How We Paid Off Our 2nd Mortgage in Less Than Three Years

by Kevin on July 22, 2010

I’ve been waiting a little while to announce this. I’m pretty freakin’ excited.

We Paid Off Our 2nd Mortgage!

Yea, we’re kind of stoked! Less than 3 years after we bought our house we’ve paid off that second mortgage that’s been hanging over our heads.

When we bought our house we made a dumb decision. We put 5% down, got a traditional mortgage for 80%, and begrudgingly accepted a second mortgage for the final 15%. Oh, and the second mortgage was at 8.125%. Uhhh, yea. Bad idea. At least it was a 30 year fixed mortgage!

If we had kept the mortgage the entire 30 years we would have paid almost $52,000 in interest. As it is we only paid about $5,500 in extra interest.

It’s been long and it’s been hard, but we finally did it.

Don’t you want to know how?

Three Steps to Paying Off Our Second Mortgage

There were three essential steps we took to pay off our second mortgage so quickly.

1. Living below our means

We live well below our means. Each month we’re able to save approximately 40% of our income for various saving goals. We are very, very blessed to be able to do this.

Until recently one of those goals was paying off our mortgage. So a lot of that money we had free every month was going to pay off the mortgage rather than going in our savings account. We started off with small extra payments, but then switched to taking big chunks out of the mortgage.

It was quite satisfying seeing the loan amount drop, and drop, and drop…

2. Increased our income

I mentioned we were saving around 40% of our income from our regular jobs every month. That’s all well and good, but there are two ways to improve your final situation. Spend less and earn more. We were spending less. It was time to earn more.

I started blogging here in 2008. While I wasn’t earning enough money to quit my day job (not by a long shot) I did start pulling in a couple hundred of bucks here and there.

A majority of that money went to the mortgage which along with our budgeted extra payment really started to kick things into high gear.

3. Kept intense focus

There were a few times during this process that I wanted to pause our extra payments.

I would get nervous — would the money be better off sitting in a savings account, couldn’t we use it to buy ourselves something nice, etc. All the typical garbage you tell yourself in order to make poor money decisions.

I would say my wife had these feelings occasionally, too, but I honestly don’t think it was often as I did. (Perhaps because I look at our budget a lot more than she does. I’m the nerd. She’s the free spirit.)

Thankfully we never landed on the “let’s go blow money!” mentality at the same time. The other person (my wife) was always able to interject and remind me that we were on course and there was no good reason to deviate from that course.

Was Investing a Better Choice?

Maybe there’s someone out there that thinks that even at 8.125% we would be better served investing that extra money. The whole “but you get a mortgage tax deduction!” crowd.

Well stick around. Next time I’ll show you what would have happened to our cash had we invested it in the stock market rather than paying our second mortgage down.

{ 3 trackbacks }

Weekly Favorites and Gratitude! «Budgeting In the Fun Stuff
July 24, 2010 at 5:03 am
Should I Pay Down My Mortgage or Invest? | Real Savvy Real Estate
July 29, 2010 at 11:43 am
Debt Reduction Success Stories » No Credit Needed - Debt Reduction Rocks – We Are Living Debt Free!
October 10, 2010 at 2:58 pm

{ 23 comments… read them below or add one }

Richard @ Debt Assistance Guru July 22, 2010 at 7:39 am

This is a very inspiring post and just goes to show what can be done when you put your mind to it. 3 years seems like a long time to manage your finances so carefully but what an amazing feeling now your mortgage is paid off! Did the sacrifices you made feel like a struggle or did you manage the process without too many problems?

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Kevin July 26, 2010 at 6:19 pm

Well for starters it isn’t our 1st mortgage — our 2nd. So we still have a good 79% left on the original loan to go!

Sure it would have been nice to go on nicer vacations or upgrade our cars sooner, but there is nothing like getting that huge monkey off the budgetary back — and freeing up the cash flow each month, too.

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Budgeting in the Fun Stuff July 22, 2010 at 2:03 pm

YAY!!! CONGRATS!!!

We just paid off our car loan with one big $4600 payment last week so I know you must feel great! We have less cash on hand than usual, but my husband has a contract for the next year (school librarian) and I have a really stable job (cubicle monkey for a business that’s doing well) and we live on one income. That helps. The car loan was “only” at 4.6%, but our emergency fund money was only making 2.15% anyway.

Now we just have a $71,000 mortgage to go, but we’ve been overpaying since the beginning in 2007, so it should be paid off no later than 2017. That’s also “only” at 5.375%, but that sounds like a safe investment to me. We also have equity investments, so I feel like we’re balanced enough. We’ll see I guess. :-)

Yay for getting rid of a 8.125% loan!!! That’s awesome and I think it’s a great investment, especially right now!

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Kevin July 26, 2010 at 7:23 pm

Thanks! And great job with knocking out the car loan. Be careful with letting your savings get too low though… I’d always rather have cash on hand than equity in a home/car. You can eat with cash, not so with equity!

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Enoughwealth July 22, 2010 at 9:41 pm

“Next time I’ll show you what would have happened to our cash had we invested it in the stock market rather than paying our second mortgage down.”

After that, please do a post on what would have happened if you hadn’t bought with only a 5% deposit, but instead of paying off the 2nd mortage you’d saved the same amount and then bought now with a large depost (20%+). And allow for any difference between what you’ve been paying on your 1st mortgage with the rent you’d have paid during that time. With the way house prices have gone in the past 3 years it will probably be a depressing post.

