Our Current Mortgage and Goals
Notice how little of our first year’s payments are going towards principle.
March is here and it’s the start of our mortgage payments! We paid our regular payment at the beginning of this month. If you remember from last month, we mentioned that we wanted to use our tax refund to pay down our mortgage.
We also want to go ahead and send regular extra principle payments. Our first extra payment was sent out from ING Direct this past Friday and we feel great!
I logged in today and saw that our mortgage lender has received the payment. Besides including a note with our payment, we requested the lender directly to apply the extra monthly payments towards principle.
We didn’t want to delay getting the acceleration system in place so we started with month 1. We’re looking forward to eliminating this debt within 15 years (or less).
I think we got a decent deal on our mortgage. To give you an idea of where we’re starting from, here are the numbers on the mortgage loan that we have:
- Total Loan Amount: $123,239
- Interest Rate: 5.00%
- Loan Term: 30 years, fixed rate
Why Pay Off Our Mortgage Early?
I mentioned before that keeping a mortgage just for the interest deduction is crazy. You’re just sending over more money to your mortgage company instead of paying a fraction of the amount in taxes. The numbers don’t add up.
By paying our mortgage earlier than the 30 years scheduled, we’re going to save tens of thousands of dollars in interest. Following the mortgage amoritization schedule, most of the money goes towards paying interest in the beginning of your loan.
As the mortgages draw to a close, the payments increasingly goes towards the principle owed.
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.
To figure out the acceleration plan and provide us some motivation, we went ahead and looked at our mortgage amortization schedule. It’s definitely a mouthful to say, but important to analyze. We wanted to run the numbers to see what we’re up against.
I wasn’t quite familiar with it before we were house hunting so I looked it up. Amortization is basically the method that lenders use to allocate payments of the life of the mortgage that takes into account the principle and the interest. For a fixed rate mortgage (like we have) the payment amount remains constant over the life of the loan.
Our Mortgage Acceleration Plan
I decided to run the numbers and see what we could come up with. We wanted a mortgage acceleration plan that was sustainable and had some impact with the mortgage.
We decided to look at our much of our mortgage payments this year were actually going towards paying down the principle. Seeing how it was only around $150, we decided to use that as a guide for our acceleration payments.
If we continue to pay $150/month extra towards principle, our 30 year mortgage will become a 20 year mortgage. That means we’ll save $42,408.57 in interest payments!
If we continue to pay $150/month extra towards principle and put down our $8,000 tax credit, our 30 year mortgage becomes a 18 year mortgage. That means we’ll save $55,113.56 in interest payments!
Your Mortgage Plans
How about you? If you’re a home owner, what kind of mortgage did you get and why? If you’re planning on buying a home, what options are you looking at?
Have you thought about refinancing from a 30 year into a 15 year? Right now checking out the current mortgage rates may very well save you money now with monthly payments and over the long run with interest saved.
Photo Credit: Horia Varlan