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How to get rid of your mortgage

Paying off your mortgage early isn’t as hopeless as it seems

How to get rid of your mortgage

Image courtesy Stuart Miles via FreeDigitalPhotos.net

Let’s face it: 30 years is a long, long time. As Americans, we have almost come to view our mortgage as a never-ending bill, occasionally it goes up, sometimes you can get it to go down, but always, always there.

I know people who bought property for $5,000 in the 1970s and today owe $200,000! How does this happen?

It’s important to realize this “death contract”, as the word means in France, hasn’t been around all that long in its current form. In the United States, it was only in the 1930s that mortgages became the way houses were purchased. Now this had two results: It brought more homes within reach to more people and it drove up housing prices. (In much the same way car prices shot upwards once car loan became popular.) This also meant that banks had a reliable stream of income (secured by the property, of course!), which also meant that they had an incentive to keep you in debt to them. Thus, your old pals the HELOC and the cash-out refinance.

And, we know the rest of that piece of history, where the brain-dead American consumer racked themselves up a pile of credit card debt and when that bucket got too full, they used their home as an ATM and started again at zero (not counting the new additional real estate debt).

Now, because you’re a clever person and you want to pretire, you’re not going to play those games*. You’ll want to get rid of your mortgage** as soon as possible to lighten your overhead and bring you that much closer to pretirement. I am not going to waste your time with the common, tiny gimmicks like making an extra payment to principle each year.  And you already know you can sell or default, so I’m not getting into that, either. You have the rest of the internet to read if you want to pick around the edges or take a shortcut. I’m talking about obliterating your mortgage, faster than you ever thought possible. It’s not easy, but it is doable in many cases.

A couple notes. There may be more than one approach that will work well. Also note that the amount you owe, your interest rate, your income and other factors may limit your ability to try these ideas. I share what I know hoping at least a few folks may be able to speed up their timeline and get their freedom back.

In effect, what we’re going to do is refi to a short-term loan, save like a crazy person and then when enough time has gone, simply pay off that sucker. To make it a little more tangible, I’ll use an example: John and Jane Johnson recently purchased their house for $300,000 and put 20% down. They have a 4% interest rate. They owe  $240,000. Their P&I is $1,146. Tax and insurance is an extra $300/month so their payment is $1,446. We’ll say both make $50,000/year so jointly they bring home something like $70,000 after taxes ($5,800/month or so in take-home).

They’re depressed: 30 YEARS!! That seems like forever!

But they take a look at some ideas and decide to rework their lives. What if they…

  • Refinanced into a 10-year loan at 3%
  • Cut their ongoing household bills down to $2,000/month (shouldn’t be that much higher anyway)
  • Cut their “fun” spending back severely to ensure they could keep up with the new payment
  • And, maybe because they’re ambitious, they’re even able to scrimp and save just a bit on the side as the years go by

Let’s see what happens:

  • New payment: $2,617 (including the same tax and insurance)
  • Monthly bills (utilities, etc.): $2,000/month
  • Fun: Next to nothing, but cooking at home and enjoying friends and family can’t be a bad thing, right?
  • Loan gone in 10 YEARS!

But wait, I’m not done yet!!

So after all of that, they still have a $1,200 cushion each month for surprises or the occasional splurge. And they’ll be saving over $130,000 in interest and will be able to bank all money after the 10-year loan is paid off to put toward their pretirement fund. (Monthly income of $5,833 – $2,000 in bills – $2,617 house payment.) But let’s pull up a handy-dandy amortization calculator and see if we can get tricky!

Let’s assume our lovely couple is also able to save around $600 per month on average over the course of their loan. Now I know they’re running a little tight here at the beginning, but remember, we’re talking about many years. We can safely assume they’ll be getting a raise or bonus here or there and Jane is pretty smart and will likely change jobs a few times and end up getting that promotion. So, remember, we’re just talking about on average saving up that money over the years. (This also means not sneaking in and spending it, which is what most of us will do.)

