Thursday, December 6, 2012

Mortgage Musings

Now that we are a few months into our new loan term it is time for me to start dreaming about killing the mortgage again.

As a reminder, our new loan term is 15 years (or 180 months) and our new rate is 2.75% fixed.  Post-refinance, our monthly mortgage payment actually went up, although our rate went way down, about a $100 because we shortened the loan term by 6 years.  Our current monthly loan payment is more than 60% principal payment, so we are already making good progress at chipping away on our principal.

If we continue to pay an extra $415 a month towards principal, which is what we have been doing the last couple of years, we will shorten our loan period by 40 months or 3+ years.  We actually don't save that much in interest by prepaying on our loan because our current interest rate is so low.  If we keep to this prepayment schedule of an extra $415 a month, we will save $13,500 in interest.

If we increased our prepayment to $830 a month (doubling what we are prepaying now) we will shorten the loan period by 65 months or almost 5 and a half years.  Meaning that we would have the mortgage on our primary home paid off in under 10 years.  Doing so would mean saving $21,800 in interest.

Having our mortgage paid off in under10 years is very appealing, but we'll have to balance that against whether it makes mathematical sense to do so and the priority of other goals.


Anonymous said...

I have a plan to pay my mortgage off in the next four years. I'm about 6 months into the 30 year amortization on a 5/1 ARM. I made the decision that killing the mortgage was my first priority after maxing out my 401(k). So far, it's been going down pretty quickly, so I guess I'll see how things change in the next few years, but I have a feeling it will be paid off pretty "early".

Frugal Coconut said...

Even though I hate having a mortgage at all, I'm considering refinancing the mortgage on my rental property to actually extend the term (and possibly even roll closing costs into the loan). This will allow me to be at approximately breakeven cashflow rather than negative cashflow every month. This will basically allow me to start over so that the huge mistake would finally be somewhat self-sustaining instead of haunting me by eating into my discretionary funds (along with the more productive things I could be doing with that money). This goes contrary to my instinct to wipe out the debt as quickly as possible ... but I think it might be the best overall course of action for the long haul.

Anonymous said...

just last week we closed on the refinance our 2 rentals and in process of refinancing our primary residence, all 3 at 15 year fixed and rates around 3%. I prepaid $40k principal on the loans this year alone but with the new low rates, I am instead sending those extra prepayment dollars to mutual funds with the expectation I will average more than 3% return long term. At 3% I just can't see typing of the funds in the house. By the way Sam, I was following your lead on the refinance, didn't think to look into it until you shared your story, I was instead focused on paying them off.

Sam said...

FG - although our rental properties are held in our individual names, I don't treat the debt (in my mind, although its captured in our net worth numbers) as my debt. Rather, its business debt. So when we refinanced one property we rolled all the refi costs into the loan rather than pay those costs up front. For us it makes sense for our tenants to pay those costs rather than for us to pay them. Sounds like you are doing something similar by extending the term to get a profit from the rental. Makes sense to me.

Anon, great job on getting your properties refinanced at super low rates. Glad that I sparked the idea, that's what this blogging is all about. And, I agree, math wise probably makes sense to put extra funds into the market rather than prepaying on the mortgages since the interest rates are so low.

TB at BlueCollarWorkman said...

My wife and I refinanced and are looking to pay off early too, but we always have to remind ourselves to step back and make sure taht we have a good emergency fund and that w're not going to end up strapped for cash because we were so motivated to pay off early. Sounds like you've thought about that kinda stuff though!

Anonymous said...

Great! Stories like yours keep me inspired.

We are currently on a 30-year mortgage, with "Contractual Remaining Term" of 26 Years, 4 Months. Our "Actual Remaining Term" is 21 Years 10 Months. We pre-paid approximately $6000 towards the principle this year.

I'm waiting for 1 year and 4 months, that is when we hit the 5 year mark of owning the mortgage, at which point the MIP will be taken off! And then I'm going to refinance in to a 15-year mortgage.