Shave 10 Years off Mortgage Term

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Think Outside the Box

Ever wondered what are some of the best ways to shave say 10 years off your mortgage term? According to a Zillow Research, 37% of U.S. household own their homes “free and clear”. In other words, this means these home owners are mortgage free. One way to join the ranks is to shave 10 years off your mortgage like I did. I will dive deeper into how to pay off your mortgage early.

I’ve learned that the best way to maximize my dollar involves some creativity, savviness, and frankly thinking outside the box. As the old saying goes, work smarter not harder. Let’s face it, there’s a number of reasons why one would be inclined to pay off its mortgage early. For instance, the sooner you pay it off, the sooner you can divert that money towards something else. That something else could be 401(k) contribution as depicted in this article. After renting for so many years, getting married along the way and expanding our family, it was time to settle down and have a place to call our own. Below is how I was able to shave 10 years off my mortgage term.

My Goals and Objectives

I had 3 goals in mind all along even before we selected a builder and consequently the building location.

 First, I wanted my mortgage to be as low as possible.

Furthermore, I wanted the biggest house I could afford in the safest neighborhood with a great school system without breaking the bank in the process.

Finally, I wanted to pay the mortgage off as fast as humanly possible.

A lot of things were unclear to me as we embarked on this journey. One thing that is clear is, I wanted to shave 10 years off my mortgage term. I was determined to pay off my mortgage early. For specific details on how I pulled the project off, you can read the blog here.

How the Savings Took Place

Scenario:

  • Property – Single Family Dwelling (New development)
  • Loan term – 30 years
  • Interest – 4.5%
  • Home Value – $521K
  • Basement – Unfinished

1. Unfinished Basement/DIY

Opting not to have the basement completed brought our home purchase price down from $561,200 to $521,200. The builder as well as general contractors I reached out to all gave an average quote of $40K.

By opting to complete the basement, the purchase price of $521K puts my mortgage price at $2640 (@4.5% over 30 years). If I had kept things this way, it translates to $950, 338 over the duration of the loan as depicted below ($521K principal + $430K interest).

How I shaved 10 years off my mortgage - Mortgage rate and timeline without making any modifications

On the contrary, if the builder had completed the basement with that additional $40K factored in, my mortgage would have been $561K. This means my monthly payment would have been $2843. More importantly, that would have come at a total cost of $1,023,873 over the duration of the loan as depicted below ($561k principal + $462k interest). This means before we even close on the house or step foot in it, we had already started saving by inching closer to paying off my mortgage early.

How I shaved 10 years off my mortgage - Mortgage rate and timeline if builder or contractor completed basement

You are probably asking great for you for saving over $70K but your basement is not finished. You’d be correct but not completely. This is because this is where the DIY portion of this step comes in.

Full disclosure – I am NOT a construction professional.

I finished my entire basement (with the exception of HVAC installation and electrician work) all by myself. Total cost to complete the project? $14,000.

Savings from unfinished basement /DIY project = $1,024K – ($951K +14k) = $59K

2. Mortgage Bump-Up

The next move I made in how I shaved 10 years off my mortgage was bumping up my monthly payment. In other words, I currently pay more than my mortgage note requires. You can play around with the numbers by using this mortgage calculator. It will suggest how much you can save based on the additional amount you are comfortable with.

Before getting any anxieties, there’s a simple method to the madness. I was pre-approved by the bank for a certain amount. What I did was make sure I didn’t max out that amount. In fact, I set a hard budget that the house we were going to purchase (or in our case build) with closing cost included would be $40K or so less than the pre-approved amount.

The numbers based on my strategy above (buying a house that’s less than the amount I was approved for) suggests that I was paying roughly $400 less than I otherwise would if I maxed out the amount. Put different, I could afford to increase my mortgage by $400 and still be within the original ballpark of the full amount I was originally approved for.

Below is the amortization schedule that compares the BEFORE (without any additional monthly payments) and AFTER (with the additional monthly payments).

BEFORE

How I shaved 10 years off my mortgage - Mortgage rate and timeline without making any modifications

AFTER

Mortgage rate and timeline with a $393/month "bump-up"

As depicted above with the before and after, what I was able to accomplish was reduced my mortgage term by 7 years (brought down the loan term from what would have been August 2049 to September 2042!!!). I also brought my total interest amount from $430K to $317K.

Savings from mortgage bump-up = $430K – $317K = $113K (and 7 years shaved off my mortgage term). Total Savings between step #1 $59K & step #2 $113K =

$172K (and 7 years shaved off mortgage term)

3. Interest Rate Reduction Refinancing Loan (IRRRL) –

This is another method that helped me and I’m sure will help you shave 10 years off your mortgage term. The name is pretty self-explanatory in that the program helps refinance your loan at a reduced rate. Please beware that this program is only available to military veterans. There are also certain IRRRL facts for veterans you ought to be aware of.

The biggest selling point for IRRRL and why it was a no-brainer for me is the significant dip in the interest rate. There was a dip between when I purchased and roughly 6 months later which was when I became qualified for IRRRL. When I bought, the interest rate was 4.5%. Just 6 months later, I found out that the interest rate had dipped to 3.625%. We are talking 0.875% reduction in my interest rate. To put that in perspectives, that brought my monthly mortgage rate down by $278!  

BEFORE IRRRL

Mortgage rate and timeline without making any modifications

AFTER IRRRL

Mortgage rate and timeline with $393/month bump up AND IRRRL.

Where the Rubber Meets the Road

We have a few numbers in play here so I’ll try to clarify them in the least confusing way I could think of as possible.

$514,000 – This is the new amount of the loan once I refinanced. 9 payments had been made which dropped the original loan amount. If you’ve owned your house for multiple years say 5 years, the numbers would look different for you because you’d owe much less than say someone who had only owned their home for a year.

$670 – I was already making an additional payment of $393 per month to bump-up my mortgage. With the new IRRRL, I was able to get the interest rate down to 3.625% which ultimately led to saving another $277 per month. I put that amount saved right back towards my mortgage increasing the bump up from $393 to $670.

Savings from IRRRL = $838K – $724K = $114K. (Plus 3 additional years; Sept 2042 to Sept 2039, shaved off my mortgage term).

Savings in step #1 $59K

Cost saved in step #2 $113K

Savings in step #3 $114K

Total Savings $286K

This concludes, how I shaved 10 years off my mortgage. I also saved $286K in that process. What exactly would you or can you do with extra money? Here’s another article on some alternative options such as 401(k) that can pay future dividends. This article also go into more details on accounts on some retirement accounts you should consider.

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