How to Be Mortgage Free

The book The Cheapskate Next Door: The Surprising Secrets of Americans Living Happily Below Their Means suggests how people can live mortgage free (after some time, of course) by taking the following seven steps:

1. Buy less house than you can afford.

2. Stay put in the house as long as you can.

3. Make additional payments toward principal whenever possible.

4. Whenever you get a pay raise, allocate most or all of your increase to paying off your mortgage early.

5. Consider setting up a "mortgage acceleration plan" with your lender.

6. If you refinance to take advantage of lower interest rates, do the math carefully and shorten -- never lengthen -- the remaining term on the loan.

7. Keep your eye on the prize.

Sound familiar? Pretty similar to my formula for buying a house. ;-)

We've been mortgage free for over a decade now. If you want to read about how we did it, check out How I Paid Off My Mortgage.

As for their tips above, here are my thoughts on each one:

1. This is a key step in the process. If you buy what you can afford or (worst of all) more than you can afford, you'll probably never pay off your home early. To see what we've done, check out How to Become Wealthy and my comment #6.

2. Moving frequently is expensive (unless you have a company paying for it -- I've never moved without my employer covering all of the expenses) and the less you do of it the more you'll save. FYI -- we've lived in our current home for 11 years now (we did look at moving a couple years ago, but decided against it for various reasons) and plan to live there for at least several more years (probably at least until our kids are in college.)

3. Of course. This is another key step in the process.

4. Same as #3 in my book.

5. Not needed -- you can do it yourself if you have discipline.

6.  Again, of course. You want to refinance to make yourself BETTER off financially, not worse off.

7. You must be disciplined over a long period of time (several years) to make this work. If you are not, you will not pay off your mortgage early.

Basically, it all comes down to three steps:

• Buy less than you can afford.
• Make extra payments.
• Stick with it.

Pretty simple, huh? ;-)

Comments

[Brent]

I do not agree with this, why give your cash to the bank in installments when you could save it, earn some interest on it, and pay it off once you have accumulated enough to pay off the house in full.

This way you don't pay 90% of the house off and then lose a job and the bank takes it away from you.

You always have the option to walk away and have the cash in your pocket in the case you lose your income stream before you can pay off the house. Once the house is paid off then its a question of if you think you can do more or less with that money, I would rather have no mortgage payments.

[Old Limey]

We bought brand new house #1 in 1963 for $27K, conventional mortgage (payment $124/mo), and sold it in 1977 for $90K.
We added $17K, traded up, and bought 5yr old, much nicer, house #2 in 1977 for $107K, conventional mortgage (payment $331/mo).
We made a final lump payment in 1992 upon retirement and our $44K original capital outlay for housing has now grown to $1.1M. What a bargain!

I realize we made mortgage payments and property taxes (now $2,172/year) for 29 years but it was far cheaper than renting all that time plus we lived in great, well kept neighborhoods with good schools and a very low crime rate the whole time. Home prices went steadily upwards from 1963 to 2005, helped by a booming hi-tech economy in Silicon Valley, CA and the availability of cheap orchard land. Now the land has all been used up by homes, industrial parks, schools, hospitals, and shopping centers as the population grew.

Today's newspaper census results announced that California's period of rapid growth and gains in congressional seats has finally ended - thank goodness! The fastest growing states are now Nevada, Arizona, and Utah. Their growth comes at the expense of states in the Northeast - I wonder why, could it have anything to do with the climate?

I would suggest that the most important factor in buying a home is "Timing". Unfortunately most people, myself included, don't have that luxury, they buy a home when they need one, their family is growing, and are able to swing the deal.

[Matt]

I made the mistake of refi when rates were lowered but traded a 30 for another 30 after paying for 2 years on the first 30.I did not realize this until I got the first payment due. The next time I refi I trade a 30 for a 15 year and a lower rate. I have accelerated payments and should have it paid of in 11 years instead of 15.

A word to Brent is that is why you have an emergency fund that you do not touch. By all meaans this is a large pot of money sitting there and it very tempting to tap. If you do lose your job then you will not lose your house because that is when you use your emergency fund.

[Jeff]

I'm finding I have to agree with Brent. If you can find CD's or other guaranteed deposits with interest rates equal to your mortgage rate, there's really no reason to pay the bank in installments. This might be difficult to do right now, and as such I would agree that paying the bank in installments now is a great idea. However, if we hit another boom season then putting the extra mortgage principle into a CD earning at least equal to your mortgage is a great idea. Cash gives you flexibility and makes you less susceptible to risk. This requires rock steady discipline, but assuming 100% discipline this is theoretically better in every way.

[You be the bank]

I also must agree with Brent,,,,saving the extra payment in a side fund is a more efficient alternative. Keeping control of all the money you have is key!

