Is Our Mortgage Payoff Too Aggressive?

Four years ago, we made the decision to refinance our mortgage.  We hit the time when rates were about the lowest they’ve ever been, and decided to get into a 15-year mortgage.  This would increase our payments but lower our total interest.  It would also move forward our mortgage payoff date.

From a financial perspective, the move has been a big win so far.

The Benefits Of Our 15 Year Mortgage

  • Low rate – We got a 3.375% rate, if memory serves, so we are paying very little in interest and more toward principle.
  • Modestly higher payments – Our payments went up a bit from our previous 30-year mortgage
  • Getting in line my payoff date objective – I’ve always said that in an ideal situation, the mortgage would be paid off before our kids started college.  This timing would actually have the payoff occur during senior year of high school for our oldest.  I’d be 52 which is a pretty good target age to be mortgage free, all things considered!

However, with everything positive, there is a downside.  It’s only one item, but it’s definitely a noticeable one.

The Drawbacks

The payment takes a big percentage of our take-home pay.  Between the mortgage payment, and our tax and insurance payments, the payments take away about 33% of our take home pay.  I learned by example (from my parents) the benefits that a 15-year payoff can have and have applied it via re-finances for my condo (back in my single days) and our current home.

I’ve read that the ideal number is around 25%, with the target range that most would suggest going no higher than 35%.

So, we’re on the upper end and we definitely can feel the pinch at times.  As I look back at the application of the lesson I learned from my parents, I realize that in principle, applying the practice is a no brainer, but from a situational standpoint, we have one big difference: Right now, we’re a single income family.  We made the choice for my wife to stay at home  when we had kids, and we have no regrets on that, but we always knew there would be tradeoffs involved from a financial perspective. We’re fine with that, but it does mean that we have to approach things from different angles.

Home Vs. Car

The reason I’m noticing this is that I’m starting to pay close attention toward our New Car Savings Fund.  We save what we can toward new cars, and as our cars are 8 and 9 years old, the time is coming faster and faster that we’ll need to address this.  Over the years, the amount we’ve added toward this fund hasn’t kept up with the combined cost of depreciation on our current cars plus the overall rise in cost as prices have gone up.

This means that if we were to buy a new car today, we wouldn’t be able to meet the objective of being able to do so without taking on a new loan.  And if we look at both cars, then we’re definitely nowhere close.

Will The Mortgage Payoff Be Worth It?

So, I guess the question to ask is has it been worth it over the last four years, and will it be worth it over the next eleven years to have this situation?  Some of the variables to consider:

  • Income – We counted on our income to go up.  This would lower our percentage of payment vs. income.  With the recent economic slowdown, this hasn’t happened to my projections.mb-2015-11-checkbook
  • Other costs – In truth, the squeeze has been felt not so much from the mortgage, but simply because of the rise in other costs.  Grocery bills have gone up as a lot of food costs have risen, plus our kids are getting older and eating more.
  • Side income– My wife has a nice side gig that she’s dedicated toward paying for a Disney World trip that we’ll soon be taking, that is definitely a luxury.  However, it’s a trip that is a once-in-a-few year type thing, and now that the costs will largely be done, her income could help supplement other things….like bolstering the car fund!
  • Money chunks – Tax refunds are always a good way to address big ticket items.  They’ve helped us fund a new roof, landscaping, and other things we’ve looked to do.  We need a new furnace.  Plus, we’ll have new cars to pay for eventually. The current ones won’t last forever!
  • Another refinance – One option would could certainly consider is refinancing again to another 15-year mortgage.  The rates are higher and we’d be adding years back onto the end, but it would free up cash flow, and we could always pay the same amount as we were anyway.

Staying The Course (For Now)

As of right now, we’re staying the course and I’m not looking into refinance options.  I like the rate at which we’re paying things down.  I’d certainly love the flexibility in our cash flow.  However, I want to make sure to look at all of our available options.   Our family does a good job of balancing present needs with saving for the future.

