There are countless programs out there aimed at paying down the mortgage as quickly as possible, but they often highlight the interest savings without properly disclosing the risks involved.
While it may sound extremely enticing to pay down your mortgage in “half the time,” or “save $50,000” via some kind of payment accelerator, it doesn’t always work out exactly as planned. Or even close to it.
Larger Mortgage Payments = More Debt
Ironically, extra payments to principal are intended to reduce debt and interest expense, but Quinn managed to accomplish the exact opposite.
While it sounds great on the surface, that money has to come from somewhere. And if it dries up your liquidity in the process, you could put yourself in a bind.
Quinn experienced this first hand after she and her husband set a lofty goal to pay off their mortgage by 2020.
When they first purchased their home in 2005, they had an initial monthly payment of $1,100 on a 30-year fixed, despite setting a goal to pay off the mortgage in 15 years by making payments of roughly $1,500.
Then they refinanced from a 30-year loan to a 15-year loan (at no cost), which increased their payment to $1,230. By the way, no cost loans mean higher interest rates, so another mistake was made here if their intention was to pay off the mortgage with the least amount of interest.
After that refinance, they refinanced again to lower their monthly payment to just $930, though they continued to pretend that they needed to pay $1,500 each month.
And if they ever experienced a windfall or came into some money, such as a tax refund, they’d throw that toward the mortgage balance one month early to ensure they could continue making the extra large payments if anything else came up.
Quinn seemed to be pretty happy with her progress back in late May of this year, and proclaimed that she and hubby couldn’t “wait to finally be free of our mortgage.”
Then the Unexpected Happened
As expected, something unexpected came along. They had some medical bills, and were forced to put $10,000 on a credit card while also taking out a $5,000 401(k) loan.
After all, she didn’t believe in maintaining an “emergency fund,” and was never good at setting aside cash for a rainy day, which she felt would just be a self-fulfilling prophecy.
For the record, the 15-year mortgage is set at a ridiculously low 2.75%, while the credit card’s APR is a much less attractive 15.24%. The 401(k) loan probably wasn’t cheap either, and it meant she couldn’t contribute to her retirement savings while paying it back.
Fortunately, she was able to pay off the 401(k) loan in one lump sum, and is now using the extra mortgage payment money to pay off the outstanding credit card debt.
So in essence, her quest to reduce her debt led to even more debt, despite holding a fixed-rate mortgage that could never surprise her.
The New Goal Is to Set Aside Cash
As a result of her unfortunate series of events, Quinn has created a new goal to set aside $50,000 by the time the mortgage balance reaches $50,000.
The idea is that they’ll have cash on hand for any emergencies or unexpected costs, and save up enough to pay off the mortgage overnight if they feel like it. Still sounds like they can’t let that dream go.
Of course, first they have to tackle their credit card debt…
This personal story illustrates the risks involved with fixating oneself on paying down the mortgage.