Pay Off My Mortage Faster? – Here Is My Plan.
I have finally decided to dramatically reduce the time I take to pay off my mortgage. But first, a little background : I bought my house three years ago and took on a $439,000 mortgage. For my last statement, it turns out that I have still over $428,000 left on my mortgage. As most would know the math of mortgage, in the beginning years of your mortgage, only a fraction of your monthly mortgage payment ends up going to pay down your principal. The rest (or rather the bulk of it) goes mainly to paying the bank in the form of interests. It is only in the later stages of the life of the mortgage that more of your monthly payment goes to your principal payments.
I clearly recalled that during the closing of my house, the mortgage person said that at the end of my mortgage payments, I would have paid an amount that was almost double the price of my house. Yikes! Even if my house value doubles in 30 years, I would have actually made close to nothing.
Hence, I decided that I am going to pay off my mortgage as soon as humanly possible. I have never had any credit card debt and I really hate having a mortgage to think of every month. So I did a bit of research to find out how I could reduce the time to pay off my mortgage short of paying it off lump sum. Here are the options that were available :
1. I could increase my payments from a monthly payment to a bi-weekly payment. – By doing so, the math works out that we can take six years off our usual 30 years of mortgage payment. However, our cash flow is such that doing a bi-weekly simply does not makes sense for us.
2. Refinance – Our mortgage is presently a 30 year fixed rate at 6.25%. Presently, the 30 year rate is about 6.17% for a conforming loan. My present mortgage is considered non-conforming ie above $417,000). Hence, refinancing does not make sense even if it were for a 15 year loan.
3. Paying a principal lump sum at the end of the year – That could work but psychologically, I do not like having to pay a lump sum at any time.
4. Paying extra principal payments monthly together with my mortgage payments – I have decided to actually take this route. Because of our situation where our income has increased, we are able to make that extra payment we want towards our mortgage payment.
This is how the math works out. Presently, we are paying :
Current Monthly Payment = $3,327
Interest = $2,236
Escrow = 560
Principal = $$491
By adding an extra $1,000 to my principal every month, my mortgage will be paid off in 2022, about 13 years earlier.
But shouldn’t I invest and save for retirement instead? – Well, that may be the correct thing to do since I’m only paying 6.25% on my mortgage. Having said that, we have enough cash to actually put to work in our retirement accounts and extra savings in the taxable account as well. So we are still saving. And here is the thought process. If I am able to save and pay off my mortgage faster, why not have the best of both world. In fact, the faster I pay off the mortgage, the more disposable income we will have after we pay off the mortgage.
But as I mentioned before, I really hate having any sort of debt and while most look at their house as an “investment”, to be, it is a place to stay. In fact, if I could pay off my debt tomorrow, I would certainly do so.