Well, we’ve officially been homeowners for three years now, and I’m proud to say that our house payoff plan is still going strong (see our 1-Year and 2-year “House-iversary” posts for some background). In three years, we’ve paid just over 20 years off our mortgage! It’s surreal to be in the single-digits, but at the same time it feels like we still have a long, long way to go. So how does one keep the financial furnace stoked when your goal is so long-term? Through the wonder of fiscal nerdery!
Toward the end of 2012 I found myself scrutinizing our budget spreadsheet and mortgage graphs (yes I have multiple graphs, remember the nerdery?). With those numbers, I concocted three “levels” of mortgage payment; the three basic ways homes get paid off. For fun, I applied those levels to our own situation to come up with some hypothetical scenarios of what might have been. We’ll start with a graph to give you the total picture. Read on for the details. Perhaps you’ll think of a ‘might have’ you might like to try.
Scenario 1: The Normal (aka “status quo”)
Our mortgage payment is $1,200 per month; $757 for principle and interest (P&I), the rest for insurance and taxes. Over three years, if we had followed the strict terms of our 30-year mortgage thus far…
- Total Paid: We would have paid a total of $43,200 in mortgage payments.
- Amount on Principle: Approximately $6,600 of that total would have applied to the principle of our mortgage. That’s just 15% of what we’d have paid out. Ouch.
- Bottom Line: Mortgage debt reduced by a paltry 5% of the total loan.
Scenario 2: The Bi-Weekly
The first level to accelerate mortgage payoff is both easy and effective, and the one most folks are familiar with. In a nutshell you set up bi-weekly half-payments instead of monthly whole ones. Those 26 half-payments add up to 13 whole payments, or one extra monthly payment per year. It’s as painless as it gets, but still packs a punch. Make it automatic through your bank (it should be free to enroll) and you’ll likely barely notice the difference but you’ll pay off a 30 year mortgage in 22 to 25 years, and save $10,000 to $40,000 in interest (or more) depending on your loan balance. If we had followed this plan…
- Total Paid: We would have paid an extra 3 full payments so far, for an additional $3,600 dollars tacked onto the ‘normal’ figures above. A total of $46,800 in payments.
- Amount on Principle: Approximately $10,200 of that total would have applied to the principle of our mortgage, a more reasonable 22% of what we’d have paid out.
- Bottom Line: Mortgage debt reduced by 7% of the total loan, a decent improvement over the ‘normal’ track.
Scenario 3: The Berzerker (aka “Go Big and Own Home”)
Past bi-weekly, all further levels are really just one big level, there aren’t any tricks from here out: Pay whatever you can above your regular monthly or bi-weekly payment, period. Every dollar beyond that minimum goes right to principle (make sure you designate it as such on your payment voucher, or online portal, whichever you use).
We’ve chosen to try to pay off our 30-year mortgage in just five years. Admittedly, we’re an extreme case for a couple with under a six-figure combined income. We routinely make triple or quadruple payments, our largest being eight times our monthly P&I amount. It makes for a very tight budget, but by living simply and getting rid of all other debt first, it’s very doable and the results are pretty incredible.
- Total Paid: In 3 years, we’ve paid a total of $117,000 in mortgage payments.
- Amount on Principle: Approximately $74,000 of that total was applied to the principle of our mortgage, a whopping 63% of what we paid out.
- Bottom Line: Our mortgage debt has been reduced by 51% of the total loan. That’s sizeable, but thanks to the magic of amortization, we’ve cut an unbelievable 67% (just over 20 years) off the term of our 30 year mortgage. Truly, time is more than money!
The truth is, this is nothing but a simple, yet profound, savings and security plan. As we own more of our house (and especially once it’s paid off) we are far less at risk from changes in the housing market, our investments or our income. Fewer bills equals less to worry about should bad times come. On the savings side, the money we pay extra on our home is invested in our largest asset. Even considering the housing crisis of 2008, houses generally trend upward in value. More importantly, we’re building massive ‘saving muscles’; once our house is paid off, we could apply the monthly payment we used to send out to the bank to our own savings. Or we could go the other way; reduce our working hours and do whatever we want – more time for hobbies and travel, more time with family and friends, or the chance to start our own ventures. There’s a whole lot of freedom in these kind of margins!
NOTE: It should be understood that it is not a good idea to pay extra on a mortgage until/unless you have gotten rid of all other consumer debt (including student loans and cars), have a comfy cash emergency fund, and regularly contribute to retirement.