So let’s do the math. In, say, eight years, they’ll have saved up $57,000 — enough to pay off their remaining balance! Plus, because they were smart enough to invest the money, their savings will even be a little higher! But, we’ll say their investments were quite modest so maybe they have around $60,000 at the end of those eight years — done! In fact with a slightly stronger investment or a little more saved, they could easily do it in seven years! Wow!!

We went from an endless 30-year life sentence of an expense and turned it into a trivial 7-8 year sprint.

But I have to stress a couple things:

  1. This isn’t easy. Maintaining strict discipline over many years is something very few people can pull off. Automated transfers and putting money somewhere where it’s a little bit hard to reach can help.
  2. This really only works for most people now when interest rates are this low. A much higher interest rate will make the payment too high to be workable.

But, Nick, the banks will never grant me a loan that devours that much of my monthly income. Thanks for nothing! 

This is actually a legitimate concern. Banks have really tightened up their requirements and, frankly, are being quite absurd in some cases. It is possible you won’t be able to get this type of loan. (Although you should try!)

If this happens, here’s Plan B:

Keeping all other variables the same, we’ll keep the original 30-year loan. The amount that would have been going toward our 10-year payment and our side-savings, we’ll simply save on our own. So the existing payment of $1,446 will still be paid and we’ll also save around $1,200 on the side. The outgoing money is basically the exact same. In eight years, we’ll have saved $115,000 and investment growth will be at least $126,000 (really should be much more, but just being very conservative here to make the point). You can play with different timeframes and do this refi earlier or later depending on your situation. Or just keep building up your pretirement fund and eventually use that money to pay your mortgage for you. That might be a good post for another day.

Now, at this point, if interest rates are still low, you’ll do a refi (you’ll be able to get that loan, no problem) and pay down your balance. So effectively you’ll take out a new loan for $100,000. What I would do in that case is take out a 30-year loan (now with tiny payment) and simply park it and work on building up my pretirement fund.

However, if our couple really wanted to get rid of that mortgage, they could keep on saving aggressively and take out a 4-year loan instead. By continuing to save on the side at the same rate, they would be done a year early (11 years total) and be mortgage free.

Boom — powering down your mortgage in just a few years! What could be better? 

 

*Meaning the credit card problem. A HELOC is actually a really important tool for homeowners and early retirees.

**There are legitimate reasons to retain a mortgage, particularly in a low interest rate environment. But that’s a discussion for another day.

UPDATE: If you’re considering this approach to quickly getting rid of your mortgage, be sure to check out my post on how to recast your mortgage. You can save a bundle without doing an expensive refinance.

Ten awesome ways to look like a total idiot

There was once a time when wealth was hard to fake. For example, in the Gilded Age, the Vanderbilts and the Rockefellers, among others, floated far above the masses living in their own, untouchable world. Several layers below those elites were the plain ol’ rich, but they weren’t obscenely so. These were the executives, the entrepreneurs, and others who made a great living, living it up in mansions and even owning cars.

No matter how many boom and bust periods the country went through, you could still spot the wealthy a mile away. It was them and everyone else.

This continued right up until later in the 20th century, particularly in the 1980s and 1990s. That’s when something very interesting began to change: the advent of Easy Credit. Suddenly a lowly office drone could drive to work in the exact same car as the owner of the company. While their financial situations may have been very different, if you saw them stopped next to each other at a stoplight, you wouldn’t be able to tell which was which. This was new. In fact in the ’80s I was working in fast food and our manager drove a new BMW convertible. A fast food manager. Of course he also burned out his nose on cocaine, but that’s another story…

We are, after all, just animals

In the natural world, animals employ various tactics to attract a mate. The male frigatebird inflates a large, red sack on its chest, dancing about to bring on the ladies. Male rams famously crack heads with competitors until the strongest stands alone, thus impressing the females. And the male cichlid fish prefers females with a large pelvic fin, causing the ladies to sprout outsize fins to attract the boys (and probably starve themselves to make the pelvic fin look larger).

