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

Saturday, May 31, 2008

Monthly Summary: May 2008

The payment we made this month was the 25th of 180 scheduled payments on our 15-year note. It was also the 5th payment since we set our five-year goal.

The balance after all "April" payments were completed was $176,276.47. The total principal amount for May was $3,840.09. This included a $3,000 additional contribution to principal (which is actually the amount from the sale of the car we decided to allocate toward our mortgage balance). Our outstanding balance dropped to $172,436.38.

We're $12,933 ahead of schedule on our payments. The mortgage would be paid off fifteen months early if we ceased extra principal payments after this month.

We saved $49.42 in interest this month. When added to our previous months' savings, I see that we are ahead $133.23 on interest since the beginning of our mortgage-elimination project.

The average monthly principal payment required to meet our five-year goal fell to $3,135.21.

As we move into the summer months, we're expecting to receive some extra income in the near future. This should help us continue to make steady progress toward our ultimate goal.

Wednesday, May 28, 2008

No Mo' Escrow

I was discussing our saving plan with a friend over the weekend. He asked if our monthly mortgage payments include a contribution to the escrow account (they do). He suggested that we might be able to remove the escrow portion from the monthly payment amount simply by calling up our lender and asking. This intrigued me, so I did just that. It turns out that since we aren't required to pay PMI, we can drop escrow at any time. The lender just keeps it there for our "convenience".

Last year we paid around $4,000 in property tax. If we can ensure that we have at least $4,000 saved at all time in a special tax reserve fund (and contribute to it monthly), we can earn interest on that money above and beyond the measly rate paid by our lender. Last year we earned about $29 in interest from the escrow balance. If we invest the $4,000 in a money market fund paying a conservative 2.00%, we could earn about $80 per year. This isn't a huge difference, but why leave free money on the table?

Also, each of the past two years we've received an escrow refund at the end of the year because our house's appraised value has fallen with the overall real estate market (and therefore our tax burden was lower than the projected amount). By taking the tax payments into our own hands, we can avoid waiting 12 months for any escrow refund payments to come through. I realize this would work in reverse if house prices were rising, but I don't see that happening in the next few years.

Finally, once we do achieve our goal and are 100% mortgage-free, we'll have to pay taxes on our own anyway. So setting up the tax payment fund now will give us plenty of practice when that day finally comes.

Because of these reasons, I asked the lender to stop including escrow amounts in our monthly payment. They are sending us a check for our current accrued escrow balance. Property taxes are due next month, so I'll be ready in time to make our first tax payment on our own.

Friday, May 23, 2008

Monthly Summary: April 2008

This "April" summary is over three weeks late, but (as I mentioned previously) I wanted to await the results of making our April payment during the grace period in May. I'm pleased to report that the Mortgage Professor was right; our lender credited the additional principal payment toward April's balance even though I made the payment during the first full week of May. This is not something we expect to do on a regular basis going forward (in fact, we've already scheduled our May payment for next week), but it's nice to know we have that option in case of a similar situation in the future.

The April payment was, by the way, the 24th of 180 scheduled payments on our 15-year mortgage.

At the beginning of April, the outstanding balance was $179,102.43. We made a $2,000 extra principal payment, which when added to the principal portion of our regular payment resulted in a total principal payment of $2,825.96. Our outstanding balance dropped to $176,276.47.

We're around $9,884 ahead of where we'd be if we'd never made any additional principal payments. If we ceased making extra payments at this point, we'd pay off the mortgage exactly one year early. This part really impresses me. We've been paying extra for about four months, and that extra principal only amounted to 4.8% of the original loan balance, but we've already taken a whole year off of our term thanks to future compounding interest savings.

We saved $39.23 in interest this month, for a total of $83.81 saved interest so far.

Our average monthly principal payment required to meet the five-year goal is now $3,147.79 (up slightly from last month).

May's payment will include the proceeds from our recent car sale. I am looking forward to wrapping up this month already!

Tuesday, May 20, 2008

Sold!

