How to Hack Your Mortgage

Yep, if you have a mortgage, you should hack it.

Pick a hack, any hack.  In fact, pick a couple.  Each of them allow you to pay off your mortgage sooner and can save you a ton of money in interest.

First, let’s talk about how mortgages work.  When you get a mortgage, your monthly payment includes both interest and principal.  The principal reduces the amount you owe, the interest pays your lender for letting you use their money.

The best rate I can find today (on bankrate.com) is 3.75% for a 30 year fixed mortgage.  For a $250,000 mortgage, the monthly payment is $1,158.  $781 of that first payment goes to pay the interest.

$250,000 x 3.75% / 12 months = $781 all to interest
The remaining $377 goes to reducing the amount you owe-the principal
For your second payment, a little less ($1.18) goes to interest and a little more goes to principal

Over the 30 year term of the mortgage, you’ll pay almost $417,000 in payments and $167,000 of that is interest.  Yep, even at today’s historically low interest rates, that’s a ton of money going to interest.  So it definitely pays to hack your mortgage.

Hack #1 – round up.  Round up that 30 year loan payment of $1,158 to a payment of $1,200 and save almost $12,000 in interest and shorten a 30 year loan by about 2 years.  Just $42 a month can do what???!!!  Round up to $1,250 and save another $13,000 in interest and shorten your loan another 2 years.

We rounded up or added a couple hundred dollars to our mortgage payment whenever we could.  Then, with a bit of luck and a rising real estate market, we were able to build our dream home without a construction loan or mortgage.  Rounding up works!

Hack #2 – make bi-weekly payments.  Most of us get paid every two weeks.  This means, we have 10 months with two paychecks and 2 months with three paychecks.  So why not set up mortgage payments based on how we get paid?  This allows us to make one extra payment each year–and that payment goes entirely to paying down the loan principal.

This hack effectively makes an additional $100 payment each month.  And saves you over $26,000 in interest plus, it shortens a 30 year loan to 24.5 years!  And I’d bet you won’t even notice the difference.

Contact your mortgage lender and see if they can set up bi-weekly payments for you!

Hack #3 – Consider a 15 year mortgage.  Today, the best rate I can find for a 30 year mortgage is 3.75% BUT the best rate I can find for a 15 year mortgage is 3.027%.  The total interest paid on that 15 year mortgage is $61,000 vs. $167,000 for the 30 year.  This hack just saved you $106,000 in interest payments over the life of the loan.

This hack does come with some risk though.  You’ll be locked into higher monthly payments when you use a 15 year mortgage.  In this example, your payment goes from $1,158 per month to $1,730 per month.  An increase of $572 per month.  Then you’ll pay insurance and property taxes on top of this amount.

If you have your emergency fund of three to six months of your essential expenses and can incorporate the higher payment into your budget, consider a 15 year mortgage.  There’s a side benefit of using a 15 year mortgage–it helps you make sure you’re not buying too much house.

Hack #4 – Pay off your 30 year mortgage in 15 years.  If you’re hesitant to commit to a 15 year mortgage but like the idea of paying less interest, then get a 30 year mortgage but make extra payments so you can pay it off in 15 years.  Even though you won’t get the lower interest rate, you can still save almost $90,000 in interest in our example.

To pay off a $250,000 3.75% mortgage in 15 years, you’ll increase your payment by $660 each month.  But this method gives you some flexibility–if you lose your job or have a financial mishap, you can back your payments off to the 30 year amount.

Hack #5 – drop your PMI.  Keep an eye on home values in your area.  When you think you have at least 20% equity in your home, contact your mortgage company to find out what it takes to drop your Private Mortgage Insurance.  This insurance costs you 1% of your loan value each year–so $2,500 in our example though it does nothing for you.  The premium covers your mortgage company if you default.

Hack #6 – act like you still have PMI.  If you drop your PMI then continue to make that extra payment of $2,500 a year you’ll save almost $55,000 in interest and shorten your mortgage by 7 years!

What if you don’t want to pay off your mortgage early?  With today’s historically low interest rates, some folks say you shouldn’t worry about paying down your mortgage early.  They would tell you your interest is tax deductible and you’d be better off putting that extra money in the stock market.

And they’re right, your interest is deductible.  So if you pay $9,300 in interest in the first year of our example mortgage, you can save $2,325 on your taxes if you’re in the 25% tax bracket. But it is still costing you $6,975 or $581 a month to have that mortgage.

And you may be better off putting that extra money in the stock market.  Over the past 10 years, the S&P 500 has returned 7.4% including dividends each year.  But there is risk in the stock market and putting the money towards your mortgage is risk free.

And would you put that extra money in the stock market?  Or would it just disappear into your spending?  Making extra payments on your mortgage is forced savings.  It tucks the money out of sight and out of mind.

Even if the numbers say you’d be better off putting this extra money in the stock market, let’s think a minute about how amazing it would be to really own your home.  I’m telling you it’s amazing–and once that mortgage payment is out of your life, it opens up your world.

But let’s not forget about the personal part of personal finance.  If you want to invest this money in the stock market, do it!  If you want to really own your home, do it!  One of these will speak louder to you–whichever one it is, make it happen!

So there you go, what did I miss?  If you have any mortgage hack stories, I’d love to hear them!

Author: Ms. Liz

A CPA, I retired at 51 and I am helping people create their fantastic futures!

6 thoughts on “How to Hack Your Mortgage”

  1. Great advice Ms.Liz. We paid off our mortgage earlier this year and yes, it feels amazing. Tempted to call Dave Ramsey and shout “We’re debt-free!!”

  2. Weighing in on the side of the option to keep your mortgage and invest the funds wisely: Let’s say that you do have a $250,000 mortgage at a 3.75% interest rate. And maybe you are in the 25% tax bracket.

    The effective interest rate, after the tax benefit on home mortgage interest, is 25% of the interest rate, or about 2.8%. So, over the long term of your mortgage, you only need to earn 2.8% on the money you might have used to pay off your mortgage (after taxes). The are many investment options with long term returns over 2.8% – quite a few with relatively low risk. Putting the money into the stock market is one of the options with higher returns and higher risk than a guaranteed “mortgage return” of 2.8%, but there are also many many low risk options.

    I acknowledge that there is the “I’ll sleep better at night” benefit of paying off your mortgage. But if you are comfortable with investing the funds rather than paying off your mortgage, the reward can be substantial. In this case, every dollar that you earn in excess of 2.8% is gravy in your pocket! That is a fairly low bar to surpass, especially over the long time frame of a 30 year mortgage.

    1. I can’t argue with your approach at all. I’m sure you’ll come out ahead financially.

      Here’s how I try to think about it. If I had a paid off house, would I get a mortgage so I could invest the money. I wouldn’t, you would.

      Thanks for stopping by Mitch!

    1. Thanks for stopping by Mr. 39!

      To be truthful, we were accidentally debt free. When we built our home, we looked into financing and it would have cost something like $8,000 for the construction loan fees. This was shocking to us so we started adding up available monies and had enough cash to fund the construction. Then we liked the idea of being debt free so much, we never got a permanent mortgage.

      We have a good friend, (the catsitter below) who also has enough cash but prefers to have a relatively small mortgage and invest his money. I’m certain he’s come out ahead financially given what the market has done over the last 7 years. But I feel like we’ve come out ahead emotionally.

      Now that we’re retired, not having a mortgage allows us to keep our income low, which allows us to both qualify for Obamacare subsidies and keep our taxes really low.

      Great job getting your mortgage paid off! It’s exciting to watch your progress towards FIRE! Thanks for the link on your site 🙂

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