This is a guest post from Ashley at Wide Open Wallet. Her blog takes “an honest look at family finances”. Check out her site and if you like what you see, don’t forget to subscribe to her feed!
photo credit: booleansplit
We bought our house 4 years ago. The idea of taking on all that debt scared the bejeezes out of me. So before we signed the papers I sat down and figured out a reasonable amount of money to pay extra. I tried not to get crazy about it. Sure, I wanted to pay every extra dollar towards the mortgage. But I couldn’t expect my family to live with no disposable income for 10 years while I get rid of the mortgage payments. I mean, come on.
So we decided on $50 a month extra and a lump sum payment once a year of $1,000. Fine and dandy. We started it from day one. Paying $50 extra right from the get go was easy. We were excited to be in our new house and were adjusting to home ownership so really, it was actually kinda fun. (I just totally revealed the finance dork that I am. I called paying extra towards debt “fun”.) Now that we’ve lived here a while and it’s not new and exciting anymore that $50 is just part of the payment and we don’t think anything about it.
Over the years we’ve paid about $7,000 extra towards our mortgage. We should have 25 years 10 months left to pay. But according to their website, our lender says we have 22 years 10 months remaining. That $7,000 has taken three years off our loan. Wow. At $920 a month (principal and interest only) we have saved $26,000 in interest. Holy cow. Plus it let us get rid of our PMI early. I’m not even counting those savings.
I know numbers have been run showing that it’s better to invest that $50 a month. That the interest I’m saving on my mortgage isn’t as much as what I could be making in the stock market. I got one question for you, Dr. Phil style, “How’s that workin’ for ya?” I’ve been investing regularly in the stock market since 2002. At this point I’ve actually lost money. I have less money in my account then the amount I’ve contributed. I would have been better off putting that money under my mattress.
Now, I’m not saying that you shouldn’t invest. I will continue to invest in the markets. Yes, please save for retirement. But I’m glad that I also took the time, money, and thought to put some money else where as well. There were times when someone would corner me and go on and on about how I’m wasting my money by paying down my mortgage. They would have charts and graphs to show me how much less money I will have at the end of time. But so far, I’m glad that I continued to work towards my goal of being totally debt free. It’s important to have balance in all aspects of your life and money is no different.
This is such a great post. There is alot of rhetoric out there about NOT paying your mortgage down early. Well, we did, and with this economic climate we are so thankful that we did. It is so comforting not to have that bill hanging over our heads every month. I would highly recommend it to anyone who can swing it.
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So true. Mr Chiots and I started paying extra when we moved in as well. We also started with $50 per month. We have upped that now to paying a full extra principal payment each month. I’m happy to say we’re projected to have the house paid off in 2-3 years which will be 9-10 into ownership. There’s nothing more satisfying than know that I’ll own my home outright.
We also are still investing in the stock market, but like the author, we’ve lost thousands on that prospect and earned thousands in saved interest by paying extra on our mortgage. The peace of mind I have when we finally pay it off will more than make up for any lost income by not investing the stock market. Not to mention, money I save by prepaying my mortgage is actual money saved, not projected money earned like in the stock market.
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Great post! Paying off your mortgage early can be of great benefit — even if all it does is offer peace of mind because you are truly debt free. We’re hoping to refinance to a shorter term loan at these lower rates, and then pay extra on THAT to get us paid down. The only thing to watch out for in these cases, though, is the prepayment penalty.
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I completely agree with paying down the mortgage as quickly as possible. I haven’t trusted the stock market for some time now. But I couldn’t convince my husband that it wasn’t sound strategy to invest rather than pay down debt until recently, oddly enough. Even if the markets and our overall economy were sound, paying down a mortgage could be seen as a viable “investment” for part of your money. I see it as a don’t-put-all-your-eggs-in-one-basket kinda thing. But personally, I just want to be debt-free for peace of mind.
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I’m debating whether to pay down the mortgage or just stick the extra cash we would pay into savings. A few thousand won’t change my situation, being so much underwater. The general rule of thumb is one extra mortgage payment a year will knock 7 years off the 30 year term. It sounds like you’re making more than 1 extra, congrats, you’re way ahead of the game.
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Great post! I always like seeing others’ personal finances and their take on topics. It’s interesting how one topic can vary among so many people.
MrsMoney´s last blog post..My Free Living Room Makeover
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I think it’s good to diversify your investments – paying off debt is an investment as well.
ABCs of Investing´s last blog post..Setting Financial Planning Goals
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I have a different take on this but it’s because my husband and I both work for the same company. We have recently paid off all our consumer debt and have 8 years left on a 12 year mortgage (yes you can get a 12 year mortgage or any number of years you’d like!) Our original plan (thank you Dave Ramsey!) was to throw everything we had been paying on debt to the mortgage after the last bill was paid. Since then the economy tanked and now we are going to throw everything to savings (even though we have a pretty decent emergency fund.) This is to buy us more time should we lose our jobs.
