I Cut my mortgage by 10.5 years and saved $67,500 in interest

[toptaxguy]

Last year my wife and I purchased a new home and our mortgage was $210,000 and was amortized over 25 years. Our monthly payments were $1,236.36.

First:
After negotiating the mortgage, I called the bank and asked if I could make weekly payments of $309.84 (1/4 of the monthly payment). This accelerated my mortgage payments and reduced the interest I would pay over the life of my mortgage because I was effectively making an additional monthly payment per year and reduced my amortization by 3.6 years. I also saved $27,100 in interest.

Second:
Last year in January, I received a bonus of $1,600 that I immediately applied to the mortgage and this cut off another 15 weeks off my mortgage and saved me about $3,100 in interest.

Third:
In June of this year I received a 5.3% pay raise and I called my bank and asked to increase my payment accordingly. The new weekly payment is now $325 and this shaved off another 1.5 years and saved me a further $10,000 in interest expense.

Fourth:
This month I received a promotion and received a further 6% raise and again called my bank and asked that the payments be increased to $346 per week. This saved me a further $11,100 of interest and reduced my term by another 1.7 years.

At this point if I don't make any further adjustments or principal payments my mortgage would have been paid off in just under 18 years.

Finally:
I plan on increasing my mortgage payments by the same percentage as my annual raises which normally occur in June. If I assume I get a 3% raise per year, keeping my interest rate constant, I project that the total term of my mortgage would be 14.5 years and I would have saved a grand total of $67,500 in interest.

[maat55]

Well done.

[disneysteve]

Sounds good. Are you already maxing out your 401k and Roth accounts? If married, is your spouse doing the same? Are you funding your children's education? Are you otherwise debt-free?

[Gailete]

My only concern with what you are doing is that once you have your bank changed to the higher amount, can you go to a lower if for some reason there is a problem and you can't pay that much. Why not just pay the extra as extra on the principal according to the original mortgage.

Good going on those plans. We only have about 7 more years before we are mortgage free. In the meantime we have some CC to pay off and I try to round up and pay extra as much as possible. In your case, I would be paying $350/week on the mortgage.

[Tree0164]

Well done-I do have the same question as Steve are you maxing out your retirement savings as well

[toptaxguy]

Originally Posted by disneysteve

Sounds good. Are you already maxing out your 401k and Roth accounts? If married, is your spouse doing the same? Are you funding your children's education? Are you otherwise debt-free?

We are otherwise debt free, our employers contribute to our retirement plans, and we also make contributions. I have not established a colledge fund yet but plan on doing so.

[toptaxguy]

Originally Posted by Gailete

My only concern with what you are doing is that once you have your bank changed to the higher amount, can you go to a lower if for some reason there is a problem and you can't pay that much. Why not just pay the extra as extra on the principal according to the original mortgage.

Good going on those plans. We only have about 7 more years before we are mortgage free. In the meantime we have some CC to pay off and I try to round up and pay extra as much as possible. In your case, I would be paying $350/week on the mortgage.

I confirmed with the bank that I can lower the payment back to the original payment level if I ask.

In my opinion it is important to get rid of credit card debt before paying down the mortgage. I can go either way on car loans if the rate is reasonable.

[disneysteve]

Originally Posted by toptaxguy

our employers contribute to our retirement plans, and we also make contributions.

What exactly does that mean? What percentage of income do you have going to retirement (not counting the employer contribution - just your own money)?

My concern would be if you are prepaying the mortgage but not adequately saving for retirement.

[glock35ipsc]

Originally Posted by disneysteve

My concern would be if you are prepaying the mortgage but not adequately saving for retirement.

I agree with Steve. In addition, I would add:

You should have an emergency fund with 3-6 months living expenses (if you don't already),

then max your 401(k)'s,

then fully fund Roth IRA's for you and your spouse,

then fund ESA's or 529's for your kids,

then concentrate on paying off the mortgage.

[disneysteve]

Originally Posted by glock35ipsc

I agree with Steve. In addition, I would add:

You should have an emergency fund with 3-6 months living expenses (if you don't already),

then max your 401(k)'s,

then fully fund Roth IRA's for you and your spouse,

then fund ESA's or 529's for your kids,

then concentrate on paying off the mortgage.

I don't completely agree (though there isn't anything majorly wrong with that plan).

I would fund the 401k up to the level to get the full employer match.
Then I'd max the Roths.
Then I'd go back to the 401k until that is fully funded (if you have that much available to invest).

