The science and art of paying off your mortgage early

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. Yet there is also an art involved in paying off a mortgage early.

With Chuck Freedenberg, I developed calculator 2a, which is the most frequently visited page on my website. It deals with the math.

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 backward to find the combination of payments and payment intervals that will work.

Here is an example. After 30 months, Mabel's 30-year, $400,000 mortgage at 3.75 percent has been paid down to $381,083. If she continues making the required monthly 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 years.

Using 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, it is easy.

Readers will find the calculator at www.mtgprofessor.com/calculators/Calculator2a.html.

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 areas that separate 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 No 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 No. 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 current balance.

For best results, I suggest placing the reinforcement tool, whatever that is, next to the checkbook.

• Contact Jack Guttentag via his website at mtgprofessor.com.

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