Progress to Date

  • Original Loan Amount: $204,000.00
  • Balance at Beginning of 5-year Goal (1/1/08): $188,983.82 @ 6.00%
  • Balance at Refinance in February 2009: $148,000.00 @ 4.625%
  • Outstanding Balance: $0.00 (PAID IN FULL!!!)
  • Latest Payment Date: April 2011
  • Latest Additional Principal Amount: $17,623.22
  • Amount Ahead of Schedule (since refinance): $121,462
  • Time Ahead of Schedule (since refinance): 7 years 10 months
  • Interest Saved Last Month: $23,972.48
  • Total Interest Saved: $28,435.55 ($1,037.74 on original mortgage; $27,397.81 on current mortgage)
  • Months Remaining in 5-year Goal: 20
  • Average Monthly Principal Needed to Meet Goal: N/A (Goal achieved)
  • Progress List Explained

Sunday, February 10, 2008

Predicting the Future

Although we have not completed even two months of this experiment, our progress is being challenged by unexpected events. I've already described the major appliance replacement (the dishwasher) in January, and the surprise tax bill in February. I tend to be optimistic about any plans I make. Thus, I'm disappointed that we haven't been living out my best-case scenario so far.

When I recently mentioned my frustration to my wife, she responded by predicting that unexpected events will continue to occur. We'll have to monitor our status each month, and make the most aggressive extra principal payment we can. She also reminded me that our goal of five years is arbitrary, and may need to be modified if we discover that we're stretching ourselves too thin in this first year.

I realized that part of my frustration came from not knowing how a sudden change in plans might affect our ability to pay off the mortgage in the original five-year period. For instance, if I had been hoping to pay $4,000 extra in February because of an anticipated tax refund, and then learned that we could only afford to pay $2,000
(due the absence of the tax refund), how would that impact the mortgage balance in four years? I wanted to know, but didn't have any way to find out.

To help answer this question, I created a hypothetical model spreadsheet in Excel which allows me to enter payment information over a 60-month span. It reduces the ending balance each month, and uses that new balance to calculate the next month's interest payment. It also displays the necessary average principal payment needed to reduce the balance to zero by the sixtieth month.

I set up a few some sample scenarios and learned that we didn't need to come up with quite as much extra principal each month as I had originally thought. Because regular payments made toward the end of the mortgage term include a much larger percentage of principal than those at the beginning, it's possible for us to meet our goal by making payments below average for the first couple of years.

For example, let's say we decide to pay $2,000 extra each month starting in February (month two). Our current required average principal payment amount is $3,139.11 (a balance of $185,207.26 divided by 59 months). February's payment would amount to $2,795.43 ($795.43 representing the principal portion of the regular payment), which is $343.68 below average. Furthermore, the shortfall means that the average in month three increases to $3,145.03. It doesn't seem like $2,000 per month is going to cut it.

However, as the balance falls, the principal portion of the regular payment steadily increases. By the end of year two (month 24), the total principal payment is $3,119.63 ($1,119.63 plus the extra $2,000). This is still less than the constantly-changing required average principal payment of $3,253.21, but this time the shortfall is only $133.58. The break-even point occurs between months 34 and 35. The highest required average payment amount of $3,276.34 comes in month 34, but because the total principal payment that month exceeds the average for the first time ($3,295.56, with $1,295.56 coming out of the regular payment), the required average payment falls, and continues to fall throughout the remainder of the scenario. By the end of year four (month 48) the total principal payment is $3,516.32 ($1,516.32 from the regular payment), which is $360.12 more than the required average principal payment of $3,156.20. Continuing on with this $2,000-extra-per-month scenario, the balance falls to zero in month 59 (one month early).

This new knowledge allows me to understand that falling short of the required average payment amount won't necessarily keep us from meeting our goal in the long run, so long as we keep making significant payments to principal as often as possible. Going forward I'll update the hypothetical model over time to make sure we're still on track. I'd love to tidy it up a bit more and post the spreadsheet here at some point to more clearly illustrate how it works.

As I mentioned in the previous post, my early prediction for February is a $2,000 extra principal payment. I won't pay the tax bill until April (and even then I'll use a credit card, meaning we'll have an added grace period which should extend into May), so we'll gain the extra two or three additional months of compounded interest savings by delaying that expense until then.

1 comment:

Move To Portugal said...

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