As another year comes to a close, people will reflect upon their successes and failures of the past year. They will also look forward to 2014 and set goals for what they hope to accomplish in the new year. Having turned 40 over the weekend, I’m taking a bigger picture approach. I started reflecting on my life in terms of decades.
I spent my entire twenties and half of my thirties being financially irresponsible racking up $109,000 of credit card debt. The second half of my thirties was spent recovering, paying off that debt through the help of a debt management plan. As I enter a brand new decade of my life, and with only three payments remaining in our debt management plan I wanted to find a financial goal that would make an impact.
I instantly thought of the fact that Vonnie and I are currently working through refinancing our home. We are going through the final set of paperwork and will be setting a closing date soon. More on this adventure in an upcoming post, but to make a long story short the mortgage we were approved for was a 30 year mortgage.
If we paid on the loan for the entire term we would pay our house off at the ripe age of 70!!
Our mortgage payment is our largest monthly expense, currently eating up about 22% of our monthly net income. I can’t imagine handing out that much of my monthly income for 30 more years. I also can’t imagine that I’ll be working and earning the same income I am now until I’m 70 years old.
Vonnie and I have had several discussions about what to do with the $2489 influx into our budget starting in March, and paying our mortgage down faster would seem to be a great place to apply some of those funds. I started plugging numbers into a mortgage repayment calculator:
- Adding $300 to our monthly payment would pay off our mortgage in 20 years.
- Adding $700 to our monthly payment would pay off our mortgage in 15 years.
- Adding $1200 to our monthly payment would pay off our mortgage in 10 years.
I was amazed to find that we could shave 10 years off of our term by throwing $300 extra per month towards our mortgage.
Vonnie and I agreed that we would add $300 a month from the beginning, essentially acting as if that was our monthly payment. Even though the term of our mortgage is 30 years, we would be treating it as a 20 year loan from day one. Ideally, I’d like to go with the 15 year option. However we need to evaluate our retirement and college fund contributions first.
Have ever looked into the impact adding a little to your mortgage payment each month would have?ย Do you have a financial goal for the next decade and beyond?
Glad to see you guys are thinking of how to put that DMP payment surplus to good use once plan is complete. The ‘experts’ will tell you otherwise given the rate you likely got, but I think putting a big chunk toward your mortgage is a great plan. We paid off our mortgage in 2002, and, for us, I think it was the single best financial decision we’ve made.
Best wishes for a successful 2014, it’s going to be an exciting year for your family with the DMP completed early on!
I could identify with that argument given how the stock market is currently performing vs mortgage interest rates…but stock market performance is not a guarantee – plus the prospect of having a mortgage payment after I reach retirement age just scares the bejeezus out of me.
2014 is going to be such an awesome year….can’t wait to get it started!
We have the same goal; to pay off our mortgage ASAP!!! Good luck and congrats on finishing the DMP in a few months!!!! ๐
Thanks Stephanie, and good luck to you on your mortgage as well! It’s hard to say ASAP for me given that we’re essentially starting the clock over….but I’m hoping to finish it off much sooner than even 20 years. Thanks for reading!
I’ll admit right up front I don’t fully understand the differences between the rules and terminology of Canadian vs US mortgages. So that leaves me curious.
When you say a 30 year “term” is that really what it’s called there or do you mean a 30yr amortization – the length of time over which your repayment (principal and interest is spread)? Here term refers to the length of time your interest rate will apply which is completly unrelated to the length of time you’ve amortized the mortgage. During the life of your mortgage amortization you will generally have several terms. For example you can have a 5yr fixed term with a 25yr amortization. Meaning your interest rate will be unchanged for the next 5 years, and the payments are calculated based on repayment over 25 years. Therefore you’ll need 4 more renewals of 5 years each before the end of the mortgage (at 5,10, 15 and 20yrs). A 5yr term is only one of many options – you can select a term anywhere from 6mths to 10yrs at most lending institutions, the longer the term generally the higher the interest rate. It becomes a bit of a betting game to choose the ideal length of time vs what will be the going interest rate when you come up for renewal. Some people always take the shortest term to get the lowest rate, others commit to a higher rate so they know what their costs will be for many years into the future. When you get a mortgage in the US is the rate actually fixed for the entire 30yrs and never up for renewal at current rates? Is this where your refinancing negotiation comes in? For us you have the option to refinance during the 5yr term example, but there will be a penalty involved. If the interest rates have dropped well below the rate you committed to for 5 or 7 years, then even with a penalty it may still make sense to refinance to take advantage of the lower rate. A slight drop in interest rates probably would be consumed by the penalty of renegotiating.
