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

Thursday, April 16, 2009

Inspiration

My wife and I have a friend who is very particular about how he spends money. [Note: this is not one of those fake friends that some authors invent to illustrate a point. He is an actual person whose company we enjoy.] He abhors debt, and often mentions how he hates to "separate" from his money. He saves ahead of time when anticipating a large purchase (car, appliance, etc). He is also very patient, and will delay a purchase for months or even years if he feels he is not getting a good deal.

He owns a townhouse-style condominium, and for the past couple of years he's been looking to move into a house with a yard. He's made an offer or two, but no sellers were interested in closing any deals in his price range. All the while, he's been adding to his down-payment account, patiently waiting for the right house to come along.

We've told him about our progress toward our goal of being mortgage-free. He told me he's also been paying a little extra toward his principal each month since he bought his condo. Earlier this week, he stopped by my desk at work to chat. He said he'd been preparing to make another mortgage payment, and took a moment to consider the amount remaining on his loan. He also reflected on his down payment account, and realized that by combining that with some other savings he had, he could be rid of his own mortgage. So he took the plunge, and wrote a large check to his lender, and paid off his thirty-year mortgage in a little under ten years. Now he's free of that monthly obligation for as long as he chooses to remain in his current home.

He told me that he's much more excited about being debt-free than he imagined. He plans to continue to make a monthly "mortgage" payment into his savings to replenish his down payment fund. If he sticks to that, and is patient enough, he may be able to upgrade to a more expensive house and not have to take on another mortgage in the future.

What I find most inspiring about his new situation is the freedom and flexibility that he's gained. Unlike my wife and I (and most other people we know), he doesn't have to worry about dutifully paying money each month to a landlord or a lender. I think this is an envious situation, especially in the current job market. If my wife or I lost our job tomorrow, we'd have to figure out how we could cut our spending in order to keep paying the mortgage until we found new work. If our friend finds himself in the same situation, he could reasonably survive for months without running into serious trouble.

Remember Maslow's Hierarchy of Needs? At the lowest level are the basic human needs, without which we cannot survive. To paraphrase Maslow, they are food, water, health, clothing, and shelter. Although I have no concrete data to prove this, it seems to me that for the average person in a modern, first-world society, shelter is far and away the most expensive of these needs to satisfy. Water is inexpensive. Clothing can be acquired gradually, for relatively low cost, and is durable enough to last for years if properly cared for. Food expense can be kept to a minimum in times of need. And for most people, good health can be obtained by making a personal commitment to healthy habits [I have to qualify this by defining health expenses as those which are preventative, rather than costly "cures"]. Our friend has therefore cleared a major hurdle in ensuring that his basic needs are met, regardless of his employment. He is no longer a slave to The Man.

Although I'd like to be able to say I'm completely happy for our friend, and don't have any jealousy of his new situation, I do admit that our $140K mortgage balance feels like a dead weight by comparison. However, I'm going to try to use this as an inspiration to keep working toward our own goal, knowing that patience and discipline do pay off in the end. I want us to have the freedom to go to work because we choose to, not because we feel we have to. I want us to spend the prime years of our lives actually living our dreams, not just working toward them. So we continue to hope for the best, and follow the plan, and look forward to the day when we too can start making mortgage payments to ourselves.

11 comments:

ashley said...

Wow, that is really impressive that he did that! It would feel really weird I think to not have to pay off rent or mortgage anymore, haha. I'm not even close to that part of my life. But you guys seem to be doing great with your mortgage as well. I think the day when you are debt free will come sooner than you think!

Louise said...

thats really good and encouraging to read! It must be a great feeling for him to have it paid off.

Dreamer said...

Hi Executioner - I really enjoyed reading this post.

But I have to question your friend's actions. Does he have a very secure job, perhaps he works for local government if so then I can perhaps understand his actions. But unless he has a very stable job I cant help but think that instead of making himself more secure he has in fact exposed himself to risk. Although he has paid off his mortgage he still needs to eat and pay bills etc. He is not financially independant therefore he will still be a slave to the man.

If your friend lost his job would he then have to borrow againgst his mortgage to get by?

Diversification is a good idea. I do not consider that all mortgages are evil. Eggs in one basket is never a good idea. IMHO I cant help but think he has severely limited his options by draining the bulk of his savings accounts. By keeping his mortgage (unless it was a monster mortgage) he would have in fact given himself more flexibility.

What do you think?

The Executioner said...

I've heard that argument before (keeping the mortgage), and it never makes complete sense to me from a cash flow perspective.

I have no idea what my friend's monthly mortgage payment was, but for the sake of an example, let's imagine he had to pay the lender $1,000 each month (some mortgage payments are less than this; many other are more). So without paying off the loan, he had to come up with at least $12,000 each year, AFTER taxes. How much does he spend on food each year? I bet it's far less than $12,000. Even if he is a voracious eater, I can't imagine him spending more than $100 per week on groceries, which comes out to $5,200 per year. So just focusing on mortgage and food alone, he has now moved from a position of needing $17,200 per year (net after taxes) to only $5,200 per year. Even if he lost his current job, it would be far easier to find a replacement job (even part time, minimum wage, etc) to come up with $400 per month than it would be to come up with $1,500 per month. He could even take on a roommate and possibly pay his expenses without working at all (living on the roommate's rent payments).

To summarize, life with a mortgage requires a full-time job. Life without a mortgage could be possible provided a part-time or lower-paying job, or possibly even by renting out the house.

