that ratio flips
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to where your last few years,
most of your mortgage payment
[775]
goes towards your principle
[776]
and only a little bit of it
goes towards your interest.
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It's actually in the bank's
best interest to keep you
[781]
in those early years of your 30-year loan
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as often as they can
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and that is why they keep
offering you an opportunity
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to refinance your loan.
[789]
So once again, let's look at
our example of $350,000 loan
[792]
at 4% interest over 30 years.
[794]
On your very first payment,
only $504 would go towards
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your principle while $1166 goes straight
[801]
to the bank's pocket in interest.
[803]
After 10 years, $751 of
your payment goes towards
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your principle and $919
goes towards your interest.
[810]
After 20 years, $1120 would
go towards your principle,
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$550 would go towards the interest.
[817]
And after 30 years, on your final payment,
[819]
$1665 would go towards your principle
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and $5.55 would go towards interest.
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So as you can see, it's in
the bank's best interest
[828]
to keep you in those earlier
years of a 30-year mortgage
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while it's in your best interest
[833]
to get to those last few
years as soon as possible.
[836]
So even if the bank offers
you a lower interest rate
[838]
and a lower monthly payment,
[840]
you need to look at where you're at
[842]
in your amortization schedule
[844]
and how much of your monthly payment
[845]
is going towards the principle.
[847]
And this is one of the biggest traps
[848]
I keep seeing people fall into
[850]
is that they keep resetting
their 30-year loan
[852]
and they never make any real progress
[854]
towards paying down their principle.
[856]
Hey, if you wanna learn
about some more strategies
[858]
to build financial independence
through real estate,
[860]
check out this playlist right here
[861]
of some of my other
videos I've put together.
[863]
Thanks so much for watching til the end.
[864]
Everyone subscribe for more
financial strategy videos
[867]
just like this one
[868]
and I'll see you guys
over in the next video.
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