“Work a lifetime to pay off a house. You finally own it, and there’s nobody to live in it.” – Death Of A Salesman
After twelve years of methodically refinancing my property whenever rates dipped, and consistently paying down principal every month, I finally own my two bedroom condo in Pacific Heights, San Francisco free and clear!
The condo originally cost $580,000, which I thought was relatively good value for a 2/2 with parking and a park view in 2003. I had relocated from Manhattan two years earlier where all park view condos cost a bloody fortune. Go watch Millionaire Dollar Listing New York to see for yourself. My condo is nothing fancy, but it has everything one needs to live a comfortable life in my favorite city in America.
According to Zillow, USAA, and a one bedroom sale in the same building last month, the value of the condo could be worth double its purchase price with a little bit of updating. Whatever the real value is, I don’t plan on ever selling because it is an income generating engine. Real estate is “forced savings” at its finest.
THE PROCESS OF PAYING DOWN A MORTGAGE
Whenever I was feeling liquid, I’d mosey down to the local Citibank branch to pay down some extra principal – $500 here, $10,000 there, it adds up. When paying down a mortgage off cycle, it’s important to instruct the teller to pay down “principal only,” otherwise, they may use your money to pay down your upcoming principal and interest payment.
With $20,742 left in principal left after aggressively paying down the mortgage over the past six months, I decided to just pay the rest of the balance off at my local branch. When I got there, they said paying off my mortgage with them would not be possible. Instead, here’s what I had to do:
1) Call the mortgage department and request an official principal payoff letter. The principal payoff letter will calculate exactly how much in principal and interest you owe. Any overage payments will be refunded at a later date.
2) Once you receive the principal payoff letter, write the check for the exact amount and in the memo, write: “Payoff” and the mortgage account number. Send in the letter and follow up a week later.
3) Cancel any automatic payments in the meantime. The principal payoff letter will have an exact amount to account for everything. Remember, a mortgage is paid in arrears i.e. the mortgage payment for June is paid on July 1 etc.
4) Get the paper Deed in the mail. If you don’t get it within a month after paying off the mortgage in full, definitely call to see what’s going on.
5) Confirm that the liens are removed with the title company and the bank. You can do so by requesting a “Reconveyance Letter” from the mortgage holder. You must request it; the mortgage holder doesn’t send it automatically. It will confirm that there are no liens existing, and that the title has been “reconveyed” to you, the owner. This letter will save time and money when going through future credit/title searches, as it shows the lender/buyer owns it with no complications.
6) Notify your insurance company and local county tax office to change the bills directly to you if you’ve been paying for both through your mortgage company.
MORTGAGE PAYOFF FEES
Given this is the first time I’ve ever fully paid off a mortgage, I was surprised to see so many extra fees beyond my principal and interest owed. Take a look at my payoff amount calculation in my mortgage payoff letter.
Although my principal balance was $20,742.07, Citibank charged me interest through 5/16/15 because 5/16/15 is the grace period I get to pay my April mortgage until a late charge is due. Given I’m sending my final mortgage payment amount in before 5/16/15, I should get some interest credit back.
Here are the definitions of the various fees.
Recording Fee: The fee charged by a government agency for registering or recording a real estate purchase or sale, so that it becomes a matter of public record. Recording fees are generally charged by the county, since it maintains records of all property purchases and sales. Recording fee varies from county to county.
Reconveyance Fee: This fee is charged by title companies or attorneys in some states and covers the cost of removing your current lender’s lien from your property title when you refinance. For comparison purposes, a reconveyance fee is considered to be a third party fee and may be included in the title insurance fee by some lenders.
Payoff Statement Fee: What the hell is this? Seems like just another pesky fee banks are sneaking in to try and make money off their customers. I’m sure the banks are figuring what’s the big deal making an extra $30 if the entire mortgage is getting paid off. Here’s our chance to make more money off our excited customers!
Once you’ve sent your final check in the mail or via wire (there’s another fee!), all you can do is sit back and wait for the bank to notify you that your mortgage has been paid in full, and the title name has been changed from the bank to you. It’s more than likely you’ll get a little money back from the extra interest you paid. The payoff statement will always have you paying a bit more to ensure a complete payoff.