[Jim]

I've done 1,2,3 & 6 on that list. We're close to mortgage free and could pay it off with cash now if we wanted.

[Jim]

I agree with Brent to an extent. I would not pump all my free cash into my mortgage and leave myself cash poor. You should have a good emergency fund before you put extra cash into a mortgage. But if you have a large emergency fund then I see no harm in paying down a mortgage. But if you'd prefer to pile up cash on the side instead of paying extra principal on the mortgage then thats one way to go. But at some point if you've got enough cash it makes sense to just pay off the mortgage.

[Squirrelers]

Good post, the one thing that struck me is the concept of buying less than what you can afford. The thing is, how does one define what is affordable? I think that definition has historically been determined by how much lenders are willing to loan to you, but to me, that's not the appropriate measure of affordability. Neither is 1/3 of household income, or similar measures. Maybe 20-25% of income is what people can afford, given retirement and other goals? Or, how about as little as possible while maintaing a home one can be satisfied with.

[Todd]

Unless you haven't been able to refinance at historically low rates, there's no need to pay off the mortgage right away when there are better places to put that extra cash. Pay off all other non-mortgage debt, establish a 6-12 month emergency fund, max out your 401k, Roth, and HSA, and spend some money every year on a vacation or some other lifestyle-enhancing activity, THEN put any extra money towards paying down mortgage.

Other than the psychological benefit of living totally debt-free in a house, it doesn't make much financial sense to do it.

Older people who bought houses for $25-50,000 in the 60's and 70's with $100 or so mortgage payments, have houses in our area worth more than $200,000 on average. City/county property taxes are upwards of $3000 a year, and there are thousands more dollars spent in upkeep and remodeling after 30-40 years just to stay in that home. In a 30-year fixed rate mortgage, the monthly cost becomes less and less a percentage of living expenses as inflation and wage growth increase over that time. Taxes, however, do not follow that trend.

[billyjobob]

I guess if you can make more money investing the money rather than paying early, that would be the way to go. But when I bought my house in 1980 interest rates were as high as I think I've ever seen them .... my luck ;-( .. The interest rate we got was 12 percent. Me and my wife paid off that house in 4 years. Brent.... The beautiful thing about paying your house off is that you'll never have to worry about walking away from your house or not being able to make a payment. Cause it's yours!!! I've really felt good about owning my home outright for the last 26 years. That's 26 years of no house payment...leaving even more money to save for retirement... or whatever you need to save for. There's something to be said for knowing your house is truly yours. Great feeling!

[Jeff]

@Jim, I believe that's his point. You keep the money on the side and when you have enough you pay off the entire thing in one fell swoop. This requires a lot of discipline so it definitely isn't for everyone. In general, not having a mortgage is great so whatever path you take to get there faster is a good thing.

[Mike B.]

You really need to think about the extra payments as buying a bond. You're buying your own bond back from the bank.

It's obvious why not to follow the Brent model. There are no guaranteed 4-5% investments right now. The sooner you put that money into your house, the sooner you start seeing the guaranteed returns of your current interest in the form of your next payment going more toward principal than interest.

Of course, this all requires not only a good emergency fund, but also funds for buying cars, taking vacations, etc. Ie, as someone said earlier, don't be cash poor. That way, you'll have at least a years worth of house payments saved up, and if it happened to me (a layoff, etc.) if it dragged on for a year, I'd be looking at moving somewhere else anyway for employment, so I wouldn't "lose my house", I'd just sell it.

Anyway, mine's done now, and if I figured out how much I saved by making the payments early as opposed to just 'saving it up on the side', I'm sure it would be in the thousands of dollars.

[Troy]

Actually Brent is precisely correct. Risk must always be entered into any financial equasion, and when entered into home loan payments, paying additional principal on a monthly basis is financially foolish.

The smarter move is a separate account you control, where the additional funds are depositied. That leaves control, flexibility and security.

[JoeTaxpayer]

I understand the desire to be mortgage free.
But it falls onto "the list," which for us meant that it comes after very aggressive retirement savings. Of course, for everyone it should be after any higher rate debt. To pay a 5% mortgage early when one is floating 18% credit card debt if nonsense or folly, depending where you are from.
Typically mortgages have terms of 15, 20, 30 years.
So, if you have 23 years left and feel you don't want to refi into a 20, (why not? that's actually a great idea!) you should run the numbers using the rate of the new 30, but calculate the payment based on the 23 remaining. Then be sure you make at least that payment each month.
I am in my house 14 years, and refied many times. 30,30,20,15, and now 10. Every refi had no cost, no closing, so while the rate was always a bit above the best rate, I lost no time and took no risk. At 48, I'm on track to have it paid in less than 7 more years. Right before my 12 yr old goes to college, and before retiring. 21 years may be longer than many would like, but we save over 25%/yr to retirement. Even after this past decade, 55 is still looking good.