I don't think paying the mortgage is the only step required in order to gain financial independence, but I think it's a huge step to take in order to gain financial flexibility. I can easily imagine a scenario where someone without a mortgage could plan ahead and take a year off for sabbatical, etc. I find that scenario much harder to work out when there are still debt installments to be paid each month.

If your goal is to save up as much money as possible over many years, then it may actually make sense in the long run to keep the mortgage and try some more speculative investments. But if your goal (like mine) is to be free from the monthly obligations of debt, then there is nothing better than paying off the mortgage ASAP.

Dreamer said...

Yes I think it depends on your situation its all relative. I dont have stable employment so I would feel uncomfortable about using savings to pay off the mortgage. Also I want to move. I dont want to stay living where I am long term, heavan forbid.

But regarding your friend in addition to food costs he would have property taxes and utility bills, heating, lighting, AC. Doesnt it get v cold in NH in the winter and very hot in the summer? Would it be fair to say that this might add another $300 at least on top of his food bill of $400 a month. So he needs to earn $700 per month - isnt that a full time job at minimum wage? There arnt many professional jobs where they let you work part time if you dont have kids. If he is single he might be able to rent a room as you say - its more difficult to do this if you are a couple though.

change is a good thing said...

Wow!! Thanks for sharing, that is VERY inspiring! I would love to be in that situation too. Hopefully someday. Good luck with your continued progress to reducing your mortgage. I always love coming back to check in on your progress.

SavingDiva said...

That is really motivating! Thanks for the tips on paying off my mortgage ahead of schedule.

Since I'm in grad school, I won't be able to put much extra toward the mortgage each month...but I'm going to try to get up to contributing an extra $200/month :)

Your blog is very inspirational for someone who is trying to pay down their mortgage ahead of schedule (5 years is out of the question, but I'm working on 15-20)

The Executioner said...

Change, Diva: Thanks for the kind words.

Dreamer: Regardless of what your total monthly expenses are (let's call them X), without a mortgage your expenses automatically fall to [X - mortgage payment].

The mortgage payment portion of that equation is inflexible, assuming you have a fixed-rate mortgage which is far and away the most common kind held in the US.

The remainder of X is much more flexible. You can choose to not run the air conditioning in the summer. You can choose to cancel the cable TV subscription and shop at thrift stores. You can choose to walk everywhere.

So having a rigid, substantial, monthly obligation (mortgage payment) to me seems very rigid and very risky, compared to more flexible obligations which can be more easily satisfied during meager times with clever solutions.

Of course, if you DON'T lose your job, and DON'T intend to move, and pay off the mortgage, you can keep living as you were before, only with an extra amount of income every month to do with as you please (save, spend, etc).

Dreamer said...

I still dont see how ploughing all spare case into paying off the mortgage is a "flexible" approach.

Being tied into a fixed rate mortgage is slightly different however, I am not tied into a fixed rate I am on a tracker deal, where the interest rate tracks that of the bank of england, currently paying 2.36% interest. So I disagree that a mortgage is a rigid and fixed amount. I can take a mortgage break, if i'm in dire straights financially i could also rejig the mortgage to an interest only mortgage, all this will lower my monthly obligations.

If I've paid all my cash into the mortgage I'm a bit stuffed if i've lost my job, got no work, umemployed etc. Perhaps if I was employed by local government and my employment was very stable and i wanted to live in my house for the rest of my life i might think differently.

But I dont, my income is transient and precarious so I have to have flexibility and keep all options open.

The Executioner said...

Dreamer, we are not comparing apples to apples here.

I understand the types of mortgages offered in the UK (and Australia perhaps?) typically allow the user to make flexible payments over time. I do not have firsthand experience with those mortgages, so I am only going on what I have picked up from bloggers outside the US.

The mortgage we have is a fixed-rate mortgage. This is very common in the US. The standard mortgage that is most often quoted is a 30-year, fixed-rate mortgage. The rate does not fluctuate every month, so the borrower knows that the amount owed each month will not change until the mortgage is paid off.

However, there is no such thing as a "mortgage break" with a fixed-rate loan. If you do not pay your mortgage in any given month, you will get a nasty letter from your lender suggesting that you might be a deadbeat. If you go several months without paying, the lender may decide that you are no longer a suitable risk and will start the foreclosure process, which ultimately could lead to the bank repossessing the house.

Much like the utility company shutting off electric or water service if a customer does not pay their bills, lenders will evict you from your house if you do not pay the mortgage. This is an extreme case but it has been happening with increasing frequency in recent months as people have been losing their jobs.

This is why I think it is a good idea to eliminate the mortgage as quickly as possible. I do not want others having control over me each month. The lender demands my mortgage payment, and since I cannot pay off the mortgage all at once, my employer demands my toil in exchange for my wages.

Eliminate the mortgage, I am no longer beholden to the lender. And therefore, I am much less obligated to work in a job that I do not like just because it "pays the bills" (i.e. the mortgage).

One final note: we don't put every last cent into the mortgage; we do have a cash cushion in case of emergency. But rather than saving up loads of cash, we are trying to aggressively reduce debt at the same time so that our total interest outlay is lower in the long run.

I'm not saying my approach is right and yours is wrong. Personal finance is definitely personal.

Dreamer said...

Executioner - so true, we are not comparing apples with apples. The tracker mortgage has worked well for us recently what with the crsh in interest rates. We are still earning more interest of our cash than we would paying down our mortgage.

I still enjoy the debate with you though. I'm always interested in how other people think and approach things, as you say personal finance is just that very personal.