We are now OFFICIALLY a one-car family. Our second car sold yesterday. The buyers paid a little less than we were asking, but they did bring cash, and after a brief inspection of the interior and under the hood, they handed over $6,000 and left with the keys and the title. One one hand, it is a little scary to have only one vehicle between us, but on the other hand, we've been living the one-car lifestyle since February 1 of this year, so we feel that we're now ready to do it for real.

In addition to the sale proceeds, we expect to realize some significant savings over the next year by eliminating the second car from our lives:

  • I canceled the auto insurance on the car we just sold. This will save us almost $75 per month, or almost $900 per year.
  • In 2007 we spent $175 to register the car. We won't have this annual expense going forward.
  • We no longer have to pay for maintenance on the second car. At the very least, we avoid minimal routine maintenance. This might include four annual oil changes at $30 each, plus an annual tire rotation for another $30, and an inspection for another $30, to bring the total to $180. But our car was nearing 140,000 miles when we sold it, so it's likely that we would have paid for more expensive repairs in the future. And we don't have to pay for other minor maintenance like replacement wiper blades, washer fluid, air filters, and so on. My records show we paid a total of $2,250 for maintenance on both vehicles last year, so it's safe to assume that half of that cost ($1,125) could reasonably be applied to the car we just sold. I think this is a conservative estimate.
  • It's no coincidence that the vehicle we parted with was less fuel-efficient than the one we kept. Going forward, we should get better economy out of the gasoline we buy, especially if we continue to take more trips in the car together (as we've been doing for the past several months). It's hard to put a value on the fuel savings, but I don't expect it to be insignificant.
Total savings: Approximately $2,200 per year, plus the unknown savings from more efficient gasoline consumption.

Ordinarily my commute to work is about 8 miles (by bicycle or car), but today I was asked to go to an alternate office location in Boston. My company will pay for me to take a bus on those occasions, and I take advantage of that benefit. I woke up to a perfect spring morning here in New Hampshire, so I walked the two miles to the bus stop. I moved along at a casual pace, and made the trip in under 40 minutes, including the time I took to stop at the bank to deposit the cash from the car sale. I took the route through the park, listening to the bird calls and watching the flowers swaying in the breeze, and didn't miss the car at all.

As for the $6,000 sale proceeds: my wife and I decided yesterday that we would add $3,000 to our emergency savings, and use the other $3,000 to pay down the mortgage balance by the end of this month. That will put us back on track for our normal mortgage payment schedule, so the $1,000 planned additional principal payment I discussed in my last entry will be held back until June's mortgage payment.

We are masters of our own destiny.

We are on track to achieve our goal.

We will succeed because we are following through on our plan.

Sunday, May 18, 2008

Not Very Stimulating

I was expecting to receive our stimulus payment by May 16 based on this payment schedule, but for some reason it hasn't arrived yet. According to everything I've read, we should have been eligible for the direct deposit because we filed our tax return on time (in March), didn't exceed the income limit for joint filers, and had our tax bill paid by direct debit (which went out in early April). Of course, the IRS website has a disclaimer stating that "A small percentage of tax returns will require additional time to process and to compute a stimulus payment amount." Either we're part of that small percentage, or else we're getting the payment via paper check for some reason that isn't clear to me.

In either case, I've had to modify the budget for the next few months to exclude the stimulus payment. For now I'm going to assume we should have it by July if we are due a paper check. I'll keep monitoring the payment status using this page for the next few weeks, and may resort to calling the IRS if I don't get any answers. Until we receive it, I'm not counting on the stimulus payment for anything. If and when it arrives, we'll use it to pay down our mortgage balance. I am earmarking only $1,000 for our next extra principal payment as a result of the delayed receipt (previously I had been targeting at least an extra $2,000 per month).

We had some inquiries about the car this week, but it's still sitting in our garage. It's nice that we aren't in a hurry to sell, because we don't have to take lowball offers or feel pressured to work with unreasonable buyers. I'm still confident we'll find the right person to take it off our hands in the near future.