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Kevin July 27, 2010 at 6:57 pm

Excellent comment.

However, our mortgage is the same if not a bit smaller than rents for comparable homes. If we had rented our exact house from another person the cost would have been about equal (give or take $50-100).

Taking that into consideration we only lost the interest we paid on the second mortgage — $5,500. Let’s stretch that over the approximately 30 months it took us to pay it off… and that’s $183 per month extra that we paid to move back then rather than wait now to buy.

Now considering home prices is an entirely different beast, and is quite depressing. Then again I don’t try to time the market with a home, either. It is what it is. (So yes, over the past 3 years, it would likely have been better to rent.)

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Jane July 23, 2010 at 6:21 am

Excellent series you’re doing on paying off your mortgage and so clearly illustrating the illogical “but it’s a tax deduction” thinking. I’m doing the same thing, paying down my mortgage as fast as I can. I bought at the height of the market (in San Francisco), Jul 2007. The mortgage company and my Realtor both thought I was crazy for putting down more than the minimum required. They argued that the developer was offering not only interest-only for 5 years but also paying part of that interest. Which was all well and good but it freaked me out thinking that in five years I’d STILL owe the entire mortgage! My story was featured on the RealSavvyRealEstate blog, here, if you’re interested. I’m no financial wizard, by a long shot, but common sense guided me well. http://realsavvyrealestate.com/homebuyer-profiles/buying-at-top-of-market-with-no-regrets/

Keep up the good work! Love reading mortgage pay-down stories!

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Kevin July 27, 2010 at 7:45 pm

I read your story. Great stuff. Amazing that you’re getting an extra $900 on top of your total costs as you rent it out — that’s solid!

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Golfing Girl July 23, 2010 at 7:24 am

Congratulations on paying off the 2nd mortgage! It’s a great feeling–we did this as well a few years ago, though our rate was only 6.75%. Any time you can eliminate a debt payment it gives you more freedom and cash flow. After we got rid of the 2nd mortage (first we paid off our 401K loan and then the car loan), we bumped our emergency fund from $1K to 6 months worth. Now we’re working on our last debt–the main mortgage. I’ll be so excited when we get the balance below $100K later this year!

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Kevin July 27, 2010 at 7:45 pm

That’s the plan… free up that cash flow and apply that cash flow to other goals. Is going great :)

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J. Money July 23, 2010 at 7:51 am

INCREDIBLE!!! Good job guys!!! :) That is such an accomplishment, man I am impressed!

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Kevin July 27, 2010 at 7:46 pm

Thanks Mr J!

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Petunia July 23, 2010 at 12:06 pm

That’s fabulous, congratulations!!

I had to smile at your “high” rate of 8.125%. When my now ex-husband and I bought our first home (in 1989) we were paying 10.5% on our first (and only) mortgage. We thought we had gotten a bargain basement steal-of-a-deal. I can remember saying “Only 10.5%!!” with a feeling of giddiness. Lol, how times have changed.

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Kevin July 27, 2010 at 8:01 pm

Yea I can’t imagine first mortgage rates being 10, 11, 12+%! That’s just crazy. We definitely are looking at historic lows currently with mortgage rates in the 4-4.5% range on 30 year and 3.75% or so for 15 years!

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Petunia July 23, 2010 at 12:24 pm

@ Jane, according to the Case-Schiller index, real estate in San Francisco peaked in the third quarter of 2005. Hopefully, you did not pay a peak-of-the-market price 2 years later.

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Rob July 24, 2010 at 6:46 am

Congrats! We also made the not so wise decision to get a second mortgage, but ours was for almost the full 20% and the rate is just above 8%. Oh well. Once our first car loan is paid off that will be the next item to attack.

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Kevin July 27, 2010 at 8:02 pm

You’ve just got to keep chipping away at it. It works, and you build momentum, and it feels great to watch it start to whittle away. Not to mention that the more principle you pay down the larger an impact your regular payments make because each payment isn’t anchored down by interest.

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Nicole July 24, 2010 at 9:55 am

Congrats!

I would hope that nobody would consider getting rid of a high interest second mortgage as silly. A low interest primary mortgage, maybe, depending on what alternative investments are doing and if it is at the expense of tax-advantaged retirement savings or some such.

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Jeff @ sustainablelifeblog July 27, 2010 at 7:10 am

Congrats on paying off your 2nd mortgage. Are you going to channel the savings and your extra payments to you current mortgage?

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Kevin July 27, 2010 at 8:03 pm

Actually we have other savings goals for that money now. But definitely long term that’s where the money would end up.

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Samurai July 30, 2010 at 9:44 am

Great work mate! A good kick in the pants for me to start paying down some debt!

I’m refinancing now two loans down to 4%. Would you still as aggrsv paid off ur 2nd if the rate was at 4%?

What’s ur rate on ur first? Think about refing?

Best,

Sam

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Kevin August 3, 2010 at 6:29 pm

It depends on your financial situation and if you think you can earn higher returns elsewhere. Our first mortgage is just under 5% (we refinanced last year), and we’re holding off on getting super aggressive with it for now.

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Financial Samurai August 8, 2010 at 10:13 am

KEvin, what is the rate on your first mortgage now? You may consider refinancing!

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