It’s the end year, so I’m reviewing a bit of financial progress we’ve made. Today I want to look at our mortgage on our home. Like our monthly net worth reviews, we looking over the numbers to what we’ve done to see what worked and what didn’t.
This system has worked well for us as we’ve been tackling financial goals. Carl Richards, a certified financial planner, noted how couple can keep each other in the loop with money.
Write the decisions down so you can track your progress. A benefit of monthly meetings is that you can assess how you’re doing, but it requires keeping track of what you’ve agreed to do. Write things down and revisit them during your meeting. Have you made progress? If not, what needs to happen? The list can be a great way to manage your monthly conversations. Don’t be afraid to use it and hold each other accountable….
More than once, I’ve been in client meetings where it’s clear that couples are having their first discussion on big decisions — kids’ education, saving, even retirement. Without fail, either one or both individuals is surprised, if not shocked, by their partner’s opinion on a topic. So from what I’ve seen, it seems obvious that the more conversations you have about money before you have to make major financial decisions, the happier you’ll be in your relationship.
Besides chatting with each other regularly, having this information on Couple Money is our way of keeping each other accountable. So let’s get started……
We originally got our mortgage at the beginning of 2010 with a fixed interest rate of 5%. When we were getting qualified for a mortgage we decided to base it solely on my husband’s net income to make sure that the payments would be affordable. It’s worked out well for us so far as we had a little bit of room in our budget to pay a bit more on it on a regular basis.
It’s been a fun couple of years and we’ve been sending in extra payments to our mortgage lender, both on a monthly basis and a portion of some of our tax returns and bonuses How did we do? Let me show you – I made a lovely pie chart just for this post
The pie chart above shows two things – the amount we’ve paid off so far and the mortgage balance we have left. This chart doesn’t reflect how much the house is worth, it’s simply our progress on the mortgage loan. We’ve paid off 16% of our mortgage (~$19,000) in 3 years, meaning that we have 84% and 27 years left to pay it (but we’re hoping it will be much sooner than that).
For those tracking all of the numbers, it comes out to:
- Original Mortgage: $123,239
- Current Balance: $103,435
Some people have asked why we decided to pay off our mortgage. After all the rates are low and we could use that money to invest for retirement, getting higher returns. While I’ve explain a couple of our reason, I wanted to go into a bit more detail today.
Why Pay Off Our Mortgage Early?
There are a couple of reasons why we paid extra on the mortgage, some financially based, others emotionally based. As with many financial decisions with couples we’re trying to be smart with our money and work with what makes us comfortable.
One big reason we were paying down our mortgage faster than the 30 years scheduled is because we’re looking to save a larger amount of money long term. When lenders offer a mortgage they use amortization to allocate payments of the life of the loan. What that means for borrowers is that in the beginning of your mortgage, most of the money go towards paying interest. As the mortgages draw to a close, the payments increasingly towards the principle owed.
For example, if a couple bought a house for $250,000 and pays it off in 30 years (@3.45%) as scheduled, then when the loan is completed that couple will have paid a total of $401,631.29. That means they would have paid $151,631.29 just in interest! If that couple decided when they got that same mortgage they’d paid an extra $100/month, then the loan would be paid off in 26 years and they would save $22,800.19.
That’s why if you’re able to accelerate your mortgage payments with extra money going towards principle, you can cut years off your mortgage and save tens of thousands of dollars (or more depending on the size of your mortgage) by avoiding the extra interest. We had started doing that as soon as we sent in the first payment.
Another reason for sending in extra payments on a fixed rate 30 year mortgage instead of taking a 15 year loan is that we wanted some flexibility with our budget should our cash flow change due to job loss or my business slowing down. We could’ve afford the 15 year loan, but we’d have less wiggle room in our budget.
Besides the financial reasons, we admit that we were paying down on our mortgage because our risk tolerance. Paying down the mortgage quickly is also about our own peace of mind. We also don’t want to limit our cash flow for the full 30 years by carrying our mortgage the full length.
That doesn’t mean we’re not investing. We are currently contributing towards our retirement accounts, a 401(k) and an IRA. However, while we are investing for retirement, we also wanted to a get a guaranteed return and paying extra on our mortgage does that in a way.
We’re happy with the progress we’ve made, but now we’re going to be shifting gears a bit for 2013. It’s time to pay down the other debt in our lives – the student loan.
Now Focusing on Student Loans
While we still want to pay off our mortgage early, starting next month we’re going to now take that extra monthly payment and direct that towards paying off the student loan. It’s our last non-mortgage debt and we’d like to get that done and out in the next couple of years.
Right now the scheduled payments for the loan is around $150/month. By re-allocating and scheduling the extra mortgage payments towards the student loans, we’re have a minimum of $325/month going towards the loan. That’s not counting micro-payments sent in as My Financial Reviews‘ income grew. My plan is to continue to build that income and use it for the loan. If we get a tax refund next year, a big portion will be allocated for it. Our hope is to pay off the student loan in 2 years or less.
Looking back at our progress with our mortgage, I feel encouraged that we can make this goal together. It will take a bit more effort to reach this goal, but it’ll be worth it. Once this student loan is paid off, we’ll go back to the mortgage and paying extra on it. We’re still looking forward to eliminating this debt within 15 years (or less). With no student loan to worry about, that will be additional money we can use for the mortgage.
As always, I’ll be sharing our progress here, most likely with the monthly net worth reviews. If you have any suggestions, please share them below in the comments!
Thoughts on Paying Down Debts
I’d love to hear from you about your progress with eliminating debts this year and your plans for next year, especially your mortgage. For those who’ve done the calculations, how much money and time will you save if you continue on your mortgage pay off plan? What motivated you to work on your debts? How do you stay on track?
Disclosure: Information sourced from Genworth Financial
Photo Credit: Horia Varlan