The problem as I see it is that most people get completely fixated on the interest rate and forget that it’s only one component determining the cost of purchasing the house. A 0.5% swing one way or the other sounds huge but in reality it can have far less impact on your total costs over the life of the mortgage than getting great repayment terms, yet most people don’t know they should ask about those before signing. Normally, mortgage here include three options to speed up the process (and thereby drastically reducing the interest cost of a mortgage.
1. lump sum repayments. I think this is what you are looking at with your mortgage. My mortgage allows me to make additional payments beyond my normal payment anytime, any amount, any frequency as long as the total in the calendar year is no more than 15% of the original amount of the mortgage (so up to $15k per year on a $100k mortgage). Since my mortgage is with my bank I can go online and in 30 seconds request a transfer from my chequing account to my mortgage for a few dollars or a few thousand, whatever we have available. There is a delay of a couple of days before they actually pull the funds from the account as they need to confirm that I still have headroom in that calendar year for another contribution, but the process is painless.
2. increase the frequency of your NORMAL payments. Even if you never make an additional lump sum payment this one feature knocks years off the length of a mortgage. Most people take the standard monthly payment, but again that’s only one option. There are also biweekly and weekly options available. Don’t confuse biweekly with twice monthly they are completely different. Twice a month means they take the monthly amount and divide by two which I suppose helps align payments to pay cycles. This means 24pmts per year instead of 12 monthly pmts. Biweekly payments means every two weeks or 26pmts per year and are slightly higher. This is where the magic happens. Two extra payments a year can painlessly knock years off your mortgage and tens of thousands off your interest costs. I just ran a few scenarios on the pmt calculator on my bank’s website: $200k mortgage at 3.14%, 25 years paid monthly will cost you $88, 244.87 in interest alone. Change only the repayment schedule to biweekly and the morgage is paid off part way through the 22nd year and the interest is down to $76,791.86 a savings of $11,453 just for changing the frequency of your regular payments.
3. Increase the amount of your NORMAL payment. The payment quoted by your lender is only the minimum you must pay, but the terms of your loan should allow for increasing the standard payment. Before you make your first payment at the very least round up the payment amount to the next even $100. I few extra dollars on every payment probably won’t be noticed, but make a huge difference over time. in the example above the normal payment for the biweekly amount would be $480.46. If the interest rate at renewal time drops, never drop your standard repayment, keep it the same as always but now more is going to pay off the principal. Some people prefer to keep the standard payment as low as possible and make all extra payments as lump sums when they feel they can afford it. If you barely qualify for your mortgage this is probably sound logic, but if you’re commiting to a mortgage that doesn’t put you under duress, you can probably round up at least a few dollars (and it’s that much easier to enter the payments into your spreadsheet!)
When we signed for our first mortgage we picked biweekly payments and rounded up the regular payment to the next even $100. A year later we rounded up another $100. Once we got our fiscal heads on straight we realized we weren’t taking full advantage of the lump sum option nearly often enough. We’d wait until we’d saved up a sizeable amount and then make a payment, but if you do the math it’s better (if the terms of your mortgage allow it) to make smaller more frequent payments as you find small amounts of money. You’re also less likely to spend those funds if you quickly get them out of the account and applied to the mortgage. The interest calculations going forward are based on the remaining balance so the sooner you pay a bit down the better.
Just for interest sake, in Canada recently the laws changed and now 25 years is the maximum for a mortgage. The logic being that if you can’t afford to pay it off in 25 years, your committing to too much mortgage. Those who live in ultra expensive realestate markets feel this rule change more than most since the only way many people can buy in Vancouver or Toronto is to spread it over a longer period of time. I have never known anyone to take a 30yr mortgage, but it seems to be quite common in the US based on my reading of US-based PF blogs. Maybe that’s because we can’t write off our mortgage as a tax deductions, so there’s really no benefit to dragging it out any longer than necessary!
