How This Couple Will Get $1,102,405 For Paying Off Their Mortgage Early

Blog post

This post may contain affiliate links

The House

When we bought our house in 2011 we took out a loan for $175,000 at 4.35% interest. This was our first home and we were so excited. It was 3 bed, 2.5 bath, 2 car garage, and had a large unfinished basement. It was also built in 1958 and was on a busy street, but it’s brick exterior and original hardwood floors won us over (advice if you’re a first time home buyer here).

After a few years in the house, we were very certain it was not our forever home. We knew we wanted to have kids one day and the thought of raising kids on the busy street wasn’t in my dream plans. Plus the bedrooms were small and it was uncomfortable to have any guests staying with us (which is quite often), so we knew we needed something bigger. Our dilemma though was that we had always wanted to keep that house as an investment and turn it into a rental since it it was in a great location and our emotional attachment to it as well.

The Plan

After a lot of thought and conversations, we decided we would pay off our mortgage as fast as possible, then save up for our next home. I was so excited! It would mean being in the house a lot longer than we had planned on, but our long term goal of financial freedom was much more of a driving force for me than anything else. Here’s what we did to pay off our mortgage in only 6 years

The Numbers

Now here’s the good stuff…I have looked at these numbers in many different ways and here is what I have determined is our overall return on the decision to pay off of the mortgage and rent the house out.

Interest Savings

$97,605 just in interest savings. This figure I have calculated by taking the total interest that would have been paid if we took 30 years to pay off our mortgage, which would have been $138,621 paid for the interest. Since we paid it off 6 years early, the estimated amount left owed on the following 24 years is $97,605.

Rental Income

Then, factoring in no activity for a few years to save up for the next house, rental income would not be expected to start coming in for a while, but once it does, that is added into these figures as well.

Here is the breakdown of the monthly rental income:

2200 rental income
-100
taxes ($1200 per year)
-45.5
sewer ($546 per quarter)
-57.82 insurance
-80 lawn
1916.68 net income

Since our plan is to hold this property for the long term and sell it when it’s time to retire, I will calculate this based on a 25 year hold, which means $574,800 in income throughout the next 25 years. Of course, I am not factoring in for things like rental increases/decreases, replacing the roof, large appliances, etc that will occur over time, nor vacancy rates and the cost of turnover since this is for simplicity’s sake.

The other factor is when it comes time cash out on our investment is what the price of the home will be in 25 years? This is a big unknown, I know right now the home as gone up in value significantly since we bought it in 2011. It is now worth around $430,000. The market will certainly be fluctuated over the next couple of decades, but with the way real estate prices go I am betting that the house will be at least worth what it is worth today, if not significantly more. But again, for the sake of simplicity let’s say it’s worth what it is today in 25 years, which is about $430,000 and that is what we sell it for.

$1,102,405

This will be the overall estimated value of our decision to pay off our mortgage and keep the house as a rental. Give or take the cost for large repairs and maintenance, rental rates appreciating or declining, and that the home may be more or less than what it is today (being conservative here as it will most likely be significantly more).

There are other calculations to mess around with when you are planning for your financial future as well. Such as if we had sold today, we would not owe taxes since it was our primary residence and we could put that money to use in the stock market or other investments, perhaps the value at the end of 25 years would be similar. Or more, or less. Whatever decision you make, there are several things to think about and factor. For me, the idea of cash flow coming in every month and a tangible asset that I can see and touch carries a lot of value as opposed to watching numbers fluctuate in a stock account. Just make sure that you have a plan and don’t make the mistake that I made after I made off my mortgage.

Leave a comment

Your email address will not be published. Required fields are marked *

Prev Post Next Post