Pay Off Your Mortgage in Five Years? For Reals??? Now we’ve been pretty aggressive with our mortgage pay down since we started making extra payments around this time last year. The goal was to have it paid off fully by January of 2019. BUT… Things inevitably come up.
In that post linked above, I shared the reasons why we’re hell-bent on paying our mortgage off early. Mainly, not having a mortgage payment improves our cash flow. That $745 per month goes a long way. For a family of four like ours, that’s the grocery bill.
The part I don’t think I mentioned is that our 5-1 ARM expires in February of 2020. I know I know – ARMs are the devil incarnate. Part of what caused the financial crisis of ’08 was the dreaded adjustable rate mortgage.
What can happen? You start off with your new house and things are great, payments are affordable. Then, year two or three or five rolls around and BAM. The rates surge by a few points and your monthly payment surges. Shorts. Soiled.
Pay Off Your Mortgage in Five Years – With an ARM?
We knew what we were getting into back in early 2015, when we signed the papers with Wells Fargo (the other devil incarnate). I was inspired by a tactic Mr. Money Mustache presented. You refinance at a very low rate, and then aggressively pay down the mortgage. You speed up the process this way, since the lower rate increases the amount of principal paid down each month.
Going with a 5-1 ARM, we basically gave ourselves five years to get the job done. The beauty of refinancing back in 2015 was that back then, rates were super low. We locked in at 2.625% – a rate that effectively made half of our monthly payments go straight towards the principal. Yee haw!
In full disclosure, our house cost $245,000 and was purchased wayyyy back in 2004. However, because I was a peon at work with very few nickels to my name (and single with no roommates), I had to use a HELOC to manufacture a large enough down-payment to avoid mortgage insurance. Net worth hovering around zero.
A side note: I highly recommend the tactic of taking out a “piggyback loan” to help you avoid having to pay mortgage insurance. Private Mortgage Insurance can cost you anywhere from around $100 to $300 per month, depending on the size of your mortgage. It’s a total sunk cost. Better to take out a home equity line of credit (HELOC) alongside your mortgage to meet the 20% equity to value requirements necessary to avoid PMI.
That strategy helped me avoid PMI payments, but it also kept me treading water for several years on the mortgage. Progress was DOG SLOW. After I paid off that initial HELOC balance, I later used the HELOC to pay off my car loan since the HELOC interest rate was lower than the Honda dealer’s rate. Interest rate arbitrage 101. In 2013, I started using the HELOC to make down payments on rental properties.
Start to Finish
You’d think that by 2015, having “owned” this house for 11 years, I’d have put a serious dent in the mortgage. Sadly, you’d be wrong. The thing with a 30 year fixed mortgage? You end up paying a shitload of interest by the time your house is paid off. And in that first decade, you barely put a dent in the principal. Let’s take a look at what my $220,500 mortgage ($245K minus 10% down payment) looks like on a 30-year schedule:
On this schedule, by the time the house is paid off at Year 30, I will have paid a handsome sum of $255,422 in interest alone. Whoah. The house was only $245,000 list!
Our starting point for the big five-year plan, beginning in the winter of 2015, was right around $190,000. Hard to believe that after 11 years, I’d managed to pay down just 30K of the original loan. That’s what happens when you sleep-walk through a 30-year fixed-rate mortgage.
From the time our sweet 2.625% 5-1 ARM refinance kicked in, to about this time last year, we simply made the minimum monthly payments. I had a plan after all, to shed some higher interest student loans first, then tackle the mortgage.
In July of 2017, our mortgage balance had shrunk to $177,000. The new lower rate was already making serious headway into our principal. It was at this point that we started to aggressively hammer away at the mortgage. All of our extra revenues after expenses, from the rental properties, Mrs. Cubert’s practice, and day jobs would be put towards extra payments.
Fast forward to July 2018. Our balance now stands at $91,000. For the first time, we’re looking at a whiteboard on the fridge with five digits instead of six. Clap. Clap. Clap. It feels nice, but until that board shows a big fat doughnut hole, I won’t be satisfied.
There are trade-offs!
Opportunity costs abound. What if we instead put our extra dollars into the stock market? Equities have been on an absolutely stellar ride these past several years. Real estate? Same thing. Crazy how much home prices have soared since the recovery, following the Great Recession.
In fact, real estate is what’s kept us from making even more progress on our mortgage pay down: The Airbnb Experiment, specifically. There was the $25,000 down payment, followed by roughly $15,000 in refurbishing and setup costs. If not for the Airbnb “distraction”, our remaining mortgage would be right around 50 grand.
Despite that increasingly profitable diversion (see the right nav bar for the latest), we’re still on-track to knock out the mortgage before our 5-1 ARM expires in February 2020. Just in time. After that point, the rate could easily shoot up to 4%, or even 6% over the next few years.
Nevertheless, the amount of principle we’ve been able to pay down during the low rate 5 year span more than offsets any future year increases. Read this article from the Financial Samurai to get a deeper education on why ARMs are better than 30 year fixed mortgages.
How to Pay off your mortgage in five years:
- If you decide that paying off your mortgage in five years or less is for you, consider refinancing to a 5-1 ARM so your regular payments take an even bigger bite out of the principal.
- If you’re buying a home and can’t put down 20%, look into taking out a HELOC up-front to avoid paying PMI (private mortgage insurance).
- Remember to pay down all of your other debt first! Unless those debts have 2% or less interest, the mortgage should be the last debt you target for paying off.
- Don’t let good opportunities pass you by. If a real estate rental or Airbnb investment catches your eye, consider pausing your mortgage pay down. Even if your ARM expires, rates will not shoot up so high that you can’t make payments. You can always refinance.
- Bonus: Make sure you’re still contributing at least up the employer match in your 401K. In my book, paying off the mortgage is somewhat of a hedge against the market tanking. However, an aggressive mortgage pay down strategy shouldn’t come at the expense of free money (401K employer match).
So what do you think? Would you consider paying off your mortgage, as opposed to investing in the market? Would you consider using an ARM to capitalize on lower rates? I’ll tell you this much, it’ll be a lot nicer to have a ledger without mortgage bill showing up anymore. Can’t wait to say “good riddance!” to THAT.