I’ve had some mortgage conversations with other friends in Canada, and it’s always interesting to hear how mortgages work in other countries, JMK. In the US, the term and amortization are the same thing. So when I sign the papers for a 30 year loan, the interest rate is in effect for the full 30 years. Sometimes people will refinance (ie, essentially redo the mortgage) their homes because interest rates of dropped significantly. A person has to be careful though, calculating how long it will take to recoup the cost of redoing the mortgage (loan origination fees and closing costs are thousands of dollars) by taking on a lower interest rate. I do have the ability to make additional principal payments at anytime, and there is no penalty for paying the loan off early. There are other options, but the most common mortgage terms in the US are 10, 20, and 30 years.
I really have no idea about stuff like mortgages, but it seems to make sense to me that if you are already putting money towards debt repayment and don’t miss it, then you can use some or all of that towards the mortgage repayment to pay if off early. How was that for great advice? loll
I think it’s GREAT advice, Tonya! ๐ That’s exactly why we’re doing it from payment #1. Since the new mortgage will coincide almost exactly with the conclusion of our DMP, we can start off by paying the extra immediately, an we won’t ever miss it. BAM, 10 years off that mortgage! ๐
Great idea to plan for the decade. Extra money now towards the mortgage is another great idea. And not putting all your extra money towards the mortgage I believe is smart. When you see the mortgage balance get smaller more quickly, you will get excited. 12 years ago we sat down, decided where exactly we wanted to be when the 1st of us reached 62, and mapped out exactly what we had to do to get there. We planned for contingencies thankfully but unfortunately more came at us than planned for. Oh well, that just means it may take us a year or 2 more. Short- and.long-range goals/planning can be daunting and also liberating. Good luck!
I was hoping someone would comment on the fact that we aren’t applying a larger amount of our soon to be extra funds to our mortgage. The thing is, we’re a little hesitant about exactly what we’ll do with the funds. We want to increase our monthly budget somewhat, as we’ve been strapping ourselves for almost five years….but then we question ourselves by asking, “Are we just authorizing ourselves to lifestyle inflation when we really don’t have to?” Then we ask, “But don’t we deserve just a little bit more if we can afford it?” It’s a little maddening. In the end, I think between the extra mortgage payment, retirement, college funds for the kids, some extra to our emergency fund, and a “little” bump to the monthly budget the funds will be consumed. We have a lot of catching up to do with our retirement accounts. ๐
Thank you for sharing your perspective on long term planning…I love that you were detailed enough to map out where you want to be at 62. The first step in being successful with a goal is to define *exactly* where you’re going. Thank you for stopping by, Kathy!
I’m on the same boat. I believe I wrote to you in 2012 to say that I’ll be paying off my home in 6 years. You asked me to tell you when that happens ๐ So far, I’m on track. It’s a long road as anything can happen to derail me, but I’m chugging along. I used the Mortgage X calculator to help me count down the months and I can see the amount of interest per year. I can’t wait to look back in 2018 when I can write to you again. I know people talk about the accomplishments after they’ve paid it all off. It’ll be nice to read about your story as you go through the motions and seeing how you manage while keeping your eye on the goal.
***Hey Travis–when I said I wrote to you, I meant to EOD ๐ It was when I first signed up to receive EOD feeds.
That sounds familiar, Mrs. H…it certainly could have been me that responded to you. I took on the role of “feature writer” mid-2012. That has to feel awesome to be just a few years away from paying off your home. I try to imagine walking into my home knowing that I actually OWN it as opposed to the bank owning it and I’m just making payments. Thanks for the update, great to hear that you’re still on target with your goal. I hope you’ll keep reading to see how Vonnie and I do managing our funds….I’m sure it’ll be entertaining, and hopefully helpful?!? ๐
We are SO living vicariously through you guys right now!! The minute our consumer debt is paid off, we are going to start kicking our mortgage to the curb. Can’t wait! So excited for you guys that you are dumping yours early too – yay!
Laurie, it sounds strange to hear someone say they’re living vicariously through us….for so long we’ve been the one’s marching towards the horizon wondering if we’d ever get there. But here we are…We make our next payment tomorrow (12/31), and then there will only be TWO payments left. Unbelievable..keep marching!!!
Happy belated birthday, Travis!!!!!
Good for you, for wanting to pay off your mortgage early! Good luck with this awesome goal ๐
Thank you Mackenzie, it was truly a memorable birthday. I love to work towards big goals, the mortgage just made perfect sense! Thanks for reading!
