The two% Mortgage Hack Defined

People on social media love developing with so-called “hacks” to excite their followers.

Within the mortgage realm, this usually means highlighting math that appears unbelievable at first.

And it normally revolves round paying down a mortgage forward of schedule, a lot to the chagrin of the banks.

For the document, the banks most likely don’t care that a lot if in any respect, since lately 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?

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% based mostly on the unique month-to-month fee.

As an alternative, you pay 2% further in yr two, then 2% extra on high of the two% further in three yr, and so forth.

Each 12 months, your mortgage fee grows bigger, based mostly on the quantity the yr 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 frequent situation these days.

In the event you had been to simply make the conventional, minimal required fee, it’d be $2,398.20.

Now think about beginning in yr two, you add 2% to that fee. It’s $2,446.16. That’s not an enormous bounce up. It’s about $48 extra per thirty days.

For many, this might be manageable, and sure wouldn’t require any way of life adjustments 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.

Nonetheless, it might prevent almost $29,000 in curiosity. Not too shabby.

However the place the two% mortgage hack will get fascinating is you compound the additional funds every year.

So starting in yr three, we add one other 2% on high of the elevated fee from yr two.

That places funds in yr three at $2,495.09. In yr 4, it climbs to $2,544.99. In yr 5, it’s $2,595.89.

Every year, you’re including 2% from the yr prior. You are able to do this by multiplying the mortgage fee by 1.02 in a calculator.

By yr 20, the mortgage fee is sort of $3,500 per thirty days, however it’s gradual and knocks down the excellent mortgage steadiness loads sooner.

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.

Lots of the posts I’ve seen about it declare it reduces your mortgage time period by 12 to 14 years, however it depends upon the maths, aka the mortgage steadiness and rate of interest.

The quantity of curiosity saved will even fluctuate based mostly on these inputs, however the common thought is you’ll be able to considerably scale back your mortgage time period and save on curiosity.

So as a substitute of ready 30 years to personal your private home free and clear, you’ll be able to personal it loads sooner, assuming that’s a aim.

And you’ll pay loads much less curiosity within the course of.

In my instance, you’d scale back the mortgage time period by a few decade, so 20 years as a substitute of 30.

The curiosity financial savings from making further 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 Basically Emulating Inflation by Growing Your Mortgage Fee Yearly

By making a fee that’s 2% greater every year, you’re principally 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/earnings may additionally be anticipated to extend by this quantity.

And the whole lot else you pay may improve by this quantity too, whether or not it’s your grocery invoice or owners insurance coverage.

It’s additionally fairly frequent for renters to see their month-to-month lease get elevated by their landlord yearly.

So in the event that they had been paying $2,000 per thirty days, the next yr they is perhaps advised the brand new lease is $2,100.

That’d really be a 5% improve, and this illustrates why homeownership could 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 loads in case you select to.

And since 2% is such a small quantity, it’s a mild method to paying further towards the mortgage with out overextending your self.

However is it the most effective 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, and not using a massive bump in fee, it’s one among many choices.

First off, it must be famous that some owners might 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 of us, their cash is perhaps higher off deployed elsewhere.

For many who do need to repay the mortgage early, you save extra while you pay extra earlier on.

What if as a substitute of two% starting in yr two, you simply began paying 5% further per thirty days instantly?

Nicely, you’d scale back the mortgage time period by about 15 and a half years and save $211,000 in curiosity.

So you 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 simply $48 further. Chances are high owners can go somewhat greater, granted over time that quantity does get exponentially greater.

However you 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 website, 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 current) dwelling consumers higher navigate the house mortgage course of. Observe me on X for decent takes.

Newest posts by Colin Robertson (see all)