April 30th, 2019 9:00 AM by Jackie A. Graves
Most of my work on paying off a mortgage
early has focused on the science of the subject, which is nothing more than the
math needed to trace the process through which a mortgage balance (the amount
still owed) declines over time. With Chuck Freedenberg, I developed Mortgage Payoff
Calculator 2a, which is the most frequently visited page on my web
Calculator 2a allows borrowers to specify almost any combination
of extra payments, payment intervals and payment periods, and see how the
remaining balance changes over time. And if the borrower has a target date when
she wants to be out of debt, she can work backwards to find the combination of
payments and payment intervals that will work.
Here is an example. After 30 months, Mabel’s $400,000 30-year
mortgage at 3.75% has been paid down to $381,083. If she continues making the
required payment of $1,852.47, she will have another 27.5 years to go, and she
plans to retire in 15 years. She is looking for a combination of extra monthly
payments and extra annual payments that will pay off the balance in another 15
Calculator 2a, I found that an extra monthly payment of $821 plus an annual
payment of $1,200 would do the job. So would any number of other options, such
as a quarterly payment of $3,600. The trick is to find the combination that
fits best into the borrower’s budgetary process. With the calculator (which you can
access by clicking here), it is easy.
So much for the science. The art has to do with the factors that
determine whether the borrower follows through. Based on recent work in border
areas separating economics from psychology, borrowers with a high degree of
“self-efficacy” are likely to follow through while those with less are more
likely to fail.
The self-efficacy of a person is simply that person’s belief in
themselves, and in their capacity to affect their own future. It has been found
that people with high self-efficacy do better in school and in the workplace,
and rarely default on loans. While no one to my knowledge has examined its
connection to success or failure in executing an early mortgage payoff plan,
the presumption that it plays a key role is very strong.
Assuming the presumption is correct, it raises the question of
whether the level of self-efficacy connected to an early mortgage payoff plan
can be affected by the way the plan is executed? I believe that the answer to
that is yes, and that those involved in a plan will fare much better if they
follow two procedural rules.
Rule number 1 is that the extra payment is committed at the
beginning of the borrower’s pay period. If the borrower is paid on the
first day of the month, for example, the extra payment would be sent on the
second. That assures its priority. Adopting the practice of basing the extra
payment on what remains of the borrower’s pay check at the end of the pay
period is a sure recipe for failure.
Rule number 2 is to record progress toward the goal as it
occurs, continually reinforcing the borrower’s commitment. This can be done in
any number of ways, including one I am looking at as I write this. It is a
table I printed using Calculator 2a that shows the month-by- month progress of
Mabel’s mortgage, over the 180 months until payoff. Each month as she makes her
payment, she can draw a black line through the existing current balance,
revealing the lower balance that will emerge from her payments as the new
For best results, I suggest placing the reinforcement tool,
whatever that is, next to the checkbook.
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