[Sunil from The Extra Money Blog]

good one Brent, and based on my social circle, you (and I) tend to be exceptions to the conventional norm. i'm all for paying cash, given there is enough in the reserve tank. paying the cost of debt, and bearing the risk you speak off just has never made any sense to me. securing a mortgage today in my opinion makes sense if one anticipates a rising real estate market (therefore lock in the low price today). i won't comment on interest rates because if one's desire is to pay cash for a home anyway, then whether the property is bought today or in 10 years shouldn't matter. interest rates become irrelevant in this case. i've had a few folks ask me buy vs rent and ive told them that in today's economy, renting would be cheaper. take the money you would save in home maintenance/repairs etc and invest it. pay cash when you are ready to buy! but that said, buy smart and do not overpay!

anyone else with good rent vs buy discussion points? articles? thoughts? i have always been interested in looking at analysis conducted around this subject

[Old Limey]

I can see that I did my home buying in a very different financial climate from today.

In my day the weekend paper was full of ads for model homes, beautifully furnished and landscaped, and just waiting for young couples to come by and fall in love with one of them. The banks were falling over themselves to provide really great loans at low interest rates, and most people had never heard of anyone losing money by buying a home. My first home, for example, was $27K in 1963 when I put down 25% and borrowed the $20,250 from the bank at 4% on a 25 year fixed rate loan. I sold it in 1977 for $90K so in essence I used the bank's money to make $63K for myself while paying almost the same to buy as I was paying to rent, the only extra was the property tax, but then I also got a tax deduction for my mortgage payment and property taxes, whereas paying rent was no help at all with taxes. My mortgage payment was $124/month and the new duplex that we had been renting was $125/month, so it was a no-brainer to buy rather than to rent. It wasn't as if by renting rather than buying I would have been able to increase the amount we saved, it was a wash. The difference in quality of living between a beautiful brand new home in a quiet street, with a private Cabana Club membership and swim team for the kids, and in a great new neighborhood of young married couples just like ourselves, and the area where the duplex was located was huge. It sure made a big difference in the happiness of our three children's early lives and enabled them to each have their own room and walk to their grade school. Every July 4th. we obtained permission from the city to block off our street and hold a great block party. The neighborhood also gave us a nice party, and a Stars & Stripes to proudly fly, when we became citizens. That seems to be an America that has gone away for a lot of people, even though TV was B&W it was the good old days in many ways.

[Rich A.]

We bought our starter home 15 years ago when we had no kids, and we are still in it today...5 kids later.

We've tried to move several times, but it never worked out.

If we had sold it five years ago, we could have doubled our money. Today, sadly, the house would sell for about the price we paid for it in 1995, due to the housing market collapse and the glut of foreclosures in our neighborhood.

This housing "bubble" is a great reminder to live below your means and not presume too much upon the future.

[Brent]

Rich A's last comment is exactly why I would not become house rich, you never know what is in the future, even if you have a nice sized emergency fund.

For example, you purchase a $250,000 house and put $50,000 down (to avoid PMI, lower your payment or whatever your situation is)

Lets say you overpay your mortgage by $1,000 a month beginning when you still owe $200,000 on that house. In 10 years, how do you know what will happen to you or the economy? I would rather have that $120,000 in a separate account (must be disciplined) and have the option to pay the house down when I had enough cash saved up.

This scenario also works if there is big inflation due to the fact that the amount you mortgaged your house at will not change but if there is inflation your income would (hopefully) increase to meet it. (pay off house even sooner)

The only way I would not do this method is if I was overly optimistic about the future of the housing/job market and overall economy, why give the bank your cash any sooner than you have to?

The cost difference saved by paying the principle sooner through extra monthly payments is not worth it in my opinion for the simple fact that...

who cares if you save a few thousand in 15 - 20 years if you lose your house before that and lose all those extra payments?

[Nashville]

We married in 1986 and bought our first doll-sized house in same year. Sold it in 1994 and began building our "dream" house. Paid $36,500 cash for 1.1 acre lot and financed $202,500 I believe (most possible without jumping into a jumbo loan at that time) at 7.50%. Had accelerated payment plan in place day one and best thing I ever did.

About 2005 we refinanced to a 15-year loan at 5.25% and added the closing costs, etc. to the loan. Again, accelerated payment plan. Paid off the mortgage in December, 2009. Best feeling in the world!

Did all this while still building our cash reserves. Now, mortgage free plus almost $1m in cash and no other debt. We are not typical. No kids; high incomes; lucrative stock options; undeservedly blessed. But it sure does feel good.