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?
Prior to re-financing a year ago, I was making extra payments on our 30-year note. My goal has always been to have the house paid off prior to the anticipated starting date of our kids attending college, which should be in 2027. The 30 year note would have come up in 2037 had we done nothing, so the extra payments were cruicial to the plan. However, the re-fi that we did last year is a 15 year, so the base payments would put the end date in 2026, a year in advance of my date. So, for now, there are no extra payments. At some point, it is something we might consider assuming our income starts rising again at some point!
THat’s a great plan beagle, and was one of the reasons that I pushed my wife to get a 15 year. If we had kids at some point, the note would most likely be paid off before they entered high school, even if we did nothing. Making pre-payments will only speed up the process.
I’m definitely planning on paying off my mortgage sooner rather than later. Although I have a 30 year loan, so I have some more time.
I want a snow cone!
We did have a prepayment plan, but when I left my full-time job a few years ago and money was tight, we veered from that course. Now that we’re hoping to be out of this house in the next few months, we’re holding back the money for the down payment on the NEXT house instead of paying down our current mortgage. Like you, we want that loan to be for less than 30 years… maybe 15 or 20, depending on rates.
2 Thoughts:
1) I am afraid of systematic prepayments like you describe because of lack of liquidity but that is just me.
2) If I remember correctly you have some debts that you actually seem to detest, right? Why not focus on those payoffs first?
Your plan sounds nearly identical to mine! I actually make three payments a month. The regular payment, plus an extra payment to round that off to $500, and then a third payment of $500. It helps that I get paid twice a month, and just plan on taking $500 of each check to put toward the mortgage. I also use any bonus I get in December, plus tax refunds to pay on the house. So far, all has panned out well, and I’m just hoping things continue the way they have. Instead of paying for 30 years, we have cut it back to 3.5 years, which to me is outstanding.