So after a couple of emails about our house I decided that I will just blog about our money. Disclaimer, we are lower middle class and we know it. That's why our house isn't that expensive. Last year we were barely above the poverty level. Or maybe we weren't above it. All I know is that when we filed our taxes for last year the government was like, here is some money; take it. That means it was much easier for us to make certain financial decisions than if we had made as much last year as we do now.
So this post will be on how paying extra on your mortgage can make your payoff that much faster. Or at least, places where you can play around and be like, of man, I want to do that.
Why did we decide to pay extra?
The whole reason why I even considered paying extra on the mortgage when we didn't have that much money was because in January interest rates for mortgages dropped to about 4%. We were considering refinancing, and we wanted to see the benefit of that. We refinanced in January of 2008 after only owning our home 3 months because rates dropped by about 1%. Our current APR is 5.75ish. But, closing costs on the new loan would cost us $2,ooo. So I was crunching numbers to try and decide what made more sense, refinancing and essentially throwing away $2000 for a house payment that went up by $30/month but it was a 20 year loan OR paying the extra $30/month.
You see, when they try and get you to refinance, they say "You will save $40,000 in interest payments! And your monthly payment will only increase $30." It sounds exciting. I could save $30,000*! Thats like a year's wages. Thats a lot of money! *I don't remember the exact amount we could save, but it seemed like a ton of money at the time.
So I checked the numbers. How long does it take for that $2000+ dollars we would spend to refinance to even out in the savings of interest? It would take at least 3 years. We were still paying on that 3 years from last year's refinance. That means we wouldn't really be seeing any savings for at least 5 years. Plus our monthly payments would be larger. We knew Daniel would be in school for a few more years, but what if we ended up moving before we even saw savings? Plus, if we just paid that $2000 over several months, as well as the extra $30/month we would reduce the term of our loan by 10 years anyway.
Thats when I thought, maybe we should try and pay extra on our mortgage.
Call it inspiration, call it woman's intuition, but I felt strongly then, and still do, that it was wise to pay extra on our mortgage. Even though we have a HELOC with an adjustable APR and I have a student loan with a higher interest rate, its something that I knew was a better option for our family as a unit. By the way, we are paying extra on both of those, but we aren't focusing our payments toward them like we are toward the mortgage.
We needed to decide how much extra to pay each month
This is where things get a little complicated, and can seem overwhelming. If I pay $200/mo extra I can decrease my loan to a 16 year motgage, if I pay $400/month a 13 year mortgage, etc. Sometimes an extra $20 may seem like its doing nothing, but its not. Slow and steady did win the race, but fast and furious gets you sexy cars. Oh, and I mixing up my thoughts?
What if I am thinking about paying extra?
First off is the mortgage payoff calculator at dinkytown.net. This is something great for those nerdy people like me that really like graphical representations. You enter in the remaining time you have on your mortgage, the length of your mortgage, mortgage amount, additinal payment, and APR. You know where the interest paid line becomes flat? Thats when you stop having a mortgage payment and paying interest to 'the man.'
In a more usefeul area is your mortgage website's amoritization schedule. Ours allows us to enter in one time pre-payment, as well as annually, semiannually, and monthly. This is where I decided that paying an additional $2000 toward our mortgage upfront made more sense than refinancing. With the $2000 estimate for closing costs on refinancing we were cutting off several years of payments. If we added in an additional $30/month prepayment we were doing even better.
I also looked at information from Crown Financial Services for help with planning my budget. They have pdf info sheets that can help you get out of debt, or just plan a budget.
One thing I really liked was thier percentage guides. It made me think. Yes, we should spend 6% of our net income (after taxes and tithing) toward entertainment. Thats more than I realized I could spend. Of course, if you add in impulse purchases, we might have been spending more than that. Obviously, our percentages couldn't add up all pretty like thiers. Our insurance is much more than 5% of our income, plus its taked off our taxable income, so its even more confusing.
Anyway, with thier percentage guide, I found we should be spending $890/month toward housing. That number includes utilities, but since some of our other areas have extra money (like we have no car payment so we don't need to spend over $360/month on a car) I felt that we should try paying that much toward our home each month. So plugging an extra $260/month I found out we could decrease our loan by 19 years and over $40,000 in interest. So I was in. Hook line and sinker.
But what about double motgage payments?
I don't remember exactly how I decided we would pay double. I think it was number crunching, plus INTENSE budgeting. I am talking entering EVERY reciept, and saying, ok no more eating out when we hit a certain amount, etc. The first month, it was like oh man, I just paid over $1200 toward my house. That used to be our take home money for a month (we had a promotion and a crazy raise around the same time as all this). But, the numbers looked like they would be fine. And, they were.
So there you go. Pending craziness like long term disability and/or copious amounts of children coming all at once we will own our house at the beginning of 2016. How awesome is that! Besides, if something happened and Daniel lost his job and we had a sudden decrease in income, we would have plenty of equity for a refinance, and we could handle the 'lost money' toward the rifinance to save our credit and our long term stability. No one knows what will really happen to the housing market in the next few years, but we want to know that if we had to get a crappy minimum wage job (or 2) we could afford to keep our home, even if we have to borrow a bit more money to refinance our mortgage. We won't be like the people that can't refinance unless they can pay $30,000 because thier house value dropped so much.
So there you go, a long wordy blah blah blah about how paying extra on your mortgage can be wiser than a refinance and give you long term security.