Even though we do things like plan trips to Disney and camp frequently, we’re not living on Easy Street.  We aren’t rolling in the dough, and with only one full-time income, we don’t make decisions without careful consideration.  Every decision we make includes a lot of potential trade-offs and variables that come into play.

Readers, how do you approach housing costs as a percentage of your take home pay?  How does this play into other decisions on big-cost items like travel and automobiles?  

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It’s Been Two Years Since Our Refinance

Two years ago we completed the re-finance of our house.  I thought I would go through some of the numbers and things that have happened.

Original Loan: 30 year mortgage, 5.875%, closed July 2007
New Loan: 15 year mortgage, 3.375%, closed November 2011

Increase in monthly payment: $157.69

Reduction in total term: 10 years, 8 months

Principal paid on new loan in the first 24 payments: 10.67%
Principal paid on old loan in prior 24 payments: 4.97%

Amount ‘extra’ paid on new loan over last 24 months: $0Amount ‘extra’ paid on old loan over the prior 24 payments: $4,144

Number of months before euphoria of making double the impact wore off: 2

Number of times I’ve regretted not taking a longer term re-finance so that I could have extra cash each month: ~5Average amount of time (in seconds) for me to completely dismiss that idea as ‘the crazy talking’: 4

Happiness on a scale of 1 to 10 when my tax preparer followed up to make sure that the reduced interest amount for 2012 was correct: 10

My calculated age at end of original 30 year term: 62My calculated age at end of new 15 year term: 52

My kids ages at end of original 30 year term: 28 and 26My kids ages at end of new 15 year term: 17 and 15

So, some things to take away from the above numbers:

  • mb-201311contractIf we stay in our home and don’t make any adjustments to the mortgage, we will have it completely paid off prior to the kids starting college, which has always been a goal of mine.
  • We would also have at least 10 years of being mortgage free while still being in the workforce.  This would definitely help set the table for a more successful retirement.
  • When I was still paying on the old mortgage but working through the details of the re-fi, the numbers were incredible to me.  By paying essentially what I was paying anyways every month, I’d be making almost double the impact.  That was awesome for the first couple of months.  Luckily, I anticipated this.
  • Paying the mortgage off early is not a priority right now.  Any extra money goes toward savings goals such as saving for a new car, home improvements, travel, or retirement.
  • If I were to pay the mortgage early, I would likely do so when I could pay off the entire balance at once.  So, if I made a boatload in the stock market and my trading account balance (after taxes) exceeded my mortgage balance, it would be then that I might consider a payoff.
  • We are nowhere near that possibility in our current state.
  • But I’m OK with that.
  • I think we chose the perfect term length.  It doesn’t crimp our lifestyle and keeps us honest to our savings goals.  The truth is that extra cash flow would be nice, but wouldn’t be worth it at all.

 I know many of you must have taken advantage of the low rates back around the time they hit thier low point.  I’d love to hear from those who have had their re-fi’s and how you’ve fared, emotionally and financially, in the subsequent months.

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A Rule Of Thumb Estimate For Extra Mortgage Payments

There are thousands of articles available which discuss the pros and cons of paying extra on your mortgage.  Some argue that it’s a great idea, some argue against it, and others discuss various elements regarding the practice.

One thing I haven’t seen is a way to easily show the impact on the end result, specifically, how will paying extra on your mortgage change things for you down the line.

mb-checkbook201308For the sake of argument, let’s say your mortgage payment is $1,000 per month.  That alone is a good start, but for the rule of thumb, you’ll also need to know what your principle payment was for your most recent payment.

With these two pieces of information, you’ll be able to easily estimate what the impact is of paying extra, whether it be a little extra or a whole lot of extra.

Here’s how.