PAYING OFF A MORTGAGE FEELS RIGHT
My original goal was to pay off the remaining ~$91,000 mortgage balance by the end of the year (paid an extra $9,000 off between June 2014 – Dec 2014). But when you can see the finish line, all you want to do is run as fast as you can and pay the darn thing off.
It feels great to no longer have a mortgage on a property bought when I just turned 26 in 2003. In early 2014, the mortgage was actually around $250,000, but I decided to conduct mortgage arbitrage by borrowing ~$150,000 more for my new home purchased in June 2014 at a 2.5% rate to get as close to $1,000,000 in mortgage debt as possible. I then utilized the $150,000 in cash that would have gone towards a bigger downpayment to pay down my then $250,000 mortgage at 3.375% condo loan instead.
A lot of people recommend never paying off your mortgage, especially your primary mortgage, because you can make more money investing in the stock market or other investments. Until I took out a 4th mortgage last year, I generally have agreed with this principal. However, four mortgages felt like one too many. Every year I want to make one big financial move. With valuations in the stock market and private equity market feeling stretched, paying off debt felt right.
By paying off my mortgage, I’m locking in a guaranteed 3.375% return while improving my loan profile if I were to ever refinance my primary residence again. I got rejected from my latest mortgage refinance due to too much debt. Mortgage underwriters have funny math. By completely wiping out my $1,308/month mortgage payment, my cash flow in their eyes increases closer to $2,000/month.
HOW DID I PAY OFF A ~$100,000 MORTGAGE IN 11 MONTHS?
Given my perennial goal of making and maintaining a ~$200,000 AGI a year, this only leaves me with around $140,000 after taxes (30% effective rate) to live, love, and pay. With a $100,000 beast to slay, I had to focus. Here’s what I did.
1) Wrote a post on September 8, 2014 entitled, Why I’m Paying Down My Mortgage Early And Why You Should Too. By putting my goal out there for the public to see, I was galvanized to succeed. Failing in public is embarrassing, so I try my best not to. Many of the posts I write on Financial Samurai are written in order to provide motivation because I have a tendency to relax. Make your financial goals public to improve your chances of success!
2) Decided to work harder. During Christmas week of 2014, I spent time looking for another consulting client and found one for January. From December 2014 – April 2015, I billed 61 hours a week between three clients compared to billing 25-41 hours a week from November 2013 – December 2014 between two clients. I knew I could work 60+ hours a week because that’s what I did for 13 years in my finance career. For three months, I felt very rich for my age because there was also business and passive income flowing in. There’s no substitute for hard work.
3) Used 100% of all consulting income in 2015 to pay down the mortgage. Every time I deposited a consulting pay check, I immediately asked the teller to transfer the same deposit amount to pay off principal. It felt fantastic having a focused purpose for the consulting income. My primary goal for consulting was to develop my online marketing acumen and experience the startup world so I could write about it. Money was a bonus, but during that three month period, money became a great motivator to keep on working. In fact, I told myself that I wouldn’t stop consulting this year until I paid off my mortgage!
4) Used 100% of my surprise deferred equity compensation towards principal. Although tempted to use the $11,381 to go on a bender with friends to Vegas, I decided to be responsible. Put surprise windfalls to good use. Your future self will thank you.
5) Used 100% of all operating profits (rent – operating expenses) from the rental property to pay down its own mortgage. Viewing each rental property as its own business unit helps optimize profitability. Co-mingling funds blurs operational efficiency by making owners overestimate returns.
Now that the mortgage is paid off, I plan on aggressively raising cash for the rest of the year. Perhaps if the economy continues to improve, I’ll then focus on slaying my vacation property mortgage next!
Wealth Building Recommendations
Shop around for a mortgage: Check the latest mortgage rates online through LendingTree. They’ve got one of the largest networks of lenders that compete for your business. Your goal should be to get as many written offers as possible and then use the offers as leverage to get the lowest interest rate possible from them or your existing bank. When banks compete, you win.
Invest in real estate more surgically: If you don’t want to constantly pay massive property taxes, don’t have the downpayment to buy property, or don’t want to tie up your liquidity in physical real estate, take a look at RealtyShares, one of the largest real estate crowdsourcing companies today. You can invest in higher returning deals around the country for as little as $5,000. Historical returns have ranged between 9% – 15%, much higher than the average stock market return. It’s free to explore and they’ve got the best platform around.
Updated for 2017 and beyond.