I know the math behind the case to invest extra money verse paying off the mortgage early but I really like the idea of owning my house free and clear. I bought my current house at 36 years of age and got a 15 year mortgage which has been a little tight with my 15% 401k contribution and stay at home wife but I blinked and 8.5 years later I can see the light at the end of the tunnel.
I will probably pay off even earlier when the payoff amount gets down to 30k or less. Even though the market has done very well I have never regretted my decision and can not wait to not have a mortgage payment.
Congrats on your debt progress and good luck with the next phase of your financial life.
I bet that will feel great getting that house paid off, Scott……it’s so much easier to keep plugging away when you can see that finish line! Thanks for the well wishes, and hope you’ll keep reading to see how the next phase unfolds for my family and me!
I would LOVE to build equity quicker in my home, but right now I am more focused on building an emergency fund and paying down student loans. If we didn’t have student loans I could definitely see myself putting a few hundred extra towards our mortgage. $300 isn’t a ton of money relatively speaking so I’m definitely challenged by this post to contribute more when we pay off our student loans.
Happy New Year to you and your family!
Having an emergency fund is the first step in financial stability, DC…it took me a long time to figure that out, but as you can see from my Friday roundup posts, I’ve finally figured it out. Come March we’ll have the funds to save for retirement, work on that mortgage, and build the efund simultaneous – the perfect financial trifecta!!! ๐
I am totally with ya. I hate having a mortgage payment. Unfortunately, we close on our new house on Monday and are starting a new 15 year mortgage over! Fortunately, the payment is small and we can pay more than the minimum without sacrificing our other financial goals.
That’s exactly what we’re doing ,Holly….just because the bank only would approve us for the 30 year term doesn’t mean we can’t pay extra and get it done early – congrats on the new house!
Love the long term (decade) thinking. I have looked at our mortgage and how extra money would reduce the years on it, but we like you are finishing up paying off $109k in debt. We will have that finished in 11 months. After that we are bumping up saving and colleges funds, so we are a few years away before attacking the mortgage. Best of luck in 2014!
One step at a time, Brian, and you’re moving in the right direction…keep going! Thanks for the well wishes – here’s to a great 2014 for us both!
I’m just hoping to start saving enough for a downpayment. Would love to be a home owner someday!
Keep on saving, Stefanie – then when you pull the trigger pay it off as fast as possible – the amount of interest paid over the life of a mortgage is CRAZY!
Go for it. Get that mortgage paid off asap. I don’t know what exactly happens when you make that your goal, but I’ll tell you our experience. We did the typical things – went into debt with undergrad/grad school loans. Bought a “starter” house, had a couple of kids and a car loan, blah, blah, blah. When we finally got our youngest thru college (debt-free) we thought yay! We can FINALLY start spending our money on getting this mortgage paid off. So we made a goal of paying $4K/mo towards the mortgage. The very nano-second we did that “Muphy’s Law” hit – within the first 5 months we had over $25K in unexpected bills (yes, really unexpected bills – funeral expenses, medical expenses, dead cars, etc). But we just decided we WOULD throw $4K/month at the mortgage – no matter what. We didn’t really think we could do that, but we were going to give it our best shot. So, after 12 months did we actually throw $48K at the mortgage? NO! We didn’t. We just added it all up and we actually threw $51K at the mortgage. Still not sure how that happened, but it did. And we never felt deprived. It still has us shaking our heads.
Just make a goal, write it down, start working towards it, ignore what financial difficulties life will throw at you (not ignore per se, just don’t let them get you side-tracked), hold on for 12 months then open your eyes and see where you’re at. It’s amazing!!!!!!!!!!!!!! Not kidding.
Your comment reminds me a lot of my parents, Jim. That’s exactly how they live – they have goals, and if something comes up, they NEVER let it derail their goals. Somehow, someway, they find a way to handle the unexpected expense, and keep their goals on track. Thanks so much for sharing!
Travis,
It sounds like you’ve been blessed with very wise, hard working parents. Good for you! (good for them). Set your goal (please just do one at a time, too many makes things crazy), WRITE it down with the love of your life (together you will make sooooooooooooooo much more progress than you will alone), start doing it, don’t get distracted, close your eyes and then open them (together) in 12 months. You’ll be amazed! Best of luck.
I don’t know how I missed this comment, Jim, but what a great idea…..put the goal in an envelope or something – and it’ll be some kind of time capsule. Thanks for the idea!