Even in the human world, we see the same approaches, although it’s harder to recognize them in ourselves. For example, the Maasai tribe in Africa uses a jumping ritual where the males compete to show their prowess. The higher the jump, the more attractive you are to the girls. In western culture, we do crazy stuff as well. Mostly geared toward looking wealthier than we are. If we spend a lot of money on haircuts, fancy clothes, gym memberships, flashy car, etc., on some level it’s just the human equivalent of flashing our plumage. (Which in turn is a proxy for better genetic material, according to the scientists. Wealth is an indicator, however subconsciously, that this mate was stronger, smarter, whatever and therefore is someone we want to combine DNA with.)

How humans choose a mate

Which brings us back to the world of personal finance. For quite some time, people were able to discern wealth (and by proxy, desirable DNA) by easily identifying those individuals by their trappings. Mansions, beauty, cars, leisure time, etc. But in the era of easy credit, beautiful jaw structure or a sleek black Mercedes could be presented as wealth with no way to tell how real it was.

HOWEVER, like any animal, we can’t be fooled for long. Certain things we do to present that fake wealth are now easily able to be seen through. Once symbols of wealth, they’ve become symbols of stupidity. Ways to be targeted for Loserville by potential mates, even as we’re still doing them in hopes of mating success.

So with that very long introduction, I present Ten Awesome Ways to Look Like a Total Idiot and thus be overlooked by potential mates. (Full disclosure: I’ve done more of these than I want to admit. I’ll leave it to the readers to guess which ones.)

Keep in mind, we’re talking about things that people do to make themselves look rich but actually make them look poor and stupid. There are a lot of dumb things people do, such as not investing in their retirement plans at work, that are private. That’s a different post.

1. Buying a brand, new car

Photo: Beth and Christian

Photo: Beth and Christian

Once upon a time showing off that flashy new car to your friends was a sign you’d made it. But in the era of easy credit, your new car just screams “I’ll always be poor!” Your polite friends might compliment you on your new purchase, but inside they know you’ll be asking to borrow money someday. It’s probably the most vivid example of an item where the consumer thinks everyone else thinks they look rich, yet we all know what’s really going on.

 

2. A perfect lawn

Photo: Iamrealestatephotographer

Photo: Iamrealestatephotographer

No one is denying a perfect lawn looks nice. But that lush green patch also looks like you don’t know how to manage your money. There’s nothing more pathetic than watching someone dump gallons of water on their green patch just so they can trim off the excess growth they just caused and throw it in the yard waste bin. Even worse is watching someone sacrifice the health of their pets and kids by covering the lawn with chemicals. Here’s a tip: If a plant doesn’t grow without unnatural intervention, the plant doesn’t belong there!

 

3. An expensive coffee habit

Photo: Ishmael N. Daro

Photo: Ishmael N. Daro

Look, an occasional treat is one thing. But we all know that person who can’t stumble their way into work without their triple-Venti-no-foam-half-soy-half-nonfat-extra-hot latte. These people can’t function without their morning milkshake and they carry their disposable cup around all day as if to say “look how rich I am, I can’t function without my fancy coffee milkshake every day.” Newsflash: everyone knows you’re buried in credit card debt — we can tell by your decadent wasting of money every morning.

 

4. Fancy bottled water fiji_water

Some business genius started this madness in the 1980s when Evian bottles became the hottest thing to make sure people saw you holding. Never mind that it tasted like shit. For awhile it got so bad that just having a water bottle in your hand was a status symbol in and of itself. We’re finally at the point where most people acknowledge bottled water is one of the worst things you could do to the planet and it’s started to disappear. Except! Now we’re also seeing the arrival of new, fancier bottled waters, with morning dew shaken from the leaves of gorgeous plants in the most exotic locations. Just stop. If you’re thirsty, grab a glass and put some water in it.

