Could We…Should We Pay Off Our Home Early?


“It seems like we will be making house payments forever. We owe $140,000 at 6% interest and are paying $1000 a month. How much sooner could we pay it off if we started paying an extra $100 a month?”

The above is a hypothetical question, but it could be you. There are two answers: the quick one and the dig deeper one. By clicking a few buttons on a financial calculator we discover the quick answer is 21 months; paying an extra $100 will reduce the payoff from 20 years to 18 years and 3 months.

Should you pay off your home early?

Let’s dig deeper. Do you have other debt? Do you have any savings? Do you have an emergency fund? Are you on target with your retirement investments? Do you have children who will need some help with college funding?

Being as this is a hypothetical case, let’s say you are paying $300 a month at 12% APR on $5,000 on credit card debt and $500 a month on $8,000 on an 8% car loan. You have $2,000 in a savings account, nothing set aside for emergencies, you are on target with retirement investments and you have two children, ages 4 and 8. Your challenges are to not only get your house paid off, but also get out of debt, build an emergency fund and make plans for your children’s education. Don’t get overwhelmed. You can accomplish all of these and still pay your house off early by setting priorities and taking things one step at a time. Let’s develop a plan.

Clearly Communicated Budget

Yes, the dreaded “B” word…you knew it was coming. But until you are in control of your money, you simply cannot develop any type of a plan. It is essential that you and your spouse communicate openly while develop this budget. Discuss hubby’s dream bass boat and your dream kitchen. Leave nothing out now because it will surface later. Let’s assume you two worked together and decided that by eating out less, simplifying your vacations, getting a smaller tax refund and cutting back on Christmas spending, you find $500 a month positive cash flow.

Small Emergency Fund

Life happens, so you need a small emergency “buffer” fund. Simply label that savings account as an emergency fund and agree not to touch it for anything except emergencies. Voila! Your small emergency fund is complete.

Get Rid of Credit Card and Car Debt

We will come to paying your house off early in a minute, but let’s first free up more cash flow by attacking your credit card debt and car debt in that order. Keep making your regular car payment while bumping up your credit card payments to $800 a month (the $300 you were already paying plus the $500 you found in your budget). In seven months, when your credit card debt is gone, add the $800 you were paying on the credit card to the $500 you are paying on your car. With new payments of $1,300 a month on a car debt, which is now down to $4,800, it will be gone in about four more months. Are you still with me? You have just paid off your credit card debt and car loan in only eleven months. By doing so, you have increased your cash flow from $500 a month to $1,300 a month. Congratulations!

Time for a Big Emergency Fund

Grandma called it her “rainy day fund” for good reason: rainy days come. A big emergency fund is a higher priority than paying off your house early because when emergencies come, you need readily accessible funds. More equity in your house would not help if you lose your job tomorrow. Depending on your number of income streams and volatility of your job, you need at least three months of expenses; many financial planners recommend six months and some nine months. Let’s assume your expenses are $3500 a month and go for a six month emergency fund. Your goal therefore is $21,000, so you need to save $19,000 to add to the $2,000 you already have. At $1,300 a month, you will need at least 15 months to achieve this goal. After only 26 months, you have paid off $13,000 in debt and saved another $19,000. You are on fire!

Retirement

You said that your retirement was on track, so I am taking you at your word. If it wasn’t, you should be investing enough of this $1,300 cash flow each month to bring your retirement investment level up to 15% of your take home pay.

Kids’ College

Your two children are now 6 and 10. You could start making huge house payments now, but, because that added home equity cannot be easily converted to cash, college funding becomes a higher priority. For sake of discussion, you could achieve a $40,000 nest egg for each of them at age 18 if, assuming an 8% return, you start investing $300 a month for the oldest and $220 a month for the youngest. Check into a 529 plan to get some great tax breaks.

Finally! Pay the House Off Early!

You have been making $1,000 a month house payments all along, lowering your mortgage balance to about $132,000. Your monthly cash flow is now $780 a month ($1,300 a month less your college investments of $520 a month). If you decided to use all of the $780 to pay extra on your house, it would be paid off in only 7 years and 9 months, a total of 9 years and 11 months from the time you started your plan. At that time your payoff schedule was 20 years. You are awesome.