Sounds like a great plan. Congrats on being so close to consumer debt freedom!
Hmm, wonder how quickly that mortgage would die with an extra $2489 of principal each month. I’d want to do that calculation too, even though I think your plan is fine as is. Retirement first, college for the kids second, and then mortgage prepayment.
Petunia,
Perhaps I should have clarified. We already put our kids thru college (debt-free) and have been saving for retirement for years, so we did do it in the order you suggest. We didn’t throw the extra $ at the mortgage until those other categories were taken care of.
I plugged it into the mortgage calculator…..we would pay off our home in 6.5 years. Wow, that would be awesome! Great to hear from you again, Petunia 100!
Long term goals scare me because I’m weird about commitment. Your goal is aggressive but it’s totally going to be for the greater good. I wish you luck even though you don’t need it because I know you will rock it out. Can’t wait to read more about finding extra cash to pay off your mortgage in 10 years.
I Love a good challenge, Tahnya, and any progress made towards paying off our mortgage early will help us with our long term financial goals – it should certainly make for some great posts! Thanks for stopping by!
Again, can’t wait to read your “We’re debt FREE” post!! I would like to pay off my student loans and my mortgage in the next 3-5 years. I’m just over them.
After awhile staring at a stack of bills from different lines of credit just makes a person reflect upon why they keep having to get up and go to work each day to give their money to someone else. I want to keep ALL my money! ๐ Good luck on your quest to eliminate your debt, Michelle!
I think that’s a great use of your money. I’ve never,ever heard anyone say they regretted paying off a mortgage. We plan to pay ours off in 4-6 years, 10 at the absolute most. My in-laws lost their house to foreclosure after living there for 20+ years, so I think that makes me very anxious to pay it off long before we get close to retirement age.
That would suck losing a home after paying on it for that long, Kim…..great motivation to pay it off as soon as possible. Your comment sounds like one of those facebook memes….”I wish I hadn’t paid my mortgage off early. Said no one EVER!” Haha..maybe I should create it!
Awesome goals! I’m working on my goals for 2014, and I’m not sure if we should start paying off our mortgage. We got a 15 yr mortgage at a 3.7% rate. Experts would say invest in the stock market. But it would be great if we could reduce the mortgage term to 10 yrs.
Experts would say to invest….but only because the stock market is currently performing at better than 3.7% which is not a for sure thing. Paying off your mortgage IS a sure thing if you throw extra money at it. I dunno, I’m more of a “sure thing” kind of guy. ๐ Thanks for sharing your thoughts!
The key is diversification and moderation!
Our mortgage (obtained 5 years, 10 months, and 3 days ago at $340k) will be paid off in 4 days! and I’m exited. I had to contemplate the stock vs. mortgage payment options, but decided FOR the mortgage early pay off because:
1. like you said, the ROI on the mortgage IS guaranteed (and stocks are more risky)
2. I’m already heavily buying into stocks via our 401k and IRA (both maxed out)
so, going back to the diversification comment i made above…..although the mortgage is a gaurantee return, and stocks aren’t, you don’t want to miss out on a potentially high return that stocks ‘might’ produce. for that reason, i’d recommend doing both….although the ratio would change depending on your preference. (ie. our ratio is about 25% into stocks via 401k/ira, and about 75% into mortgage)
Anyway, wishing you the best of luck.
Thanks for the detailed advice, Sam. I am actually doing both – we are paying extra to our mortgage and investing in our future. Great advice, thanks for stopping by!
Awesome! I’ll have to look for the updates here as I found this thread about a year late. We started our mortgage payoff journey on Jan 1st, 2013 with a balance of $177,650 spread across 3 mortgages. We are one payment away from paying off the second of three houses. That will leave us with a balance of approximately $63,000 on the last house. It has been just under 24 months and we’ve paid off $109,000.
I blog about it to keep myself accountable and read the experiences of others to keep myself motivated. I’ve watched the stock market zoom to record highs over the past two years and yet I am content with the guaranteed interest savings (return) of 4.375%.
Carry on! I too didn’t want to be paying mortgaged in my 70’s. Yuck!
I haven’t done a mortgage update in awhile, Curtis…maybe it’s time to do one! Sounds like you’re kicking some ass paying off those rentals, I’ll have to check out your blog and see what you’ve got going on over there. thanks for stopping by!