2695: [Part 1] We’re Mortgage Free! Our 10 Steps to Get a $500,000 Paid Off House in 5 Years by Andy Hill of Marriage Kids and Money

[00:00:00] This is Optimal Finance Daily, Episode 2695. We're mortgage free!

[00:00:05] Our 10 steps to get a $500,000 paid off house in 5 years.

[00:00:10] Part 1 by Andy Hill of MarriageKidsandMoney.com

[00:00:14] And I'm your host and personal finance enthusiast, Diania Merriam.

[00:00:18] I have a bit of a longer post today, so what I'll do is split the article up,

[00:00:23] reading the first part today and finishing it up tomorrow.

[00:00:26] So with that, let's dive into Part 1 and start optimizing your life.

[00:00:34] We're mortgage free!

[00:00:36] Our 10 steps to get a $500,000 paid off house in 5 years.

[00:00:41] Part 1 by Andy Hill of MarriageKidsandMoney.com

[00:00:46] We are the proud owners of a $500,000 paid off house.

[00:00:51] 5 years ago, we paid off the $195,000 mortgage on our dream home.

[00:00:56] Since then, the appreciation in the real estate market has been good to us.

[00:01:01] After years of focus and partnership with my wife Nicole,

[00:01:05] we're mortgage free and thrilled about the future ahead of us.

[00:01:08] To help our two young children remember this family tree changing moment in our lives.

[00:01:14] We decided to celebrate with them.

[00:01:16] Instead of just burning the mortgage and tipping back a few glasses of champagne,

[00:01:20] which we did too, we came up with a few unique ideas of our own,

[00:01:24] like running through a mortgage wall and whacking a mortgage pinyonah.

[00:01:29] The kids had a blast and so did we.

[00:01:31] This was a moment we wanted our kids to remember.

[00:01:34] It was the day we decided that our family was going to become debt free for life.

[00:01:39] When it's all packaged up into a happy family story like that,

[00:01:42] paying off your mortgage sounds pretty simple and easy.

[00:01:45] Well, it was slightly more complicated than that.

[00:01:47] We were intentional, determined and ready to do something incredible for our family.

[00:01:53] To break it down, I've outlined the 10 steps we took to become a mortgage free family in less than five years.

[00:01:59] Number one, start with a why.

[00:02:02] When I'm about to complete any difficult challenge,

[00:02:04] I always try to think about the why before the how.

[00:02:08] Why do I want to do this?

[00:02:10] That way, I can always refer back to my why throughout the difficult process to keep me motivated.

[00:02:15] So for me, my why for becoming mortgage free was about reducing the stress that comes with having a big loan and only one source of income.

[00:02:24] I constantly felt pressure at work to not mess up because if I did, we could lose our house.

[00:02:29] With two little kids at home, I went into pop-a-bear protection mode.

[00:02:33] Given that I'm a personal finance nerd, this was the best way I could protect them.

[00:02:37] That was my why.

[00:02:39] If you're considering something big like this, I'd recommend starting with a why as well.

[00:02:44] Number two, 15-year fixed rate mortgage.

[00:02:48] We got a 15-year mortgage when we bought our new home.

[00:02:51] This made our monthly payments higher overall versus a 30-year mortgage,

[00:02:56] but more of the payment was going to the principal each month.

[00:02:59] By choosing a 15-year, we were also forcing ourselves to make larger principal payments.

[00:03:04] With a 30-year mortgage, we could decide to pay more or pay less principal depending on the month.

[00:03:09] We didn't want that option.

[00:03:11] We wanted it to be gone fast.

[00:03:13] Last but not least, our mortgage interest rate was only 3% with a 15-year mortgage

[00:03:18] versus a quoted 4% on a 30-year mortgage.

[00:03:22] We chose to pay less to the bank and keep more for ourselves.

[00:03:26] If we went full term, we would have paid $92,752 more in interest to the bank.

[00:03:32] No thank you, Mr. Banker.

[00:03:35] Number three, mortgage payment no more than 25% of take-home pay.

[00:03:40] With my first bachelor pad in 2004, I had a mortgage that was about 60% of my take-home pay.

[00:03:46] Let's just say I didn't have a lot of money for important things like, oh you know, food.

[00:03:51] My first house folly in my 20s is a hyperbolic example for more financially educated folks,

[00:03:56] but it stuck with me when we were looking at our next house.