Summary

Our hypothetical family was able to pay off $13,000 in debt, save for a $21,000 emergency fund, plan for their kids’ college and pay their house off 10 years early. How did they do it? By creating a budget, making sacrifices, and developing a plan. I have a hunch that if you follow their lead, you would also see amazing results.

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24 Comments
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  1. This is our financial game plan, exactly. Our CC debt is almost done, then car, then we can focus on the mortgage. Great explanation!

  2. Rainy Day Saver,
    I like hearing about your plan. You take this post from the hypothetical to reality. You really can win with focus and a plan.

  3. I can’t decide if I should work towards paying off my mortgage or put that money elsewhere. I go back and forth on it.

  4. 20s money,
    Were the priorities and logic of those priorities in this post helpful? I suppose your decision depends on what “elsewhere” means, but the fact that you are processing your options (going back and forth) is a good thing.

  5. This scenario is very good and practical. I like it. Good post!

  6. I like the post, practical and step by step. Similar to our plan, we have paid off 15,000 in credit card and just wrote the final payment for the car note. We are on a task to pay student loans that are over 100k

  7. @ Ken…thanks for the encouraging words!

    @Joseph…You are kicking it! I love your positive attitude “we are on task” and I am sure that those student loans will indeed be paid off, probably sooner than you think.

  8. Great article, Joe!

    I had to comment to let you know that I also live in Southern Illinois (Edwardsville), love Dave Ramsey & the Cardinals…and I’m an engineer. Small world!

    I followed you on Twitter as well.

  9. Dustin,

    Thanks for the good word! Good to hear from you and glad to have you following me on Twitter.
    Yes, it is indeed a small world! I live south of Carbondale (Anna). I figured I might flush out some Cardinal fans by mentioning them on my profile.

  10. I notice it’s Dave Ramsey’s 7 baby steps (well at least 6 of 7). I LIKE the story weaved through all the steps. It demonstrates the practical reality of following such a plan.

  11. Brodwyn,
    I was wondering if anyone would link this story to the Dave Ramsey baby steps. Of course you are right, but I intentionally did not mention the baby steps because I wanted the logic of the steps to stand on their own merit in this story. In other words, the baby steps should work because they make sense, not because they are a good formula.

  12. Ahh… I see the merit in what you tried to do and I think it was a masterfully executed.

  13. Brodwyn,
    You are too kind, but thanks for the good word.

  14. Johannah B

    I understand the needs and concerns in the above article. We never had any credit card debt to deal with, and we always lived below our means. When we made paying off our house a priorty…that peace of mind was worth much more than dollars to us. When our boys were ready for college we had the money saved by not having a house payment. We did find that we were one of the “few” with this type of plan (live below your means, have no debt and save) and others (even in our church) were not happy when we had no money woes to share as they rattled on about the cost of this and that. Today we are working & earning about 33% of what we earned just 3 yrs ago … and still we have no money woes. We cut back & we have some passive income but us it’s more like a “challenge” to see if we can do it ~ and still save!

  15. Johannah,
    You remind me of this verse: Pro 21:20 Precious treasure and oil are in a wise man’s dwelling, but a foolish man devours it.

    The wise man always lives on less than he makes and saves; that is why he has treasure and oil. The fool spends it as soon as he gets it. I think you and your husband are wise. And still being able so save when you are only earning 1/3 of what you were three years ago…that is amazing!

  16. Obviously every ones financial objectives are different. But I would add one thing, I think it’s more important to pay down your mortgage early on if you do not have 20% equity. You can be paying a lot of PMI. I would put off some other goals (college funds, retirement) until you get to that point.

  17. Adam,

    Yes, getting rid of that PMI will free up some cash flow that could be put to better use. In our scenario, I would probably focus on achieving 20% equity after the big emergency fund is established.

    Good point…thanks for your comment and thanks for reading.

  18. We have a bunch of kids (#7 is on the way) and we aren’t saving for college. Gasp. But we are on track to have the house completey paid off by the time the eldest is ready for college. In our minds, that is a fine way to handle college expenses because that’ll free up a couple of thousand dollars a month. We don’t have any other debt and have substantial savings. So I think our approach is valid. I’m one of these people who loathes debt and I really just want to get this house paid off. It’ll take 8 years or so, but we’re making good progress.

