Join the “Ivory Button Club”

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Owning a home without a mortgage provides equity, financial leverage and piece-of-mind. Historically, one way of commemorating when a mortgage was paid off included burning the mortgage note and carving a hole in the main newel post at the bottom of the home’s staircase. The ashes from the burned mortgage were poured into the hole, and then a plain ivory button was used to seal the hole. Hence, an ivory button was a symbol of wealth.

According to a second quarter 2018 report from ATTOM Data Solutions, a research and analytics firm that tracks equity movements, more than 13.6 million — 24.5 percent of U.S. properties — are equity rich. This means that, for these equity rich individuals, the combined estimated balance of loans secured by the property was 50 percent or less of the property’s estimated current market value. 

The report also revealed that 5.5 million, or 10.1 percent of U.S. properties, are seriously underwater with a combined estimated balance of loans secured by the property of at least 25 percent higher than the property’s estimated market value.

An ATTOM report from 2017 revealed that 34 percent of all American homeowners have 100 percent equity in their properties. Statistics from this report reveal some people bought their homes with cash, while others chipped away at their mortgages over time until they were paid off.

For those who have a mortgage and want to improve their equity position, one of the fastest ways to do so is to pay off the mortgage early. This requires a plan and focused commitment. Below are some ways to increase equity and ultimately join the ranks of the mortgage-free Americans.

Make an extra payment: each time you pay extra on a mortgage, more of each payment after that is applied to the principal balance. Before sending off extra payments to a mortgage lender, check to make sure they will accept extra payments. Some may only accept extra payments at specific times or may charge prepayment penalties. If the lender does accept extra payments, add a note to any extra payments that it’s to be applied to the principal balance amount and not an early monthly payment.

To see the impact of making an extra payment, consider the following example on a $220,000, 30-year mortgage with a 4 percent interest rate. By paying an extra mortgage payment once a quarter the mortgage would be paid off 11 years early with a savings of more than $65,000 in interest.

Pay biweekly mortgage payments: by making mortgage payments biweekly the result is 26 half-payments, which equals 13 full monthly payments each year. That extra payment can knock eight years off a 30-year mortgage, depending on the loan’s interest rate.

To set up a biweekly mortgage payment, locate the principal and interest portion of your payment on your monthly statement and simply divide that number by two. For example, if the principal and interest portion of your payment is $1,500, your new biweekly mortgage payment is $750. Don’t forget to include the tax and insurance portion of your payment each month. In this $1,500 payment example, the $750 biweekly payment only covers principal and interest. And here again, consult with your mortgage lender on their policy towards biweekly payments. If the lender won’t process biweekly payments, one workaround is opening a bank account exclusively for the mortgage payment. Every two weeks, deposit the half-payment and use that money to make the full payment on every second deposit.

Apply “found” money toward the mortgage: When doing so doesn’t impact savings or emergency funds, apply bonuses, tax refunds or any unexpected income toward the mortgage. An extra lump sum payment of $10,000 on a 30-year fixed-rate mortgage for $200,000 at 4.5 percent made five years into the mortgage would pay off the mortgage two years and four months earlier, while saving more than $19,000 in interest.

Refinance: The days of refinancing to secure a lower interest rate may have past for some. However, the impact of refinancing a longer term mortgage into a 15-year loan is significant. For those mortgage holders with an already low interest rate, save the closing costs of a refinance by instituting a plan to pay the 30-year mortgage as if it were a 15-year mortgage. The same goes for adhering to a 10 year schedule on a 15-year mortgage.

If you own a home, or plan to buy one in the near or foreseeable future, consider the methods above designed to increase your equity. Talk to your lender and financial advisor to work out a more aggressive payment plan. They will gladly help you set a course for getting your “ivory button in your newel post.”