Owning a home has long been a part of the American Dream, but is a place of your own worth spending 30 years in debt? And while having a mortgage isn’t necessarily as bad as having high interest debt, like credit card debt, living with any debt can still weigh on your mind.
One option is to pay off your mortgage early. Let’s say you wanted to pay off your mortgage in five years. Here are some steps you would need to take in order to make that a reality.
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The basic formula for paying a mortgage in 5 years
The formula for how to pay off a mortgage in five years is straightforward: create a payment schedule so that you know how much to pay each month, and then make sure you find ways to stick to your payment schedule.
In order to make that happen, you will need to make larger or more frequent payments (or both) than your lender requires. You will also need to cut back on other spending or find ways to earn more income each month.
(If you're just starting to shop around for a mortgage, our mortgage calculator can estimate mortgage payments for several different term lengths, including five years.)
Set a target date
Set an actual date that you’d like to pay off your mortgage by. Setting a goal of five years is useful, but it’s easier to hit your goal if you have a hard deadline. Write down your target date and keep it somewhere visible so you won’t forget the goal you’re working toward.
You may even want to set a few dates to help you stay on track. For example, mark the date when you should have half or three quarters of your mortgage paid off.
Once you have a target date, you can calculate how much you need to pay each month and year. Your lender may provide you with an amortization schedule, which shows how much of each mortgage payment goes toward the principal and interest. You can also use a mortgage calculator to determine how much you should pay each month or year.
Every time you hit one of your target dates, celebrate! Staying on an aggressive payment plan isn’t easy and you deserve a pat on the back if you’re sticking to it.
Make larger or more frequent payments
If you already have a mortgage, try making extra monthly payments. If you get paid twice per month, make a payment each time you get a paycheck. You could also make an extra lump-sum payment at the end of the year.
Another simple way to put more toward your mortgage is to round your payments. If each of your payments is $1,004, then pay $1,010 each time. As time goes on, maybe get more aggressive and round to the nearest $100. Regularly paying just a little extra will add up in the long term.
Make a 20% down payment
If you don’t have a mortgage yet, try making a 20% down payment. Private lenders will require you to pay private mortgage insurance (PMI) if you have a smaller down payment. That extra insurance cost will only make it harder to pay off your mortgage quickly.
If you can’t afford a 20% down payment, you may want to double check that you can reasonably afford the home. Having a smaller mortgage is the easiest way to pay it off quickly.
Cut back on your other spending
If you’re putting more money into your mortgage, you will have less to spend on other things. So help yourself by limiting other monthly expenses. For example, if you subscribe to five streaming services, maybe you can cut that back to three. Look for subscriptions you don’t use anymore or don’t use regularly.
Here are 25 ways to cut back on your spending right now.
Cutting costs also doesn’t have to be a permanent thing, either. Once you’ve paid off your mortgage, you can decide to go back to spending money on the things you cut. This is just a temporary measure to help you focus on paying your mortgage.
Stick to a budget
To help you avoid overspending, start a budget. Budgeting helps you track where your money goes and it ensures that you only spend money on the things that you want to spend money on. The first time you track your spending for a month, you may be surprised where exactly your money is going. But creating a budget isn’t enough. You also need to stick to it.
You can download and then adjust this sample budget to help get you started.
Boost your monthly income
Instead of drastically cutting your spending, or perhaps in addition to it, you may want to look for ways to earn a bit more money. That could mean something like having a yard sale or starting an Etsy account. To help you brainstorm what could work for you, here are eight side hustles that cost nothing to start.
When you shouldn’t pay your mortgage in 5 years
The idea of eliminating your mortgage debt in five years is appealing, but there are a few other financial priorities to consider. This doesn’t mean you can’t pay your mortgage early, though. You may just need to try a less aggressive repayment schedule, like seven years instead of five.
You have no other savings
When unexpected expenses pop up, you want to be able to pay for them. That could mean replacing a flat tire on your car or paying a doctors bill when you get a bad case of the flu.
To make sure you have enough cash savings to cover these costs, start building an emergency fund. A fund worth at least six months will go a long way, though you probably need more if you have dependents.
You have no retirement savings
Saving for retirement should be a priority for you. If you don’t have money set aside in a retirement account, whether you opt to use a 401(k) or an IRA, now is the time to start saving and investing. Even if you’re only in your 30s, waiting five years or more to start saving will cause you to miss out on significant earnings from compound interest alone.
And since the stock market has historically had returns that average about 10%, you can likely make more through an investment for retirement than from paying off a mortgage with a low interest rate.
You’re adding to other debts to pay off a mortgage
If paying off your mortgage early means you need to take on credit card debt, then don’t pay off your mortgage early.
Credit card debt will almost certainly have a much higher interest rate than your mortgage. So if you’re moving your debt from your mortgage to your credit card, you’re only digging yourself into a deeper hole
At the same time, don’t make extra mortgage payments if it means missing payments for your other debts, such as your student loans.