How to pay a 15-year mortgage off in 5 years
During late 2013 while I was traveling out-of-town for work, my wife Nicole found our "forever house".
This home had everything she was looking for including an attached garage, open floor plan, updated kitchen, walk-in closet and a big backyard on a half-acre lot. She told me that this was THE ONE and as soon as I got home from out-of-town, I had to see it.
My wife has excellent taste and the majority of the time we are in sync. I wasn't worried about liking it. I was worried about getting a BIG OLE MORTGAGE to pay for it!
Moving from our small bungalow (my bachelor pad she begrudgingly moved into when we got married) to a ranch twice the size of our current house was going to be a big upgrade for us.
When I got a look at the house she found, I loved it too. It felt like home instantaneously. Even the neighbors were perfect.
So ... We decided to go for it.
BUT ... I had a few nerdy money guy rules that we discussed to ensure this mortgage was obliterated in less than 5 years:
In our first house together, I had made a lot of uneducated first time home buyer mistakes that I didn't want to repeat. One of those areas I was bound to improve was with the mortgage process.
My first mortgage was a lovely thing called a 5-year ARM (Adjustable Rate Mortgage). "ARM" sounds a lot cooler than "Adjustable Rate Mortgage" – smart marketing department at Chase Bank! In the beginning, I didn't quite comprehend the whole "adjustable" part of the name. In 2009, when my 5 years ran out, the metro Detroit housing market was in the dumps and the rate adjusted, I quickly understood.
This time would be different.
When we bought our new house in 2013, the rates were at an all-time low. We got a $200,000 15-year mortgage at a 3% interest rate with no points.
This 15-year mortgage has higher monthly payments of $1,900, but the bulk of it is going to the principal every month instead of our mortgage company's pockets. Nicole and I agreed that if we couldn't afford to pay the larger monthly payments of a 15-year mortgage then we shouldn't buy the house.
3 years into this home purchase, the 15-year mortgage was one of the best decisions we've made so far.
Not only are we paying less interest to the mortgage company by going with the 15-year mortgage over the 30-year mortgage, the mortgage principal has been going down by a sizable amount each month.
Additional Principal Payments
My second nerdy money rule to crush our new mortgage in 5 years was to make additional monthly payments of $500 toward the principal each month.
This required us to dial back our expenses slightly – things like less eating out for dinners, more packing my lunch for work and we cut the cord on cable TV (and we still don't miss it today).
This consistent monthly payment made a major impact in the dramatic reduction of our mortgage. Yes, we had a 15-year mortgage, but I wanted to turn it into a 5-year mortgage.
My company pays us 26 times per year (every two weeks) as opposed to 24 times per year (1st of the month, 15th of the month). Nicole and I agreed when we bought the house, we would only live off of 24 paychecks annually instead of the 26 we actually received.
So twice a year, we have made a BIG payment on the principal with those two additional paychecks. This consistent biannual payment took a huge bite out of overall principal balance.
I don't always receive bonuses for work. It depends on how my company is performing or how I perform that year. Last year, I was fortunate enough to receive one for a solid performance. That unexpected money was also sent to attack the mortgage.
Monthly Budget Party
Nicole and I agree to meet every month to create and review a monthly budget. I have dubbed this the "budget party". She does not find it to be much of a "party" per se, but I figured if I call it a party she might be more willing to show up.
The monthly PARTY consists of pizza and us developing a zero-based budget through Mint where every dollar that we earn each month is committed. This way we were controlling our money instead of money controlling us.
Since paying off the mortgage is a big deal to both of us, we ensure that the extra principal payments are included in this budget each month. Since the additional principal payments are automated, it has become our way of life. It is kind of like when you set up automated retirement contributions. You don't even allow yourself to realize you have access to that money.
My wife is a good yin to my yang. She likes dreaming for the future with me and having a little less today so we can have more tomorrow. She also wants to make sure we're enjoying our lives today. With the madness that sometimes comes with my full-time job and two kids under four years old, we both agreed that if we're going to do this crazy 5-year mortgage pay off extravaganza then we still need to have fun.
Everyone defines fun differently. For us, it meant things like going to dinner with friends, having themed birthday parties for our kids, driving to northern Michigan to visit our family for the weekend, going to Detroit Lions games (more torture than fun really) and doing spur of the moment trips like going to Manhattan for a quick weekend.
The last thing we want is to be house rich and life poor. I can accurately say we're having fun and excited about the future. Nicole would agree.
Dream Big Dreams
In order to keep us motivated and excited about paying off the mortgage, we constantly remind ourselves why we're doing this.
With a paid off mortgage, we will be able to go on an epic family vacation every year. We're thinking Mexico for a week during Christmas or Easter. The warm, beautiful sun will shine on our pale native Michigan skin while we lie on floating rafts in a picturesque infinity pool. I can see it now!
With a paid off mortgage, we'll fund our kid's college funds so they will have the freedom to attend college and not worry about student loans.
With a paid off mortgage, we'll be able to save for our first rental property and begin generating some true passive income. As the passive income builds over time, we will be able to retire early.
These dreams keep us motivated and excited about the day the mortgage is gone for good.
We're three years in now ... Including the profit we received from our bungalow, we've paid over $160,000 of the principal.
As of today (April 2017), our balance sits at $33,000 and we're on track to pay our mortgage off by December 2017 ... and that will truly be a life changing Christmas present.
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