Think of it this way – we pay down our mortgage rapidly and there’s only 50,000 left. Then we lose our jobs and can’t find another. We have three months of expenses – don’t find new jobs – and six months later we are foreclosed on. We lose everything we put into the house.
Instead if we throw everything at savings, maybe we’ll have a year’s worth of expenses should something happen. This gives us a year to keep making our housepayment while we try to find more work. If the house gets foreclosed on after a year, at least we won’t have so much money tied up in it.
Please don’t get me wrong – normally I’d be paying down the mortgage! But these are difficult times, we’re a bit older and we both work for the same company. I guess I’m saying you really have to look at your own situation and your own risk tolerance to figure out exactly what *you* should do!
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[...] Paying Off the Mortgage Early — a guest post by Ashley from Wide Open Wallet, featured at Remodeling This Life [...]
Great post! Thanks so much for this. I think it’s wonderful that you implemented your plan early and are already seeing the payoff, even after just four years. Good job!
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we built & moved into our house back in ’03, and as we’re self-employed (and big Dave Ramsey fans too!) we decided to finance it for 30 and pay it like a 15…we’ve been very successful in doing that, thankfully! As the months went by, we realized that we had extra discretionary $$ in our budget, and we started putting that $$ towards the house as well. Over time, we’ve never missed that money, and it’s been easier to add a little extra here and there…we’ve now been making almost 2 full payments every month (which comes out to about 3 extra principal payments) and it makes a big difference. Towards the end of last year, we realized that we had more that we could put towards it each month, but as we have baby #2 due any day now, decided instead to add that extra money to our emergency fund, and then once the baby is born, and healthy and all is well, we can just make a bigger chunk payment of the extra $$ to the mortgage. God-willing – we will pay it off in ’09, and worst case, looks like it would be 2011 – WOW!!
I can’t imagine that I would ever regret paying extra on the mortgage & paying down debt. The change in financial position & a feeling of personal liberty is just amazing! I would greatly encourage anyone who is otherwise debt-free to start saving those few extra $$s a month and plunk it on the mortgage. As you put a little bit more towards it month-by-month, you’ll never miss the $$, but it can make a huge impact!
Keep up the great work!
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Wow – great post and great comments!
I actually market a program that helps people to pay off their mortgage and debts in the quickest way possible, and do occasionally run into people who believe that paying off your mortgage is not a good thing. I can usually see merit in even opposing viewpoints, but I have a hard time with that one. Why on earth would you not want to cancel out a bunch of mortgage interest, like the author did, and pay it off a lot quicker?? Maybe they just don’t understand how it actually works, or believe that it actually can?
Or, as some accountants advise their clients, they think paying off the mortgage is a bad idea because they need the tax write-off. They have a hard time understanding that spending $1.00 (in interest) to get back (about) 33 cents (in a tax write-off) may not necessarily be the best thing to do.
And yet, what Mary said about her specific situation (and building up her emergency fund in case of layoffs) makes total sense!
It’s very refreshing to read posts and comments from like-minded (and obviously financially savvy) people. I’m glad I found this blog!
MrsMoneyMerge´s last blog post..End 2008, Begin 2009
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Oh my gosh you guys. Thanks for all the comments!
@ Susy: I love the idea of paying twice the principal payment. I will work towards that, it’s a good goal.
@ Mary: I think you are doing the right thing buy stocking it away in savings. You won’t regret it. If you need it then it will be there for you, if you don’t then you will have lots of options when the time comes. The few extra dollars you pay in interest will be TOTALLY worth the peace of mind.
@MrsMoneyMerge: I never understood the whole tax deduction thing. It doesn’t make any sense to hold onto a mortgage you don’t have to have just to save a little bit on your taxes.
Ashley @ Wide Open Wallet´s last blog post..Interview with Mrs. Money
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Thank you for this post, Ashley and thank you for all the wonderful comments here too! I am a huge advocate of paying down a mortgage early since I believe an elimination of all debt is freeing and valuable. I am so happy to see others that embrace the same value and see that being debt free sooner is an investment that takes money but pays off in so many other ways beyond just the financial aspect of it. It provides greater security, more flexibility with money and time and for my family has meant that we have so much more time to live life together rather than be slaves to long houred jobs to pay a hefty mortgage until we’re grey.
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I can’t and won’t pay off the mortgage faster. Mostly because it will create a discrepancy in my net worth. Too much skewed to the home equity and not enough in retirement/savings.
I also think there are other priorities for me. I don’t want to finance our next vehicles so rather than paying off the house, my next big goal is to save for newer cars. Ours are 9 and 10 years old so we are due.