 

5. Whipping out the store credit card

Photo: mlinksva

Photo: mlinksva

Ugh, when will this die? Whether it be accidentally pulling out a fancy store’s credit card at dinner or simply using that store’s card when shopping, this ridiculous phenomenon must be stopped. With very few exceptions (I can think of exactly zero right now), store cards are for SUCKERS. For a large purchase, it can be worth it to apply for and use a store card just to receive the discount. However, after the purchase is complete, cancel the card! Keeping a wallet full of various store cards is absurd. And while you think your fancy wardrobe is making you look rich, your idiotic store cards make you look POOR.

 

6. Driving gas guzzlers

Photo: David Guos Master

Photo: David Guos Master

I’m not sure what is going on in America these days, where certain individuals are threatened by anything environmentally friendly, but it’s super weird. I see people all the time who love to mock gas-saving cars and then rumble away in their giant trucks, the ash from burned-up dollar bills coming out of their tailpipes. My favorite is the Hummer, the ultimate car of the fake-rich. Bought, no doubt, on credit, the fools that drive these giant machines get a little ego boost every time they get behind the wheel. Meanwhile the rest of us are snickering at their stupidity.

 

7. Kids buried in toys

Photo: Rob Boudon

Photo: Rob Boudon

This one really gets obnoxious at Christmastime. Spoiled little American brats find themselves awash in plastic crap from China. It’s quite amazing to watch this ritual each year. The pile of presents is slowly processed into two piles: one of shiny, crumpled paper and the other of shiny plastic. The excitement of anticipation on Christmas morning lasts about 0.3 seconds per gift as the item is ripped open and quickly thrown aside as they go on to the next one. Later the pile makes its way into a basement or bedroom, where it’ll be occasionally played with, but usually forgotten as the kid searches for the next thrill.

 

8. Name-brand wardrobes abercrombie

I’m actually a little bit amazed that people still consider name-brand clothing a status symbol. It is well understood now that the jeans with the fancy label on the butt were made in the EXACT SAME factory as the cheap version of the same item. We tend to think of women and their shoes and purses when we talk about name-brand money wasters, but if we’re honest, men can be just as bad. Really, you’re going to go in public with the word “Abercrombie” emblazoned across your chest? Why don’t you just wear a shirt that says “Idiot”?

 

9. Ridiculous car accessories

Photo: ThaRemix

Photo: ThaRemix

The U.S. is nothing if not a car culture and it shows in how we pamper our vehicles. And this treatment all too often goes to ridiculous levels. When you put spinners on your 1989 Honda Civic, you’re not showing the world how rich you are, you’re tell them how POOR you are. I wince whenever I see headlights covered in colored shrouds, bits of chrome trim added around taillights shining above a coffee-can tailpipe. Cars that glow, flash, thump with horrendous base, or even that bounce, are all really just messages saying, “I never want to have any money!”

 

10. Smoking cigarettes

Photo: Rick Camacho

Photo: Rick Camacho

Cigarettes are still the best way known to science of turning cash into lung cancer. Even so, millions are still hopelessly puffing away, quite often outside the doors where these people work. They gather in small groups to bitch about the latest corporate outrage, blind to the fact that they are breathing in their early retirement dollars as they complain. How much quicker could they retire if they invested their ciggy money instead? They’ll never know because they’re too busy complaining about how broke they are.

I mean, really, time to give it up already, people. What are you doing??

 

OK, I couldn’t resist adding in an extra bonus item: 

11. Plastic surgery

Photo: David Shankbone

Photo: David Shankbone

Sure, some people actually end up looking better after plastic surgery. And certainly in many cases there are legitimate medical reasons to undergo various procedures. But I’m talking about the endless pursuit of stretchy-faced fake youth. The women who look surprised and bored at the same time. The men who look like they couldn’t close their eyes if they tried. Maybe there was a time when potential mates were fooled by these techniques, but today people see right through it, always too happy to shout “Wow, she’s had some work done!” (Meanwhile thinking, “No wonder she doesn’t have any money!”)

 

What are some other ways people inadvertently show the world how financially dumb they are?

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