Paying Off Mortgage Early
Paying off mortgage early
I recently had the pleasure of talking with Tianna Homer about her and her husband's goal of paying their mortgage off early. Read on as she shares her story of why and how they are going to pay their 30-year mortgage off in seven years!
Learn more about Tianna and her frugal lifestyle at her blog:
Provo Penny Pincher
Q Tianna, thank you so much for joining us today! I am intrigued by your goal of paying off your mortgage in seven years. I don't think people realize how much money they could save if they did this! Is is true that the bulk of the amount paid every month toward a house payment typically goes toward the interest?Paying off mortgage earlyA
Oh yes. Banks make their money through interest. That's why shopping around for the lowest interest rate is very important.
Saving yourself even a half a point will save you thousands upon thousands of dollars in interest in the long run. That's also why it's very important to get and maintain a good credit score. The higher your credit score, the lower your interest rate.
That also means that the banks want to collect as much interest as possible and why you want to lower your principle as soon as possible. For example, last month only 22.75% of my minimum monthly payment went towards my principle. 52.56% went towards interest. (The other 24.69% went towards escrow, which is basically the money they keep to pay taxes, insurance, etc.) More than half of the money I paid went to interest!
Just for the sake of knowledge, the closer you get towards paying off your mortgage, the less your interest payments will be because they will be based on a lower principle amount. This gives you even more reason to get your principle down as fast as you can! In this case, interest can be translated as "What I am paying the bank to loan me the money for my house." Less than one fourth of my monthly payment went towards the actual cost of my house.* (By the way, I just want to thank you for asking this question so I would do the math! Turns out our taxes went up, so our escrow did too. This means our minimum payment went up, so we're not currently paying double after all. Oops! It's a good idea to keep an eye on things like that!)Paying off mortgage early
*If you're not planning on buying just yet, you could pay yourself a mortgage payment every month and each payment will be worth four times that amount when it comes time to actually put it towards a mortgage. Q How did you and your husband, BJ, decide to pay your mortgage off in 7 years? And why seven (as opposed to 6, or 10, or 12)?Paying off mortgage earlyA
Well, 7 is the most significantly spiritual number. Since I studied the Old Testament in college, it seemed perfect. Okay, maybe that wasn't why. Let's try this one. In Harry Potter we find out that 7 is the most magically powerful number. We were hoping that we would bring a bit of magic into our finances by choosing 7. Still not buying it? Alright, the truth. We looked up a couple of online
mortage pay off calculators
to see how much time we would cut off our mortgage by paying various amounts. Turns out that by doubling our mortgage payment, it cuts our 30 year loan down to 7 years. In other words, 7 wasn't the significant portion. Doubling our mortgage payment was the significant part. Paying off mortgage early
When we realized that we could cut 21 years from our mortgage (and all of that in interest! The poor bank…[cough]) we looked at our budget and realized that we could do that. We've had to cut out a lot of things, but we've decided it's worth it. We had, after all, been living as poor college students quite recently. It wouldn't be that hard to keep living as paupers. (Let me add, though, that the numbers for your mortgage will probably be different. A lot is based on your current balance and your interest rate. I am not trying to say that everyone can cut their mortgage by 21 years simply by doubling their payment. That just happens to be how it worked for us.)Q Can you share with my readers your game plan, or how you are going about paying your 30-year mortgage off in 7 years?Paying off mortgage earlyA
Very simple. We're doubling our mortgage payments. We're paying more on principle, which will greatly reduce the amount of interest we will pay which will, in turn, increase the amount that goes to principle, making one big, lovely circle.Q To make those double payments, what other expenses will you reduce or eliminate? Paying off mortgage earlyA
Now that's the hard part. We vary month to month as we try to figure out what's best for us and as life throws new curve balls. Mostly we try to make frugality a part of who we are.
We've made an effort to not eat out as much. I've cut down on my grocery budget, making it a game to see how well I can feed us on a set amount of money. (Which, by the way, I've been pulling out in cash so that I'm not tempted to spend more. This makes me more conscious at the grocery store of how much I am spending.)
Instead of going to a regular theater for date night, we go to the dollar theater. My sister-in-law gave us a babysitting night every month for Christmas so that we can go out on a date. That sure helps a lot in saving money. And for our dates, we've planned a lot of cheap/free things: drives up the canyon; walking along the river; free concerts in the park; etc. Paying off mortgage early
When we really want something, we stop and consider if it's something we actually need or just want. Can we do without it for a while? Can we save up for it? Can we live without it? My sister taught us her three-day rule: Whenever you need to make a big decision, give it the appropriate time and attention, make the decision, then wait three days. If you still feel like you've made the right decision, do it. If you're doubting your decision, don't do it. I like this idea. There are very few things you can't wait three days to purchase.Paying off mortgage earlyQ How long have you been living on a strict budget in order to pay double on your mortgage?A
Our first double payment was in September 2009. So we've made 7 double payments. We haven't lived here very long though, so we only paid 4 regular payments before we realized how much we could save and changed our habits.Paying off mortgage earlyQ The two of you must be very disciplined! Do you have any suggestions or tips for others for sticking with their budget without getting discouraged?Paying off mortgage earlyA
Q Thank you so much for taking the time to talk with us today, Tianna! Do you have any final words of advice about living frugally?Paying off mortgage earlyA
- Have a goal. If you know why you're sacrificing that new pair of shoes or big screen TV, it's a lot easier than some nameless, faceless savings goal. We know in 7 years we'll have that double mortgage payment to ourselves every month. A little sacrifice now for a big return later.
- We have a wish list that we add to whenever we think of things that we really want to buy, but can't justify right now. Not only does it make a great list for birthdays and Christmas, but we also allow ourselves to splurge here and there by buying something off that list. We don't do it often, but knowing that we don't have to do without everything for 7 years makes it a whole lot easier to say no to the little things along the way.
- BJ and I each have a separate ING checking account (as well as a joint checking account for everyday bills and expenses). Each paycheck we pay ourselves a little something and we can do anything we want with that money. If I want to splurge on a box of chocolates or buy an album on iTunes, I can. If he wants to buy new software for his computer or go rock climbing, he can. We are not held accountable to each other for what we buy with that money. It's a lot easier to save "our" money when I know I have a little bit of my own to do anything I want with.
- Make it a game. Make it a challenge. For a while now I've limited myself to $100 per paycheck (2 weeks) for groceries. I pull it out in cash, then challenge myself to stay under that. And I like to cook, so none of this copping out and buying a bunch of mac n cheese. To push myself even further, I really wanted a food processor. So we agreed that any money I had leftover from my $100 grocery budget would go in a jar to save up for a food processor. Then we found an amazing deal for a food processor (half off!) that we couldn't pass up, so we bought it with the understanding that I couldn't use it until I paid back our savings. Let me tell you, having it sitting right here, staring at me every day, was very motivating. Find ways to challenge yourself. And find ways to reward yourself, too.
Just do it. Stop making excuses. Even if you can save a little bit of money every month, that's a little bit more than would have otherwise. Find what works for you. Don't look at what other people are doing and feel bad about yourself because you're not doing everything they are doing. It's taken me years of frugal living to get to the point where the only debt we have is our mortgage so that we can afford to double our payments. If you can't do that right now, it's okay. Do what you can and be pleased about it. Just revisit your budget every few months and see if you can't do just a little something more. In time, it'll be a part of how you live and who you are.
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