LAL´s last blog post..Family and money
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I read somewhere a suggestion to double your principle payment each month. Then you’ll have your mortgage paid off in 1/2 the time. If $50 is going towards the principle, then add $50 to the payment. The next month, you can pay $51. It isn’t painful that way, and at the beginning of the mortgage, you are paying mostly interest anyway. Presumably your salary goes up to make the payments easier later on
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[...] Remodeling This Life shares a great guest post about paying off the mortgage early. [...]
I am thinking that with the market in the tank and having lost 30% of the value in my portfolio, paying down my mortgage is a much better investment and the gain is guaranteed, not some assumed 6 to 8% annual return. If the experts are correct and the market takes a couple years to recover, isn’t it a no-brainer to invest in the equity of your home?
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Paying off a mortgage early certainly looks appealing given the recent fall of the stock market. We would not apply more to our principle payments given our impending move, but there is a lot to be said for NOT having a mortgage.
Great post!
-HIB
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I am glad you posted this. I have been really wanting to work toward paying off our mortgage but had read mixed reviews on it.
I love the $50 a month and then an extra $1000 a year. I guess we just really need to sit down and come up with a plan.
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I’m not a great money manager and neither are the professionals from what I’m seeing. I paid off my home 6 years ago. We’ve owned it 10 years. I eliminated a 3k a month payment on a 15 year mortgage. I was very fortunate to able to do this and I’m very grateful every day. I never looked at my home as an investment; it was a place to live and raise my family. If it gained in value — all the better. When I put on a new roof, siding and windows, it was to stop leaks and keep it warmer, not to make it a showcase for flip-this-house. I’ve noticed a lot of people over the years saying that paying off your home is a bad idea. Their argument was the tax deduction and the 8% yearly return in the stock market — do I need to say anything more … Remember (and take this to heart), why on Earth would a bank that gives you a loan do *anything* in your interest? I just don’t think they have our welfare at heart, but maybe I’m jaded
Remember, they have an incentive for you to stretch that payment out as long as you possibly can. It depends on your circumstances, the location of the property, when you bought it, will it retain value, your retirement objectives, etc. If you can do it, pay down the mortgage, it will give you a hedge against future fiasco’s like we’re watching unwind right now. Of course, if your overleveraged and bought at the top, that’s a tough place to be.
Claudius.
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Hi- saw your post while doing some research. I’m not a mortgage finance specialist, but I don’t think your math regarding the $26k of interest saved is correct at all. It sounds like you are multiplying the current amount of interest that you are paying with each monthly payment times the 3yrs. Thats not quite right since any additional principle paid each month is applied to principle starting at the very end of the loan amortization schedule, when the interest-to-principle ratio flips into the area of 10% interest, 90% principle. To accurately find out the interest saved, you need to get the Loan Amortization schedule from you lender, which shows each months payments over the remaining life of the loan and the proportion of interest to principle paid each month (a gradually decreasing % every month). Then based on the additional principle you are injecting each month, calculate how many months/years you will have repaid the entire principle early and then add the interest that you didn’t have to pay in those months- however you have to start at the bottom of the loan amortization table, not the top. Those bottom months are mostly principle anyway, so your interest savings are much smaller. To really get bang for your buck in interest savings, you need to accelerate the complete repayment of the loan to about half the life of the loan, where interest is still almost 50% of each months payment. Confusing I know…just get your Loan Amortization schedule and you’ll see what I’m saying quickly.
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I guess I’m one of those guys that would corner you with the charts and graphs (I have one of those examples on my blog journey2million.com)– but actually if you are paying PMI paying down the mortgage quickly until at least the PMI is gone might make sense. However in general I think there couldn’t be a worse time to put a lot of money toward mortgage pre-payment. The home interest tax deduction, combined with all time low mortgage interest rates means that your interest savings are unlikely to exceed what you could earn with even a fairly conservative fund investment as an alternative. Some pre-payment could make sense as a diversification tool but I think it should be a small portion of available extra cash (maybe increasing with age). Check out networthIQ.com and notice how many 2 million+ net worth individuals still carry some sort of mortgage on their primary residence, even though they obviously could pay it off.
MrsMoneyMerge, the reason you might not want to pay off the mortgage and save all that interest, is that there may be an even better way to utilize your extra cash. The question isn’t whether its a better decision to pay off the mortgage quickly or blow the money on movies and fast food…but the question is whether there might be a better end result if that money were invested elsewhere. The reason the tax deduction is important is that the loss of it decreases the effective savings from paying down the mortgage, significantly enough to make other investment options more attractive. So, the analogy would be, if you’re willing to pay that extra $1 interest, you can get 33 cents back while also making an extra $1 (and probably more) through your investments. Accountants advise this because it is pretty straightforward math– if you instead invest your money and your investment beats the interest rate of your mortgage minus the tax savings (so for a 5% loan, say 3.75%) the investment is the better choice.
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