[00:04:00] We wanted to be in our dream house for the next 30 years,

[00:04:03] so our payment, principal, interest, taxes and insurance needed to be comfortable.

[00:04:08] We made sure that our monthly mortgage payments did not exceed 25% of our take-home pay.

[00:04:13] This allowed us to allocate the other 75% to other areas of our life,

[00:04:17] like household expenses, food, transportation, entertainment, savings and investing.

[00:04:22] In this example, if your take-home pay is $5,000 per month after taxes,

[00:04:27] your mortgage payment shouldn't be more than $1,250.

[00:04:31] Obviously do what's best for you and your family, but this is what worked for us.

[00:04:36] Number 4. Commit and set a date.

[00:04:39] My wife, Nicole and I came to an agreement that we'd dial back our lifestyle

[00:04:43] and pay off our mortgage in less than 5 years.

[00:04:45] This would require sacrifice on our part,

[00:04:48] but honestly we live in the most privileged country in the world.

[00:04:51] How much sacrifice are we really talking about here?

[00:04:54] Number 5. Live on 50% of your income.

[00:04:58] At the start of our marriage, we paid off $48,032 of consumer debt.

[00:05:04] Since that time, we've consistently lived on about 50% of our income.

[00:05:08] There have been years when we've spent more and years where we've saved more.

[00:05:12] On average, we are a couple who saves around half and spends around half.

[00:05:16] It definitely helps when you have a six-figure household income.

[00:05:20] During our mortgage payoff process,

[00:05:22] we average around $170,000 per year for our household income.

[00:05:26] In order to become mortgage free in less than 5 years,

[00:05:29] we knew we needed to continue this 50-50 path.

[00:05:32] We had prepared ourselves for this reality,

[00:05:34] and it wasn't bad when we were both employed.

[00:05:37] When Nicole and I decided that she'd leave her job and stay home with our two kids,

[00:05:40] the story changed a bit.

[00:05:43] Five things we did to trim our expenses further.

[00:05:46] We decreased our grocery spending by a third.

[00:05:49] Aldi rocks, cut the cord on cable,

[00:05:53] embraced all the free and inexpensive things to do with kids,

[00:05:57] think library time,

[00:05:58] negotiated our cable and cell phone bills,

[00:06:01] and took advantage of higher deductible insurance plans.

[00:06:05] Number 6, hear that on tomorrow's episode.

[00:06:12] You just listened to part 1 of the post titled

[00:06:15] We're Mortgage Free, our 10 Steps to Get a $500,000 Paid-Off House in 5 Years

[00:06:21] by Andy Hill of MarriageKidsandMoney.com

[00:06:24] and I'll be right back with my commentary.

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[00:08:17] There are many reasons why someone would choose to pay off their mortgage or not.

[00:08:22] I like that we've heard a number of different stories here on Optimal Finance Daily

[00:08:26] of people deciding to be mortgage-free because it allows me to continually check in with myself

[00:08:31] on my decision to not pay off my mortgage.

[00:08:34] Spoiler alert, I still have no intention of paying off my mortgage early.

[00:08:38] Many people find a lot of peace of mind in owning their home outright,

[00:08:42] but I find a lot more peace of mind in owning more liquid assets.

[00:08:46] Paying off my mortgage right now would mean that 30% of my net worth would be stored in this tangible asset.

[00:08:52] If I found myself in a position where I needed to access this money,

[00:08:55] I'd be forced to sell my house or take out a home equity line of credit.

[00:08:59] Also, HELOCs usually have variable interest rates,

[00:09:03] which I learned the hard way when I took on a $15,000 HELOC

[00:09:06] to help with my down payment on my house.

[00:09:09] Now, I paid it off in six months and only spent about $200 on interest,

[00:09:13] but the interest rate increased three times in that six months.

[00:09:17] That being said, I'm not interested in taking on any debt that has a variable interest rate.

[00:09:22] I like the idea of my primary residence holding only about 10% of my net worth

[00:09:27] so I can invest most of my money in income-producing assets.

[00:09:31] And so there may come a day when I put more money into my house as my net worth grows.

[00:09:36] I'm just not there yet.

[00:09:37] But we're only halfway through the article now,

[00:09:40] so be sure to come back tomorrow where we'll finish up this post

[00:09:43] and where our optimal life awaits.