I still haven't received the final figures from our April mortgage payment to determine whether the extra principal was applied to April or May. I hope to know by this time next weekend. By then it will be almost time to make the May payment, and I want to have the right numbers in place on my spreadsheet. Yes, I am a big nerd.

Last week I changed the tube on the rear wheel of my bicycle because it had caught a small nail and was slowly leaking. Just like last time, the internet saved the day. There are a bunch of good how-to videos on sites like YouTube covering all sorts of bicycle maintenance. Although it took a bit more effort than a front tire replacement because of the chain and gears, I'm pleased to report another "do-it-ourselves" success (the wife helped out this time). Total cost of the replacement was about $4 for the new tube. I saved the old tube and plan to buy some patches at some point so that we can always have a backup (patched) tube on hand for future flats.

May is turning out to be an expensive month after all. We had a big vet bill for our dogs' annual checkup, including shots and medicine. I hope we can cut back our spending in June, because we're going on vacation in July and will be spending more for gasoline and related travel expenses.

Sunday, May 11, 2008

A Little Extra

Last week my wife received a modest pay raise at work. Although the timing was something of a surprise, we had been expecting the raise to happen at some point in the spring or summer. The raise was retroactive, so in addition to seeing a little extra in each paycheck, she also got a lump-sum payment last week to cover the months that have already elapsed since the effective date of the pay increase.

Because we didn't know when the raise would occur, I had never budgeted for it. The retroactive income will help us get back on track with our mortgage prepayment plan (not that we were all that far behind anyway).

This month we also benefited from a decrease in our auto insurance premium. The monthly payment going forward will be about $25 less than it was before. Add my wife's additional salary to that, and we'll net an extra $175 or so per month. While that's not a huge amount, it's certainly better than seeing $175 added to our monthly expenses.

On top of all of that, we have been using less gasoline since spring arrived, further cutting our expenses. Even though the cost of gasoline is much higher now than it was a year ago, we spent 47% less on gasoline in April 2008 than we did in April 2007. How did we manage to do that? I've used my bicycle to get to work almost every day since the last week of March, and my wife has commuted by bicycle regularly as well (several days per week). We're now living the lifestyle of a one-car family. Our second car is cleaned and parked in our garage, awaiting its sale. It is only a matter of time before we find the right buyer, and we can be rid of the costs associated with owning a second vehicle.

Our April mortgage payment went through last week, along with an additional principal amount of $2000. I won't know whether the additional principal was applied to April or May until I get the next statement from the lender. I'll post the April summary once I learn the answer to that question. For now, I've updated the Progress to Date section assuming the principal was applied to April.

Sunday, May 4, 2008

Catching Up

I haven't yet posted the Monthly Summary for April because we still haven't closed the books on April. As I mentioned in several previous entries, our April spending was much higher than normal due to several (hopefully) one-time charges, including the tax bill and the cost of car repair. [By the way, we ultimately decided to have the mechanic replace the side mirror, as I wasn't prepared to learn how to do that work myself in such a short amount of time.] The original plan was to skip the extra principal payment for April, resuming the attack on the mortgage in May. However, not long ago I came across this article by "Mortgage Professor" Jack Guttentag which made me realize there might be another way to avoid missing the extra payment in April.

Even though I've taken the time to learn how mortgage amortization works on my own, this article inspired me to look at the mortgage payoff strategy in a new light. It's brief, but I think Guttentag does an excellent job of detailing the important points.

