Accelerating Our Mortgage Payments to Save $40K!
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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 principal 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.
Notice how little of our first year's payments are going 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 at the beginning of your loan.
As the mortgages draw to a close, the payments increasingly go 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.
Amortization Schedule
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 on 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 homeowner, 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.
I went this path and it’s a great way to go!
Before my son was born, my wife and I would pay double payments! I was great to see the 5 to 6 months being shaved off the mortgage with each payment at the beginning! Good luck, it was a best path for me! After my wife stopped working to raise our kids, we tapered back the monthly payment to 1.5 times the amount owned. Our spreadsheet was my my best tool in paying my mortgage off early! I had it so that in additional to calculating the interested saved with each extra payment, it would also calculated the months shaved off too, and it was would do this automatically 🙂
Good luck, and keep working that spreadsheet!
@Money Reasons: Thanks for the encouragement! We’ve had a mixed reaction from some people. Many do agree that paying off sooner is a great goal, some, though, think keeping it for the tax advantage is the way to go. To each his own, we’re focusing on eliminating this debt and increasing our cash flow when it’s paid off.
Here’s a thought. If with month 1 payment, you sent exactly $148.69 (the next month’s principal), you’d get to cross off month 2. You are now a full month ahead. Next month (line 3) you pay $149.93 (mo 4 prin) and so on. The beauty of this is that you can track your progress with no calculator and are on track to pay in 15 years. Keep in mind, as time goes on, the extra amount will keep creeping up, so in the early years, if you ever make payments to get ahead by two months or more, it would help. At some point, you may not be able to go ahead a full month, paying half the extra can work, too.
I’d just offer caution.
(a) one should not prepay their mortgage if they carry any credit card debt month to month, that goes first.
(b) Matching 401(k) should be a priority, before prepaying.
(c) If you see rates rise (remember 10% treasuries?) abandon prepay and load up on government bonds.
(d) It’s easy to prepay, not so easy to get it back. Be sure to have the emergency fund before paying down the mortgage. You can have 2 years left on the mortgage, but no job and no savings can still force you to leave the house.
@JoeTaxpayer: You bring up great points of why NOT to prepay. There is one that I don’t see mentioned here or missed by most others. The inflation rate:
http://investorjunkie.com/5016/prepay-mortgage/
@Elle: I sort of counter your argument to not prepay. Especially if you look at the average inflation rate for the past 100 years. In my family’s case the real mortgage rate and average inflation rate is the same, so we are best off not to prepay.
@JoeTaxpayer: We’re hoping to increase payments as our income grows, but I wanted to run the numbers with the lower amount. Good points on prioritizing your finances. We’re fortunate to not have credit card debt and my husband definitely invests in his 401(k) to get the match.
Prepaying the mortgage has opportunity costs that everyone has to weigh for themselves.
Elle, it’s so fun and addicting to pay extra principal yeah? This is the key right here:
“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!”
I’ve matched mortgage duration with the expectation of ownership. I’ve got rentals that are 30 year fixed which I plan to pay off in 15 years, and 20 years, respectively. The house I live in I have a couple yrs left on an ARM at 4.625% that resets to 3.25% if it was floating today! Schucks. At any rate, I don’t plan to sell my house in 8 years, so don’t care about a long term fixed loan.
Every chance I get, I pay extra principal. Even if it’s just $20 bucks here and there walking by the bank.
Fantastic plan. We are doing a refi to cut our 30 year mort into a 15… taking advantage of lower rates to help absorb some of the payment increases. But hopefully we’ll be able to attack it even more aggressively as we move forward.
Good luck!
Dave
Congrats on your new home!
I am wondering how you got your lender to agree to accept an additional principal payment mid-month. I have never heard of a lender agreeing to this. Will you elaborate? Thanks!
Elle,
We paid extra on our mortgage each month from the beginning and I highly recommend it. We are on the 20 year plan and will be done in about five more years.
We also heard it was a bad investment from the NPIO (Never Pay it Off) types, but we ignored them. Unfortunately, many of them have recently lost their houses by continuously refinancing. I am looking forward to a lot of freedom and flexibility after our house is finally paid off.
Good luck with your plan. I think it’s a good one.
Bret
Definitely pay off the house. Such a great idea. All of those people wouldn’t consider borrowing at 5% to invest, but they think paying the interest on the house is a great idea while investing for the tax deduction. It’s crazy.
How about an update on your progress thus far?
Here in Canada there is no tax deduction for your mortgage so there’s far less incentive to keep it. The only folks not attempting to pay it off fast are those who simply cannot afford more than the minimum or those who are convinced they can may way more on their investments.
I don’t know if it’s not allowed or just uncommon but I’ve never heard of anyone here having a 30yr mortgage, or rather a 30yr amortization. We were asked if we wanted the 25yr or something faster. We picked 20yrs, and then more importantly selected to pay every two weeks (not to be confused with twice a month). That move alone shortened our 20yrs to 17yrs 5mths and saves us $24.3k in interest. Before leaving the bank we also had them round up the minimum payment to the next even hundred dollars. It meant we were paying an extra ~$55/payment and every bit helps. In addition at least once a month we throw some extra at the mortgage and in the end we’ll have it paid off in a little over 9yrs instead of 20. I don’t think our mortgage terms are unusual here and we’re allowed to make extra payments anytime we want, as often as we want and the only limitation is that in a calendar year we can make extra payments to a maximum of 15% of the original amount borrowed.
We’ve paid a little over $20k on the principal of our house in 9 months. Our balance today is at what it should have been August of 2012. I must admit that I’m literally addicted to paying down this mortgage. We are blessed with a good income, but we live below our means without compromising essentials. As of this month, I’m (we’re) pretending that our 15 year@3.75% mortgage is a 7 year mortgage, which means that an extra $1,400 will go into the mortgage principal. Our mortgage lender is Chase and I can make extra principal payments online as long I’m current on the monthly payment. If it all works out, I’ll pay our monthly payment 15 days before its due date and on the first of the month I will pay the extra $1,400. Honestly, I’ve made principal payments of as little as $7.35 because for me, any extra amount I send will get me to pay off this mortgage a little bit sooner.