As I go through my money planning goals periodically, I try to reevaluate any strategies I’ve been using that might need tweaking or have become outdated. The one I’ve been fixated on recently is paying off the mortgage early. I would like to “give” this to myself on my 50th birthday, though I plan on working as long as I possibly can, if for no other reason than I get a lot of personal value out of my work. Since I’m turning 35 this year, that means shaving my 30 year mortgage by 15 years.
There are lots of reasons to do this and lots of reasons not to. Reasons to do it should be the interest involved. I’m shocked at the amount of interest I pay over the life of the loan, and I have an excellent interest rate. My little house is worth $120,000 (and about $96,000 of that is the mortgage on it) — but I’ll pay nearly an additional $70,000 in interest over the life of the loan. Egads! $70k is a lot of sushi. Inflation alone makes me want to pay it off as quickly as possible. Even though my payment will probably be peanuts compared to costs 20 years from now, I’d like to have as many little peanuts staying in my pocket rather than someone else’s. Ultimately, owning outright one’s own home is security. Having shelter costs covered and my student loan paid for, my required outflow drops by 30%. Add to that the fact that the boy will be well and truly in adulthood by then, and my grocery bill and expenses probably reduce my outflow by another 10 – 20% hehehe. Of course, this assumes nothing changes, and I know that. If I have health complications or I cannot maintain insurance, it’s quite possible that budget then stays the same. And I’m sure there will be instances where I help the boy as he’s in adulthood, as my mother sometimes helped me, and I would do it happily. Of course, the counterargument is those things are likely to happen anyway, and better they happen with other loans paid off so that your budget doesn’t increase. Additionally, my home is holding its value quite well, even increasing a bit in value. I live in a college town, and homes (and jobs) have never really taken a turn for the worse here. Some McMansions in hastily thrown up “suburbs” have, but not the stuff inside the town, which is where I live. My home actually grew in value by about $6000 from the time I’d first purchased it at the beginning of 2010.
Ultimately, home security for me means I have more choices than I did before. I can do more and different things with my money. I can weather poor health or unfortunate circumstances with less discomfort. I can do work I want to do that is important, not that meets some bottom line I have to maintain. Home security, no student loan, truly no debt at all, means freedom to me.
Reasons not to pay it off early include first and foremost, knowing you’re going to move within 5 – 10 years of the mortgage being finished. It might make more sense to save that money instead. It also doesn’t make much sense to me if the home isn’t holding its value or it is underwater. In that sort of situation, I think I’d rather save the cash and try to figure out how to get my money back reasonably and start with another, better valued place. Another reason would be the tax benefits you get from claiming your home stuff every year. I suppose if you think you can do better investing elsewhere with money you’d use to pay off a mortgage, there is that, too. But in this sort of market and economy, I don’t know who can really know that for certain. If there is other debt, such as credit card debt, any extra money should really be devoted to getting away from that injurious card relationship. If there is no emergency fund, ditto. I would also have to justify paying more on the mortgage instead of using that money to dump into retirement savings. This one, however, I think I can find a happy medium for. Part of my retirement plan is owning my home outright, so that all I really have to deal with are property taxes, insurance, and the occasional upkeep/repair.
Paying off the mortgage does not come before the very real divorce debt I have to cough up in five years. That comes first, or back to court we go! It also does not come before student loan debt, which by the time the divorce debt is paid will be down to about $25,000. I prioritize student loan debt because it’s the only debt you cannot bankrupt out of. It goes with you to the grave! I will also have to find a way to dig out money for a replacement car sooner rather than later, as well as a few known home repairs (I don’t like to think about the unknown ones!). Part of the reason my budget isn’t regularly shot more to hell than it sometimes is has to do with the fact that my car is in good running order and I try to do the same for my home, so big repairs don’t bite me hard because they rarely ever happen. But after those things are covered, the mortgage is in the crosshairs.
There are several strategies I’m reading about, and I’m trying to configure online if what I’m reading can possibly be true. From what I’m gathering, just paying your regular mortgage payment in two segments monthly rather than once a month shaves about four years off of my loan and $9000 worth of interest, and this without putting a penny extra toward the mortgage. REALLY? This would actually work out really well for me, as most of my bills come due within the first ten days of the month. Spreading out the cost of the mortgage payment over the the month would truly be a budgetary help for me, given how tight those first two weeks of the month really are. This would also allow me to do something productive towards paying the mortgage early while saving pennies towards finishing the emergency fund, dealing with upcoming debt payoffs, and car savings/home repair. Unfortunately, the bank says I cannot just make these payments on my own without paying $300 to enroll in their program to do so (and a $5 charge per month). Otherwise, they’ll just apply anything else I pay to principle and not count it toward my mortgage payment.
The second big strategy is to add more money to the payment each month and specifying that it’s going to the principle. Mortgage calculators indicate that at this point I’d have to add somewhere between $150 – 200 per month to the principle in order to have it paid off in 15 years (but I could be using the calculators wrong). Or, I could take the tax return and use that to try to lump sum pay it down year by year. When I start doing that in year six of the mortgage (as then I’m past the divorce debt), doing that for five years in a row drops me another four years off my mortgage. What I cannot get it to calculate is the net effect of doing payments twice a month as well as a lump sum payment in year six and onward for a few years. However, it seems that making extra payments to the tune of about $650 every month in the years after the student loan is paid off and the divorce debt is gone will produce the same result. That’s a big pinch, though. 😦
Ultimately, I do plan to stay in this home as long as possible. I’d only like to move if a) some fantastically marvelous opportunity presents itself (and at this point that would have to truly be wonderful) or b) Old Budget Glamorous loses the ability to go into the basement living area, which is becoming a wonderful addition to Budget Glamorous’ life, and has to seek shelter that is all on one floor. So I guess my issue at this point is whether to cough up the $300 enrollment fee and get the bimonthly thing going, or to try to mimic the result with one extra payment at the end of the year…who knows. If my calculations are correct, and that is a very big IF, I might be able to get away with just adding $40 now to the actual mortgage payment as extra principle and achieve the same effect! Sigh. But, I hope this works! Whatever combination of financial finagling works out, there is a way to get it in line for my 50th birthday present right on time!
** Update (just because I don’t feel like rewriting several paragraphs :p): As a way of saying “Ha, ha, screw your fees” as well as solving my problem about the first ten days being tight for budgetary purposes, I managed to get my student loan, which is my second biggest bill, moved to the middle of the month to even things out. 🙂 Now, I can go ahead and add $40 to the principle of my regular mortgage payment without really feeling the squeak as well as continuing to put money dollars away for other purposes! Happy future 50th birthday, me!!