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

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.

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22 Thoughts on “How to get rid of your mortgage

  1. Great post! My husband and I are working to pay off our mortgage by the end of 2014 by living off of one income (we make about the same amount each year: and less than the example listed above) and putting the other half directly toward our mortgage. We started this January 2013 and thus far, we have paid off almost 18% of our mortgage balance from January! Mind you, we didnt have the $24000,000 mortgage, but bought a very inexpensive fixer-upper that we will most likely be “fixing” for many years to come. But right now, we have a goal: Mortgage-Debt-Freedom!

  2. Pretired Nick on April 13, 2013 at 6:27 am said:

    That’s great, Meg! Once you’re done with that loan, you’ll be able to put TWO incomes toward your pretirement. Wish I’d been as smart as you on my first house years ago.

  3. We are prepaying ours too! You’re right, 30 years is nearly forever. I’m only 33 years. The fact that some people start a 30 year mortgage over at my age is crazy~!

    Ours will be paid off in 2-3 yearsish, depending on what happens between now and then. We could pay it off faster, but we still want to live a little! =)

  4. I love this math! I wish some of my friends understood what they were getting themselves into with the 30 yr loan. I currently rent, but when I do decide to buy, I think I’ll try to power through the mortgage in under 10 years like you said. I don’t know if you know Leigh at but she’s trying to pay off her condo mortgage in just 5 years.

  5. Pretired Nick on April 14, 2013 at 8:38 pm said:

    With interest rates this low, my general rule is that if you can’t afford the payment on a 10-year loan, you’re buying more house than you can afford. Paying off a 10-year loan early is totally doable.
    I don’t know Leigh, but I will definitely check out the site!

  6. Hi Nick-

    I’m new to your site and enjoy your writing! Regarding this post, one thing that I think about all the time is this:

    My mortgage is about 3%, but I’ve been participating in peer lending (Lending Club ad Prosper) now for about 3 years and am earning over 10%.

    I can’t tell you how much I HATE having debt of any type. However, I just can’t bring myself to pay the mortgage off early with the returns I’m getting with the lending.

    I do acknowledge that peer lending is not risk free, however, the industry is quickly maturing and I believe it is fairly safe and getting better with each passing day.

    Any thoughts?

  7. Pretired Nick on April 15, 2013 at 9:14 am said:

    Glad to have you aboard, Mr. 1500!
    I did allude briefly to this when I said there were legitimate reasons to retain a mortgage and this is what I was referring to. Certainly if you can make a higher return than your mortgage rate, that’s something you may want to consider. I’ve actually got a draft post on this exact topic that I just need a little time to complete. But the bottom line is putting your money in a riskier investment can be a good strategy, but only for those who are living life on “advanced mode”. My post was really written for people who never even considered shortening their mortgage timeframe.
    For you, one option to consider is to use your 10% earnings to power down your mortgage. You can do the math to build your own plan, but if you, say, put $X into P2P lending, the profits (10% of X) then go to mortgage principle (which is another way of saying you’re limiting the AMOUNT of money you have in the riskier investment).
    But in reality, you’re basically doing what I recommend in my post: saving on the side for eventual (or in your case, potential) mortgage pay-off. Hopefully you’re at least on a 10-year mortgage. With your P2P lending, how soon will the lines cross on your amortization table (ie, when will your invested money equal the amount still owed on your mortgage)?
    That might be the way to have the best of both worlds: use your P2P lending to accelerate your timeframe for payoff and then take the guaranteed savings of your mortgage rate by paying it off.

  8. The crossing lines is something I think about often. The other one I think about is when will the interest I earn from P2P lending be greater than the amount I pay in mortgage interest.

    I haven’t thought a whole lot about either because we’ll be moving soon to a cheaper home. After we purchase another home, this is something I’ll definitely be exploring.

  9. I have a 5/1 ARM and a plan to pay it off entirely before the rate resets. I’ve already refinanced once to lower the rate down half a percentage point and in about 9 months, I’ve paid down the first 15% of my mortgage loan. The way I looked at it was that I was unlikely to stay in a condo for much more than 5-6 years or I could pay the entire loan off myself. By the end of this year, I should have my mortgage balance down to about 1.1x my W-2 income for the year.

    People say that I should have taken out a 30 year loan and invested each month with my savings. I’m going to lose the ability to itemize my taxes once/when/if I get married and it would be great to buy a house with a partner with the proceeds from selling a paid off condo!

    • Pretired Nick on April 15, 2013 at 6:07 pm said:

      Here’s another idea: Pay off your condo and just rent it out when you buy your next place. How quickly could you pay off house 2 with an extra $1000+ a month?

  10. Another detailed post that I enjoyed. I think it is an eye opener for most people because they never even think about paying off the house early. I think the issue we have when paying ours off early (~2 years total) is that the numbers seem really big! The progress feels much slower than our other savings projects but in the end it should be worth it. I think for me the obvious benefits of having a paid for house is a lower risk profile and lower income needs. This is a great post to send to people who couldn’t image paying off their house early.

    • Pretired Nick on April 17, 2013 at 11:26 am said:

      Aw shucks! (: I do hope it helps people see what’s possible even if they choose not to go for it. It’s too bad how many people are locked in a mental box about it.

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  13. I have thought about this approach. I think we will end up attacking our net worth in three different ways: retirement funds in Vanguard mutual funds, invest, and pay off mortgage.
    Savvy Financial Latina recently posted…Carnival Cruise on the Western CaribbeanMy Profile

    • Pretired Nick on May 24, 2013 at 5:33 pm said:

      Yeah, your plan is super “savvy”. If you can have all three tracks (mortgage, pretirement fund, and retirement savings) come together at once you’ll be set!

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