My wife, Lynne, and I have lived in Atlanta for about 18 years now. Together we have lived in Vinings, Brookhaven, Virginia-Highland, Lake Claire, and for the past six years now in the Morningside/Midtown area (near WSB).
The home we purchased six years ago was built in the early 1930s. It had been renovated a few times over the years, but the house still needed several updates and had the potential for more usable space. Finding more room became a priority as we went from two to four children since we moved in. That led to turning the attic floor that used to be unbearably hot in the summer into a fully functional floor with bedroom, bathroom and playroom combination. The work required a roof lift in what capped off a significant renovation.
The process was disruptive enough that we had to move out and rent for almost a full year. Despite taking longer than we would have liked, the final result was worth the wait. Now we love our home even more and hope to stay until our four boys graduate from high school (still nearly two decades away).
We also knew that the renovations would add to our overall mortgage balance. It’s a mortgage I’m comfortable with, but I’m also eager to eliminate it long before I retire. In fact, I know that there are significant psychological and financial benefits to not having a mortgage.
In research for “You Can Retire Sooner Than You Think,” one secret of the happiest retirees was to have their mortgage paid off, or being within five years of paying off their mortgage.
Now, this is easier said than done. In fact, according to a 2013 study by the American Community Survey, only about 20 percent of owner-occupied housing units are without a mortgage. But since we know that "a paid off mortgage" can create tremendous peace of mind and retirement happiness, let's make it a priority. Here are four ways to make it happen:
1. Keep your required mortgage payments at or below 15 percent of your gross monthly income. The mortgage and real estate industry often cites a more aggressive 30 percent.
2. Use an early payoff calculator. There are several early mortgage payoff calculators that you can find online, but Bankrate.com has my favorite. The calculator will help you determine how many years can be shaved off your loan by adding a few hundred dollars a month on top of your scheduled payment.
3. Biweekly vs. monthly. If adding $200 or $300 a month to your payment doesn't seem possible, there's another way to trick yourself into a shorter mortgage. Simply cut your mortgage payment in half, and pay that amount every two weeks. For example, if your mortgage payment amounts to $3,000 a month and you opt for the two-week payment schedule, you'll pay an extra $3,000 that year due to the way that the calendar falls. The best part? You don't even realize that you are paying extra.
4. The 1/3 mortgage rule. If you can pay off your mortgage using no more than 1/3 of your nonretirement savings, consider writing that check today.
For example, if you owe $40,000 on your home and have $150,000 in savings (not including your 401(k) or IRA funds), you are within the 1/3 rule. You can safely pay off your mortgage, and still have a sizable cushion left over, which is the optimal situation.
It is rare to feel a “deflationary moment” in life as the world seems to just get more expensive by the day. But paying off your mortgage will give you the peace of mind to sleep better. Financially, the noose around your neck will disappear, and you’ll be in a position to spend more money on the activities in life that you cherish, rather than making payments to the bank.