  19. should i pay 10% money to chruch as tithe , or give little tithe , and pay more towards mortgage, save for emergency, save for kinds. Does God wants to take care of family first in case something happens, or pay chunk of money to church. Ten percent is lot. What if i provide services instead to chruch, will paster and God will get mad. What new testment says about 10% of first income donation. If my house is not paid off, then whatever i am earning is not mine but belongs to banks . Does God wants us to live in debt free house. Why some people pay 10% tithe regardless how much debt they have, is that make sense to follow bible without questioning.

  20. @Laraba,
    No debt…substantial savings…paid for house before oldest reaches college age. Sound like the ingredients of a well managed household. Great job!

    @mona,
    You ask way more than I can answer, or even what this post intends. However, I can assure you that God will not get mad at you if you provide services to the church in lieu of money…and if the pastor gets mad about such an arrangement, it is time to find another church.

    I think you need to make sure you have a working budget in place, place giving at the top of your expenses and live on what is left after you give. If it isn’t 10% right now, don’t beat yourself up. However, have a plan to incrementally give more as you are able…maybe bump it up a percentage or so every time you get a pay raise.

    I also recommend you type “tithing” into the above “Search Christian PF” and read the rich resources available here. I hope this helps.

  21. Stephanie

    We just inherited a large sum of money. Now, we want to do the right thing with it. WHere do we start? We have one car payment at 4%, NO credit cards, a mortgage at 7.5% (yuck!) that we owe 127,000 left on. Aside from regular monthly utility bills, we have 2 kids (14 &16) we will need to put into higher education. Family says ‘take the money and pay off your house!’ Im not so sure thats the first thing we should do. What do you think?

  22. @Stephanie,
    Are you familiar with Dave Ramsey’s “Baby Steps”? If not, I recommend learning them. I have written a series starting with this post: http://personalfinancebythebook.com/dave-ramsey%E2%80%99s-baby-steps-one-step-at-a-time-step-one-baby-emergency-fund/. You may also want to buy Dave’s book: “The Total Money Makeover”, which explains the Baby Steps in great detail.

    I recommend reading and understanding how and why these Baby Steps work so you can better understand the answer to your question.

    Following these Baby Steps, you would take these actions in the order listed:
    1. Make sure you have $1000 set aside for emergencies.
    2. Pay off all debt except the house (your car).
    3. Build that emergency fund to six months of expenses.
    4. Invest 15% for retirement.
    5. Save for childrens’ education.
    6. Pay off house.
    7. Build wealth and be very generous.

    Because you have a large inheritance, I recommend working with a tax consultant, an investment consultant and an estate planner. They would be able to guide you through the best and most efficient ways to handle this inheritance. For example, investing 15% for retirement is a great thing to do for ongoing cash flow, but not necessarily from an inheritance. Don’t hire anyone, though, without checking references and doing interviews. You want only people you can trust.

    I wish you well as you use this inheritance in a way that will serve your family well for the long term and honor the one who left you the money.

  23. I’m glad I found this post, you have a great discussion as well.

    Johannah B’s post regarding the peace of mind he felt/feels even today. His financial decisions from years past continue to pay huge dividends and that’s a big encouragement.

    We owe about 180k on the house with no other debt at all. My wife and I are blessed to have decent jobs, keep a relatively tight budget, and stay strict to a healthy monthly savings plan.

    My question is about steps 4-6, because 1-3 are taken care of.

    It seems like paying off the house #6 would open up a ton of money to complete steps #4 and #5.

    What do you think?

    4. Invest 15% for retirement.
    5. Save for childrens’ education.
    6. Pay off house.

    • Thomas — good point. Steps 4-6 can flow together, but are nevertheless prioritized for a reason.

      Step 4: Retirement investing comes before paying off house because delaying such investing (maybe for years) will come back to haunt many people. You DO want a paid for house when you retire, but you don’t want to sacrifice retirement income in order to make that happen. Remember: with long term investments such as retirement, time is money, so getting started early is critical.

      Step 5: Much of the same logic when planning for your children’s college, but I could understand paying off one’s house and using those former payments to cash flow your children’s college…IF you can get it paid off before they start college.

      Step 6: You may have enough new cash flow after creating your emergency fund (Step 3) to do Steps 4 and 5 and 6 all at the same time. This is what I meant when I said they may flow together.

      In summary, you may want to do step 6 ahead of step 5, but I would really think twice about delaying your retirement investing while accelerating your house payments.

      By the way, you guys are doing GREAT! Congratulations!
      I hope this helps.

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