Snowball mortgage?

[lillyb]

I've been working on a five-year plan. I'm really liking having a plan. Will write out what I've got so far and then ask for feedback on certain aspects of it, if you guys don't mind.

1). Pay off personal loan around Sept. 1, 2006. This will leave only student loan and mortgage.
2). From Sept-Jan 2007 save all excess money to fully fund the emergency fund. This should get us to around 5 months worth of expenses saved.
3). With yearly bonus put away for daughters college. (this year only, big bonus, daughter going to cheap school)
4). Fund Roth IRA's $600 monthly (this will add to our present 3% to equal 15% for retirement)
5). After Janurary 2007 start applying all excess cash to mortgage.
6). All bigger bills will be paid in full (ie. insurance premiums that come twice a year, house taxes, deductibles, etc.) The snowball for the mortgage should allow this to be no problem in a month's income. Want to apply all I can to mortgage instead of socking it away in a sinking fund every month and it sit there. It would also reduce monthly expenses (ie. paying insurance monthly now instead of bi-anually) Our house taxes are fairly cheap and can be covered in one month's snowball, as well.
7). Any Murphy strikes will be taken care of with the emergency fund, to be replaced with the next month's snowball.
8). After 2007, all yearly bonuses will be applied to the mortgage until it is paid off, then will apply snowball and bonuses to student loan.
9). Pay off student loan last. As someone pointed out, I can always claim deferrment or hardship should something serious happen. Plus, the amount of mortgage interest saved paying it first is way more than the student loan interest saved. Makes dollar sense to me.


In this scenario the house can be paid off by December 2009 and the student loan by the end of 2010.

Now my questions: is there anything wrong keeping the intensity to pay off the mortgage super fast? I mean, like holding off on starting a gajillion sinking funds til after the mortgage is gone. And like maybe holding off socking that $600 monthly to the Roth's for just two more years? I computed all of this in my loan amortization program I have and if we did this our home pay off date changes to 3/09 and student loan payoff to 10/09. Yes, yes, barring Murphy. That's having it all gone in 3 years. How much would I be able to start investing then? 2k a month or more.

So, anyone ever kept up the paying-off intensity? Anyone snowballed the mortgage to get it gone in a few short years??

[boefixepa]

Sounds like you have a wonderful plan going!! I don't know what the rates you have on everything is and this is what my guru frind (aka, self-made millionare, by working hard and being furgal) told me about student loans and mortgages.

If the rate of return you can get on investments is larger than the interest rates you are paying on your loans, you will make more money in the long run investing rather than paying down debt. If the reverse is true, you get a better return on your money paying off debt.

So if you Roth is currently averaging 10% a year max that out as it will have a better return than your mortgage or your student loans. Heck if you have a great student loan rate, even ING is better. If your motgage is around, say 6%, and your investment account is about that, then you are better off paying off the mortgage.

You'll have to run some numbers and see. You have to look long term, consider inflation, and taxes, and really crunch the numbers to be sure. There is also the nice feeling of being completely out of debt!!! The thing about investments though is TIME. Time can be your best friend or your worse enemy. So say you have 40K you want to 'snowball' over these three years to save yourself 20K in interest on your mortgage. What would that 40K be worth with three extra early years in an investment at an average of say even a modest 10% twenty years for now....that's the question you are dealing with and the baises for my friends advice.

Crunch the numbers and see. Either way...you are doing great!!!

[Ima saver]

I am doing that now!! I bought a piece of property in Jan. 2005 and I have a mortgage on it. I have been throwing all my extra money on it. I started out owing $64,000 and now the mortgage is just slightly under $30,000. The interest rate can change every year and right now it is 7.25%.

[34saving]

Well, I've never been very good at written plans, but I guess we paid off our first mortgage pretty intensely. We paid it off in about 6 years. At the time all of the gurus were saying "tech stocks" so I'm glad we took the 7.25% return on our mortgage (at the time that was a good rate believe it or not!)

We're not being quite as agressive with this mortgage, but that's mostly because I'm a SAHM now and our interest rate is 5.375%. We're on an 11 year plan with this one. As a side note, because we didn't have a mortgage on house #1 we were able to sell on a contract for deed. So, house #1 provides a steady monthy income that more than pays the mortgage on house #2 and has a rate of return quite a bit higher than anything I've been able to get out the stock market. (People keep talking about these 10% stock market returns . . . This is not normative in my life )

[veronak]

Sounds like a plan to me good luck

[Tree0164]

It sounds great! Well thought out.

[The Budget Man]

There's an added benefit in clearing your mortgage that you may not have considered.

When you throw extra money at the mortgage you have a fallback position. If your situation changes for the worse, your debt position is better and you can ride out a difficult time far more easily.

I hope you never need this bonus.

Enjoy Your Money
The Budget Man

www.PersonalityBudgeting.com

[jmjj215]

And like maybe holding off socking that $600 monthly to the Roth's for just two more years?

I'd maybe go ahead an sock the money away for the Roth, but that kind of depends on what your current mortage rate is, what your marginal tax rate is, and where your Roth is invested...