  • First, it's interesting to note that there is no penalty for making a payment a few days after its "due date". There is a built-in grace period of 15 days on my mortgage. Each statement indicates that the due date is the first day of the month (for example, May 1), but also includes a second line which states that a late charge will be assessed to payments received on or after the 16th of the month (the end of the grace period). What the statement doesn't explicitly state is that the effective due date is the 15th of each month.
  • Second, an individual who pays the mortgage bill on the 15th (instead of the first) has given himself/herself "the use of [the monthly payment amount] free of interest for 15 days". This also means that a payment made before the due date (the first of the month) is an interest-free loan to the lender, as the borrower doesn't receive any benefit for making the payment several days early. Unlike the finance charges for credit cards, which accrue on a daily basis, mortgage interest accrues on a monthly basis. A payment on the 2nd is the same as a payment on the 17th, which is the same as a payment on or before the 15th of the following month (made during the grace period).
  • Third, because interest accrues monthly, it's advantageous to make an extra principal payment for the prior month during the grace period whenever possible, rather than delaying and making the payment for the current calendar month. An extra principal payment made on May 10th will have a greater impact on the overall interest if it's applied to the payment due May 1 instead of the one due on June 1, because that extra month of interest savings will compound throughout the remaining mortgage term.
The one caveat is the way the lender applies extra principal payments received after the due date. As Guttentag explains,
Extra payments that are made later in the month might have the same effect, or might not be credited until the following month, depending on the lender. To be credited within the same month, extra payments have to be received before the Nth day of the month, but N varies from one lender to another.
I don't know with certainty what N is for my lender. I'll admit I don't feel like calling customer service and asking for clarification of the policy. I'm going to learn this one through trial and error by studying the next statement they send us. I'm guessing that they will treat extra principal payments the same way as the regular monthly payments, but that is only a guess at this point. Right now, I plan to make the "April" mortgage payment (normally due May 1) by May 10, including an extra principal payment of $2,000. Waiting the extra time will allow both of us to receive another paycheck from our employers so that we have the cash on hand for the extra principal payment. If the lender ends up just crediting the extra principal for May anyway, then this experiment is over.

So if we didn't have the extra cash on hand to make the additional principal payment in April, and plan to make this up by paying during the grace period in May, then aren't we just setting ourselves up to be one month behind going forward? The answer would be yes if we didn't count on having some extra income in the near future. Thankfully, three sources of additional income are looming on the horizon:
  1. The economic stimulus payment of $1,200 should be arriving in May. While I question the wisdom of increasing the national debt to encourage people to spend money they don't have, I certainly won't be sending this money back to the US Treasury. Note to Congress and the President: My wife and I will not be spending one cent of this "stimulus payment" on anything other than reducing our mortgage balance.
  2. My wife expects to earn some extra income over the summer (June and July) which we aren't budgeting for anything else except paying down the mortgage.
  3. We finally put our second car up for sale. I have no idea how quickly it might sell, or how much we'll end up getting for it, but it's nice to know that we'll have an extra chunk of change coming to us in the near future which we can use to catch back up on our payment schedule. Even if it sells for a trivial amount, we'll be able to drop the insurance for that car once it's gone, and we won't need to pay for registration, inspection, and further maintenance in 2008. This will free up money each month that we can use for extra principal payments.
Our short-term goal is to use the three sources of extra income above to get back on a schedule of paying the mortgage by the due date each month. It's nice to know the 15-day grace period exists in times like this, but I don't want to rely on it each and every month. We're already debt-free aside from our mortgage, so I don't want us to feel like we're struggling financially all the time.

For the first time in a long time I've actually created a spending plan (some might call it a detailed budget) for April-July to ensure that we stay on track and don't miss any important payments. If it ends up being helpful, I may extend it beyond July. It's amazing how debt reduction requires nothing more than sticking to a spending plan involving only grade-school arithmetic (addition, subtraction, multiplication, and division).

By the way, at the end of the amortization article there are links to spreadsheets which Guttentag has created to help calculate the effect of extra principal payments on the overall mortgage balance over time. His fixed-rate mortgage calculator is applicable to our loan. I'm pleased to report that my own self-created spreadsheet agrees with his calculations, but mine takes it a step further. I have two amortization schedules laid out side-by side. The left-hand schedule shows the standard mortgage amortization without any extra payments. The right-hand schedule tracks our actual progress, including all the extra payments we've made to date. I then compare the current numbers to the standard schedule to calculate our interest savings over time, and our progress ahead of schedule. [At some point I still hope to make my spreadsheet available for download, but I need to take some time to make it more generic, and able to handle scenarios other than my own.]