Last month we talked about "why" you would want to pay off your mortgage. Now we talk about "how."
Part 1: Mortgage Free ... How Can That Be? »
The idea of being "mortgage free," of owning our homes outright, can seem as foreign to many of us as the idea that we would walk on the moon — tomorrow.
It's impossible. It's simply not going to happen. These days, paying off the mortgage is uncommon, not thought of and, often, downright discouraged. But, in the past few years, I've become more and more of a fan of paying off my mortgage.
I remember four years ago, just as my husband and I were starting our mortgage, that my in-laws paid off their own. In celebration, we bought them a giant chocolate chip cookie. Both of my husband's parents talked to us about the incredible relief and confidence it gave them to pay off their mortgage. Seeing that spark in their step made a big impact on us.
I've also seen the opposite. I've seen friends whose choices about career, family and tithing were dictated by their mortgage payments, not their wishes. Last year, mortgage defaults in America were up 42 percent nationwide. It seems that our appetite for debt may finally be catching up with us.
For me, it's time to take responsibility for that debt and get rid of it.
So, how do you retire the mortgage?
There are three ways, really. One is what Lindsay and Lindsey, my good friends, did. One is what I'm doing. And one I've really only seen on television.
Way #1: The All-Out Assault
I mentioned my friends Lindsay and Lindsey in my last article and how they are my current heroes. They are parents of three and, before the age of 30, have paid off their mortgage.
How did they do it? I can only describe it one way: an all-out assault.
As male Lindsay explains it, "Every time I got a bonus, or we got extra money, it went to the house."
If you won $1,000 off a radio station giveaway, what would you do? Buy a new plasma screen or a trip or a shopping spree? After all, I would be tempted to think, what could $1,000 really do toward my huge mortgage? But Lindsay did win — and took that $1,000 straight to the mortgage, as he did any extra money that came their way.
"It was funny," female Lindsey remembers. "He would come home after making an additional payment and say, 'Well, honey, we own the bathroom now.'"
The couple kept a note on the refrigerator telling how much debt they owed. As they paid off their mortgage piece by piece, the old number would get crossed off to make way for the new, lower number. "I saw that, hey, maybe we could really do this after all," she remembers.
And do it they did. To be sure, they made some sacrifices. And, they are quick to point out, they never let their obligation to give to God and others take a backseat to their plan. But their all-out assault worked like a charm. They have a security now that few of us can claim.
"I think it gives our marriage a security too," Lindsay says. "After all, when you figure that most couples fight about money, there's not very much left for us to fight about now." Lindsay is more right than he knows. According to an article by Crown Financial Ministries, over 50 percent of divorced couples between the ages of 20 and 30 said that financial problems were the primary cause of their divorces.
Way #2: Slow and Steady
Rather than the all-out assault, though, my husband and I have chosen the slow and steady.
I agree wholeheartedly with financial author David Bach's statement, "I'm fine with the 30-year mortgage, but I don't want you to pay for it over 30 years." Instead, both Bach and financial author Mary Hunt recommend a bi-weekly mortgage payment plan.
That is, instead of making a payment once a month (ending up with 12 payments per year), you make half a payment every two weeks (that's 26 half payments a year, or 13 payments a year). That's one extra payment a year — which, since all the year's interest is already paid, goes entirely toward paying off your mortgage.
You can either pay your mortgage company to set this kind of plan up for you (which David Bach estimates will cost you around $300 to set up and then $5 a month) or set it up yourself.
Bach says to let the company do it for you. "Over the life time of your mortgage, you would spend $1,200 on this system, but you would save $119,000 (on a $250,000 home)," he says. You can do it yourself, Bach admits, "but let's be honest, most people don't."
"A complete waste of money," Mary Hunt disagrees in her book, Debt-Proof Living. Instead, Hunt recommends you do it yourself. Just divide your monthly mortgage payment by twelve and add that onto your original monthly payment. If you're not disciplined enough to write that extra check each month, have your bank make the payment automatic.
We took Mary's way but we still weren't satisfied. Turns out that an extra payment a year still only took six years off our 30-year loan (you can figure your own mortgage prepayment numbers with mortgage calculator such as the one provided by the Motley Fool). That left 24 years. Better, but not what we wanted.
Our goal is to have our mortgage paid off by the time our eldest child graduates from high school. That gives us 12 years. So, each year as our salaries have risen, we have added onto our additional payment.
Right now, we're 18 years and 8 months until pay-off. We still have 6 more years to cut off, but feel confident that with discipline we can do it. Let's call it slow and steady with a bit of an attitude.
Way #3: Cash on the Barrel
Then there's the way that I've only seen on television and, truthfully, it wasn't even an American who did it.
I was watching an episode of House Hunters International on HGTV and saw a couple searching for a new home. I wasn't paying that much attention until I heard the announcer tell how the couple had a strict budget because they were paying cash for their new place.
Come again? My ears perked up. Evidently, the man had been living at home for years in order to save up enough money for his own home because, as the announcer put it, "mortgages are much more rare in Europe than in America."
I don't know if what the announcer said was true or not, but it struck such a chord against our "have to have it now" American perspective, that I was amazed. The homes the couple were looking at were well into the six figures and the fact that he would wait and save that much money was impressive.
On Boundless, we've often warned against the extension of adolescence — with singles living with their parents merely to stave off responsibility or to allow them to spend their money on toys, not rent. But this man seemed to strike me much differently. It seemed that he had lived with his parents to enable responsibility, not avoid it.
Would this work on this side of the Atlantic? I don't know. Our cultures are different. I would hope that any adult living with his family would contribute a good amount to cover his own expenses and assist his parents with theirs. There would certainly have to be pre-discussed boundaries and expectations. But it was an interesting idea.
The Most Important Thing
But whichever way you choose, there is one decision that will make the biggest impact on whether you pay off your mortgage or not: How big a mortgage you take out.
As we've discussed before, the mortgage you qualify for will most likely be much more than a comfortable budget can maintain — and is based on a model which does not leave any room in the budget for tithing. If you choose to take out the full amount, or even an amount close to it, you may be starting out your financial life in financial crisis.
So, before taking on a mortgage, give some serious thought to your budget and your goals. If you are married, do you want your future children in day care? If not, then only base your mortgage on one of your incomes. Do you want to pay off your mortgage early? Then choose a payment that leaves room in your budget for extra principal payments. Dave Ramsey has a great article called "How Much House Can You Afford?" You may find that after crunching the numbers, you can afford much less of a house than you were planning. Or you may find that you really can't afford one yet at all. That may seem disheartening, but it's a lot less than realizing it only after your mortgage has begun.
Copyright 2007 Heather D. Koerner. All rights reserved.