Like most people that bought a house 6 months ago, H and I took out a mortgage. We put down 20% of the payment to avoid PMI, held some cash back for renovations that we’ve been doing for the last 6 months, and have simply paid the minimum payment on our note since we had to start making payments in June. While we are seeing the needle move in a downward direction, it’s not going down as fast as I would like (read, 100% of the payment isnt going to principal) so H and I figured that once January 1 rolled around, we’d start paying it down with gusto. The situation is not terrible, as we’ve got a 15 year note, so at the moment about 50% of our payment is going to principal, as opposed to much less than the 30 year. We also got a super low rate, which helped in this area as well.
There were plenty of ways that we could go about doing this, either deciding to put extra income toward the loan, or making a payment X dollars above what we owe every month. Aside from a few small projects that generate a pitiful amount of income relative to the time that gets put into them (both from me and H), we decided that wasnt the best way to accomplish the goal of paying off the mortgage sooner. While paying an extra X dollars over the amount made sense, I thought that it could be taken too literally and we’d be easily able to say “well, we’ve got X, Y and Z going on this month, so we should save for that instead”.
Just for some fun, I did a bit of number crunching:
If we paid $100 extra every month (about 10% of the monthly payment), we’d save ~4,300 in interest and take 1 year and 10 months off of the loan.
If we paid $250 extra every month (about 25% of the monthly payment), we’d save ~9,000 in interest and take 3 years 10 months off the loan.
If we paid $500 extra every month (about 50% of the monthly payment), we’d save ~14,000 and pay off the loan 6 years earlier. Thats more than 1/3rd of the loan term!
After that I looked into the bi-weekly payment plans, and was really intrigued. I got some notices in the mail after our note got put on the county books from some organization promising to set up bi-weekly payments for us. I read through it and noticed they were pretending to be a federal agency, but really just wanted to take a bit of money for something you can easily do yourself. The more I looked at it and talked about it with H, we thought it would be a good idea. One change we made was to make it bi-monthly and not bi-weekly. Yes, I’m aware that there is 2 less checks being sent, but both H and I get paid once a month.
The numbers for making a full payment are even more awesome than those numbers above. Here they are:
If we made 2 loan payments every month, we’d save ~20,153 and pay off the loan 8 years and 11 months earlier. This means that instead of 180 month term, we would have the loan paid down in 73 months!!!
This of course, is the plan for now. I’m not saying that it will stay this way for the next 7 years because some things could change. We could lose a job, decide to move, start a family, or change our goals and use our spare cash in a different way. H may want to quit her job and open a snow cone stand (I’ve tried to get her to do this for 3 years, I’ve been shot down every time). Who knows what could happen.
I know that there’s a possibility of this not being the absolute best return on our capital for the foreseeable future. The stock market could continue increasing, generating a return higher than the 3.375% that we are getting from this plan. We are looking for flexibility in the future from this plan, and not huge returns with higher risk.
For the foreseeable future though, we will be focusing our energies on paying down the loan. The main reason that we didnt start sooner is because most of our spare cash flow has been diverted to repairs/upgrades. We are now mostly done with that (I’ll take some after pictures soon, I promise), and would like to focus on continuing to widen the gap between our appraised value and the loan value.
Readers: Do you have a prepayment or over-payment plan set up on your mortgage? Why or why not? Those of you more than 6 months into your loan, do you see any issues with the plan?