Say your most recent payment of $1,000 had you paying off $400 toward your principle, with the rest going toward interest.   The $400 is the key part here, which leads to the easy rule of thumb:

For estimating the impact of an extra payment, all you need to know is that paying roughly the most recent amount toward principle will shave one month off the end of your mortgage.

This means that if you apply an extra $400, you’ll shave a month off the end of your mortgage.  Because, what you’re doing is making the next payment, and since all of your extra payment goes toward principle, all you have to worry about to knock a month off is roughly what you’d be paying on your next payment, which is still going to be around $400.

It works for fractions, too.

Say you want to pay extra, but you only have $100 per month that you want to apply.  No problem. With the rule of thumb, you still need roughly $400 to make an ‘extra’ payment, so you’ll just need four ‘extra’ payments of $100 to knock a month off.  Over a twelve month period, you’d knock roughly three payments off the end of your mortgage.

Pretty cool stuff, huh?

There are some catches

As the title suggests, the tip is merely a rule of thumb.  There are a few things that will change.

First, is that this estimate is only good for a short period of time.  See, as your pay your mortgage, whether it be just regular payments or with extra payments, every month you’ll end up paying more toward principle.  This means that as time goes on, you’ll need more ‘extra’ to shave off that month.

In the example above, you’ll find that you hit a point where your principle payment is $450 per month, in which case it’ll take four and a half months to shave a month off.  When you get to where you apply $500 a month toward principle, it’ll take five extra $100 payments, not four.

Think of what that means

The big takeaway here is that you’ll get the biggest benefit from extra payments at the beginning of your mortgage.  The $100 you can apply in the first year will shave more payments off the end than it will if you start in year five or year ten.

But, if you want to hit a specific target of when you want to pay off your mortgage, all you have to do is adjust your payments on a regular basis, re-caclulating the rule of thumb.  So, say you want to make three extra payments a year for the life of your mortgage.  All you have to do is re-calculate the rule of thumb and adjust your ‘extra’ payment accordingly.

Again, it likely won’t be exact, but the rule of thumb is so easy that it’ll give you a really good idea of what the impact is of an extra payment.  I honestly think many people don’t make extra payments because they don’t truly see how it fits into the bigger picture.  This is a pretty quick and easy way, don’t you think?

Readers, do you make extra payments on your mortgage?  If so, do you do it with a specific goal in mind or just as you have the available funds?

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Choosing Your Home Loan

Buying a house is super stressful for a million reasons, and one of the biggest ones is choosing your home loan company.  Your home loan will determine your monthly payment for the next 15-30 years, so it is obviously a pretty important piece to the home buying puzzle.

Plan Your Attack

You will need some basic information about yourself to receive home loan quotes.  The most common questions like if you have a job are going to be easy to answer, but you may not know all of your details off of the top of your head.  Try getting together your job history info, income info, and any of the same stuff you will need for a co-owner before even starting the search.  Also remember to keep in mind other details they will want to know, like if you have another mortgage already, and make a note to ask for any discounts for which you would qualify that could lower your loan interest rate.

Choose Your Weapon

Are you better with people or do you like to do a bunch online?  When you are contacting companies for quotes, keep in mind there are several methods.  If you like the phone, you can call directly and repeat the same information to several people to receive quotes that you can compare later.  If you rather not deal with phone calls, you can get a ton of quotes online.  There are even websites no matter what country you live in that will get you multiple home loan quotes to compare at the same time.

No matter how you search, just remember to get multiple quotes for the same thing from multiple companies so that you aren’t limiting your options.  Spending that time now can save you a bunch of money every year.

After You’ve Chosen

If you are about to buy a house and know which home loan company works best for you, make sure you are officially approved before getting too attached to the exact home you want to buy.  It is usually a quick process but it may be frustrating since they may come back several times with requests for more info.

If you already own your home, remember to keep an eye on home loan rates every year or so.  If they fall a bunch, you could possibly refinance and save a bunch on interest.  Only you can protect yourself from bad deals by shopping around.  Good luck!

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