People on social media love arising with so-called “hacks” to excite their followers.
Within the mortgage realm, this usually means highlighting math that appears unbelievable at first.
And it often revolves round paying down a mortgage forward of schedule, a lot to the chagrin of the banks.
For the file, the banks most likely don’t care that a lot if in any respect, since today they’d most likely pay you extra in case you put cash in a financial savings account as a substitute of towards the mortgage.
However I digress – let’s take a look at the newest scorching development, the two% mortgage hack.
What Is the two% Mortgage Hack?
| $400k mortgage @ 6% | Authentic | 2% Hack |
| 12 months 1 fee | $2,398.20 | $2,398.20 |
| 12 months 2 | $2,398.20 | $2,446.16 |
| 12 months 3 | $2,398.20 | $2,495.09 |
| 12 months 5 | $2,398.20 | $2,595.90 |
| 12 months 10 | $2,398.20 | $2,866.10 |
| 12 months 15 | $2,398.20 | $3,164.41 |
| 12 months 20 | $2,398.20 | $3,493.77 |
| 12 months 21-30 | $2,398.20 | $0 – paid off! |
In a nutshell, the two% mortgage hack requires you to extend your mortgage fee 2% every year.
This doesn’t imply simply paying an additional 2% primarily based on the unique month-to-month fee.
As a substitute, you pay 2% additional in 12 months two, then 2% extra on high of the two% additional in three 12 months, and so forth.
Each 12 months, your mortgage fee grows bigger, primarily based on the quantity the 12 months earlier than.
For instance, let’s take a look at a $400,000 mortgage quantity with a 6% mortgage price and a 30-year mortgage time period. Fairly widespread state of affairs these days.
For those who had been to simply make the conventional, minimal required fee, it’d be $2,398.20.
Now think about beginning in 12 months two, you add 2% to that fee. It’s $2,446.16. That’s not a giant leap up. It’s about $48 extra monthly.
For many, this may be manageable, and certain wouldn’t require any life-style modifications or slicing again.
That alone wouldn’t do a lot although. It will merely shorten your mortgage time period to twenty-eight years and 6 months.
Nevertheless, it will prevent practically $29,000 in curiosity. Not too shabby.
However the place the two% mortgage hack will get attention-grabbing is you compound the additional funds every year.
So starting in 12 months three, we add one other 2% on high of the elevated fee from 12 months two.
That places funds in 12 months three at $2,495.09. In 12 months 4, it climbs to $2,544.99. In 12 months 5, it’s $2,595.89.
Annually, you’re including 2% from the 12 months prior. You are able to do this by multiplying the mortgage fee by 1.02 in a calculator.
By 12 months 20, the mortgage fee is sort of $3,500 monthly, however it’s gradual and knocks down the excellent mortgage stability quite a bit quicker.
What Does the two% Mortgage Hack Accomplish?
In brief, the two% mortgage hack reduces your complete curiosity expense and shortens your mortgage mortgage time period.
Most of the posts I’ve seen about it declare it reduces your mortgage time period by 12 to 14 years, but it surely will depend on the mathematics, aka the mortgage stability and rate of interest.
The quantity of curiosity saved can even range primarily based on these inputs, however the normal concept is you possibly can considerably scale back your mortgage time period and save on curiosity.
So as a substitute of ready 30 years to personal your own home free and clear, you possibly can personal it quite a bit sooner, assuming that’s a aim.
And you may pay quite a bit much less curiosity within the course of.
In my instance, you’d scale back the mortgage time period by a couple of decade, so 20 years as a substitute of 30.
The curiosity financial savings from making additional mortgage funds would additionally scale back your curiosity expense by about $135,000.
Merely put, you’d have a paid off mortgage in about 20 years and save greater than six figures. Good!
You’re Primarily Emulating Inflation by Growing Your Mortgage Fee Yearly
By making a fee that’s 2% greater every year, you’re mainly emulating the speed of inflation.
The greenback’s worth erodes every year by round this quantity, so by paying the additional 2%, you’re basically adjusting it to maintain tempo.
This could imply it’s not an additional burden, as your wages/revenue may also be anticipated to extend by this quantity.
And every little thing else you pay would possibly improve by this quantity too, whether or not it’s your grocery invoice or householders insurance coverage.
It’s additionally fairly widespread for renters to see their month-to-month hire get elevated by their landlord yearly.
So in the event that they had been paying $2,000 monthly, the next 12 months they could be informed the brand new hire is $2,100.
That’d really be a 5% improve, and this illustrates why homeownership will be nice. It’s an inflation hedge.
You aren’t required to pay extra every year with a mortgage, however as this technique exhibits, it can save you quite a bit in case you select to.
And since 2% is such a small quantity, it’s a mild strategy to paying additional towards the mortgage with out overextending your self.
However is it the perfect technique on the market?
You’ll Save Even Extra by Paying Additional Earlier On
Whereas the two% mortgage hack is a cool approach to scale back your curiosity expense and shorten your mortgage time period, with no massive bump in fee, it’s one in all many choices.
First off, it needs to be famous that some householders could not need to repay the mortgage early in any respect.
That is very true for these with low mortgage charges, whether or not it’s a 2% or 3% price. For these people, their cash could be higher off deployed elsewhere.
For many who do need to repay the mortgage early, you save extra once you pay extra earlier on.
What if as a substitute of two% starting in 12 months two, you simply began paying 5% additional monthly instantly?
Effectively, you’d scale back the mortgage time period by about 15 and a half years and save $211,000 in curiosity.
So you possibly can save extra in case you don’t wait 12 months to start making bigger funds, and much more in case you look past a 2% bump.
The two% improve is barely $48 additional. Likelihood is householders can go slightly greater, granted over time that quantity does get exponentially greater.
However you possibly can nonetheless implement say a 3% or 4% improve proper off the bat and turbocharge the financial savings of this technique.
Learn on: Ought to I prepay the mortgage or make investments as a substitute?
Earlier than creating this web site, I labored as an account govt for a wholesale mortgage lender in Los Angeles. My hands-on expertise within the early 2000s impressed me to start writing about mortgages 19 years in the past to assist potential (and present) residence patrons higher navigate the house mortgage course of. Comply with me on X for decent takes.
