In fact, I’d spend weeks. Not only that, I did. I spent weeks developing a mortgage payoff calculator to help me work it out.
*Fair practice disclosure: this is not my original idea. I read books and watched presentations online. I made sure I understood what was presented, worked out the formulas in Excel, tested it with my own money, and it works so well for me I want to share it.
Here’s how it works:
Step 1: Get a credit card that provides rewards you want – 20 minutes
We want to be able to travel to see our kids and grandchildren, so we opted for a travel rewards card. If cash back floats your boat, get a cash-back card. Gas rewards? Get that. It doesn’t matter. I found mine by looking here. What does matter is that the credit limit is more than your double your monthly non-mortgage expenses (preferably even a little more). For example, monthly expenses (including having fun and saving for a rainy day) are $3,600. $1,400 of that is your mortgage, leaving $2,200. Get a rewards card with a limit over $4,400.
Step 2: Open a Line of Credit (LOC) – One hour
We want to use other people’s money (specifically the bank’s) to pay our mortgage off early. Why we want to pay it off early is another topic. There are a few great things about lines of credit – the best is that it doesn’t cost you anything if you don’t use it. It will probably take about an hour at the bank to get this done. A line of credit requires a better-than-average credit rating. I don’t pretend to be an expert on fixing bad credit, however I have read some good things in “I Will Teach You To Be Rich” by Ramit Sethi.
Step 3: Run most of your expenses through the Rewards Card – no additional effort
But don’t blow your budget! Anything you can pay for with the rewards card, do it. Some things can’t be paid on a credit card (auto-draft for your mortgage, for example). I get a 0.25% discount on my car loan for having it auto-draft from my checking account. This doesn’t go to the credit card.
Netflix, the electric bill, grocery shopping, eating out, all of it goes on the card. Be careful with your auto-payments. We almost agreed to an additional 5% with a utility for the “privilege” of paying by credit card.
Step 4: Transfer (almost) your whole paycheck into the LOC – 2 minutes on payday
Transfer your entire paycheck (yes, the whole thing) from your bank account into the LOC, minus anything that gets paid directly. Essentially, you are “parking” your net pay in the LOC. You call it a “deposit” – the bank calls it a “payment”. Each deposit into the LOC reduces the balance. As long as the withdrawals are less than the deposit + interest accrued, you’re making progress. Seem complex? Here’s an example:
- LOC payment to mortgage principal: $10,000
- Deposit (payment) to LOC: -$5,000
- LOC Interest on $5,000 @ 10%: $50
- Withdrawal for monthly bills: $3,000
- New Balance: $8,050
$10,000 in progress on your mortgage (about a year’s worth of interest), $1,950 in progress paying down the LOC, without paying any more out of pocket than usual. Keep this up and you can cut another $10,000 from your mortgage balance within 6 months! This is a great way to use other people’s money (OPM) to accomplish your own goals. It’s what the banks do with your money. The math can be a bit complex, so we’ve created a calculator that will work it out for you.
Step 5: Pay Off the Credit Card Every Month! – 5 minutes for one-time setup
This is probably the most important step. Pay off the credit card in a lump sum from the LOC. The credit card is there for two purposes: 1) consolidate the monthly expenses into a single payment and 2) earn the rewards the card supplies. In the first 18 months we had our travel rewards card, we were able to purchase three airline tickets on only points – it paid the air fare when we took our daughter to college.
My regular job helped us make additional progress. One of the most fruitful adjustments I made was to base the monthly plan on two biweekly paychecks instead of a monthly cycle. We then use the “extra” two paychecks each year as found money that gets allocated toward making additional progress on the financial goals. I treat overtime and bonuses the same way. Because our financial goals are well-defined, I can quickly allocate the “found money” appropriately. I typically take 10% for something nice, like dinner out with Grandma. Using these methods has allowed us to pay off one of our cars 18 months early and cut $30,000 from our mortgage at the same time. Now we can use the “found money” to pay off the other car or pay down the LOC faster.
That’s only 1 hour, 25 minutes – what about the other 35 minutes?
Set up the mortgage payoff calculator. Get out your most recent statement for each of your mortgages, as well as for your LOC. Fill in the blanks and the calculator will show you not only how much interest you’ll save, but how soon you will have paid them off.
The proof in our life
Grandma is returning to school to become an RN. The schools in our old area are impacted, and we couldn’t continue to live in our old house on only one income. We had to choose: turn our family home into an asset or sell it. By refinancing, we dropped $400/month off the payment – just enough that we can rent it out. We found a tenant who we know will care for the property and are charging just enough rent to break even. From that point, we set aside all the “found” money for our move to the Midwest. Our new home has a cost of living about 60% of our home in California. We purchased a nice house with some property, which allows us room to pursue some other ideas while maintaining my job and grandma’s school. We couldn’t do any of this without the extra $30,000 in principal payments we made on this plan.Using the mortgage payoff calculator, we will be able to pay down both mortgages faster than 30 years each, which will turn the rental home’s rent into nearly pure profit in about 10 years.