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If you can afford to pay extra on a loan principal, you’ll come out ahead.
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While conditions certainly haven’t been ideal for buyers over the last couple of years, with competition and elevated home prices (and rising mortgage rates over the course of 2022), some people have managed to buy a home recently. If the stars aligned for you and you’re now staring at 30 long years of mortgage payments, you might be wondering how to get out from under it sooner. While you could refinance into a 15-year mortgage, your payments will be a lot more expensive if you go this route, perhaps unaffordably so.
You may also have bought with a down payment under 20%, meaning you’re now paying for mortgage insurance. Once you’ve got more than 20% equity in the home, you can have your lender cancel your PMI, so it’s worth it to pay extra to get there faster if you can. With a little math and some extra funds, here’s how you can accomplish it.
The 10/15 rule
Sean Pan on TikTok (@seanlovesrealestate) recently outlined his 10/15 rule in one of his videos. If you can manage to pay 10% of your mortgage payment every week (in addition to your usual monthly payment) and apply it to the principal of your loan, you can pay off your 30-year mortgage in just 15 years.
The first several mortgage payments you’ll make on a home cover just the interest charged by your lender. Paying extra money (in any amount) toward your principal means that you will end up paying less interest, as you’ll pay off that principal sooner. This process can be applied to any type of loan; finance expert Tori Dunlap advocates for it too.
The example Pan uses is a $3,000 mortgage payment, so an extra $300 per week. This is a lot of money, and it’s likely more than many people could comfortably afford to pay in addition to their regular mortgage payment and other bills. However, any extra money that you can send to your mortgage lender to be applied to the principal (and make sure your lender isn’t just tacking it onto your next payment, as this will not save you money on interest) will help you pay off your mortgage faster.
Could it work for you?
There are a few circumstances where the 10/15 rule might work for you. If you live below your means and can comfortably afford your monthly mortgage payments, you could try it out. And if you live in a part of the country that hasn’t seen such elevated home prices thanks to the wild market of the last few years, you might be able to afford those extra payments. Ditto if you’ve recently increased your income thanks to a raise at work or a side hustle.
Unfortunately, many people did have to stretch financially in order to afford to buy a home recently, and may be sitting with very large monthly payments, both as a result of higher home prices and higher mortgage rates. So while they may have the option to pay extra, they may lack the ability. Run the numbers and see if you can swing any extra amount of money to send to your loan principal. You could also earmark future windfalls (like a tax refund or a work bonus) to go to your mortgage.
Don’t feel bad if you can’t manage to pay off a 30-year mortgage loan in just 15 years. The nice thing about the 30-year mortgage loan is that it gives us the ability to stretch those payments out, and it has made homeownership possible for many people who otherwise wouldn’t have been able to buy.
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