Whether or not you do college savings or prepay the mortgage is really a personal decision. Not all parents feel the need the save for college. Prepaying the mortgage is a perfectly reasonable way to go at that point once retirement is taken care of. If you do plan to help your children financially with college costs, having the mortgage paid off could be very helpful by freeing up cash flow that can go toward college costs. Personally, we will still have a mortgage when DD goes to college, but we've been saving in a 529.

[glock35ipsc]

Originally Posted by disneysteve

I would fund the 401k up to the level to get the full employer match.

Oops, that's what I meant buy maxing the 401k, contribute up to the match....

[Gruntina]

I also think it depends on how old the children are as well. If one can pay off the mortgage in less than 15 years, that amount saved on interest pretty much be allotted for the college funds?

I am seeing in a perspective if you save a small amount each month (small enough that can pay extra towards mortgage) in the college funds while the kids are fairly young. By the time the mortgage is paid off, just sock away the ongoing amount that was paid for mortgage to the college funds while the kids are in high school. I would think this would be a win-win on everyone’s part?

[glomerulus]

I am about to buy a home for the first time. Do all banks/finance companies allow bi-weekly or weekly mortgage payments??

In my situation, I am planning to stay in my home for only 4.5 years. Would making extra payments on the mortgage or making weekly mortgage payments make any sense in my case.

[SusanP]

Well done, toptaxguy! I think that's a very reasonable and prudent plan and I will certainly keep it in mind. The sooner your mortgage is paid off the sooner you have that much more available income to invest otherwise, I understand and respect that pov, especially knowing so many people who choose to make only minimum payments and seeing their situation first hand.

My husband and I are losing patience with landlords now, so we may look into buying our first home in the not-too-distant future. Thanks for this insight.

[disneysteve]

Originally Posted by SusanP

The sooner your mortgage is paid off the sooner you have that much more available income to invest otherwise

This is generally a flawed plan because mortgages are typically "cheap" money and you can usually do better by investing and taking advantage of the wonders of compound interest. One thing you can never, ever replace in your portfolio is the benefit of TIME. The later you start investing, the less you will end up with - period. In most cases, it makes more sense financially to keep the mortgage assuming it is at a decent fixed rate, and invest the difference.

[Ima saver]

I never knew much about investing, so i paid my mortgage off early. Even tho we have always lived on a low income, I have been able to save so much extra by having no mortage payments for over 30 years.

[aida2003]

We've also decided to pay off our mortgage early. But in our case it's a bit different.
- We both max out 401k's and RothIRA's;
- We also do taxable investing;

Our EF and savings are a bit too high, IMO, so we'll knock down our mortgage after our CDs expire. I don't see Bernanke increasing the rate by 1% or 2% in foreseeable future, so we rather pay off our house loan and replenish savings very slowly.
After the house is paid off, that same monthly payment will go for the 2nd child's daycare.

We don't have 529 or anything for kids' education.

[b4freedom]

Originally Posted by aida2003

We don't have 529 or anything for kids' education.

For those of you who don't have a 529 and don't have any college savings, I'd suggest you look at upromise.com. Although you may not want to open their 529 plan, you'll definitely want to sign up to get the "free" money. My 2 1/2-year-old son's 529 plan is over $2k from just money saved from this site.

[disneysteve]

Originally Posted by aida2003

We've also decided to pay off our mortgage early. But in our case it's a bit different.
- We both max out 401k's and RothIRA's;
- We also do taxable investing;

Same here. My wife contributes 50% to her 401k (the max she is permitted). We fully fund Roths for each of us. We do some taxable investing. And we contribute to a 529. With some of what remains, I prepay our home equity loan. When that is paid off next year, I'll probably start prepaying the primary mortgage.

[Gailete]

I am about to buy a home for the first time. Do all banks/finance companies allow bi-weekly or weekly mortgage payments??

In my situation, I am planning to stay in my home for only 4.5 years. Would making extra payments on the mortgage or making weekly mortgage payments make any sense in my case.

Why would you consider buying a home in this market for only 4 .5 years? You could concievably end up taking a year or more to sell the place when you are done with it.

To partially answer your question though, for the most part, the first couple of years that you are paying on a mortgage it is almost all interest depending on what your downpayment was. If you go into a house with a minimal downpayment and have to pay a PMI you would have to be dumping buckets of money onto the payment to really acheive any affect in those few years. You would most likely be better off saving that extra towards your next home after that assuming you will be buying again.

If think for you we would actually need to know more about why you are buying a house for such a short time, what kind of downpayment you are going to use, and what you will be doing after to really answer your question.