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

Monday, January 31, 2011

Monthly Summary: January 2011

Compared to a year ago, this January has been very snowy in New England. I have hardly been able to ride my bicycle at all, because the snow piles on the side of the roads are intruding into the bicycle lanes, forcing me to ride in the same area as cars. As much as I enjoy riding (even in the winter), I've had to put the cycling on hold for my own safety (more because I fear drivers won't be able to avoid hitting me on the narrow, icy roads than for any other reason).

We made good progress on mortgage killing this month. My wife's new job (as of last October) comes with a higher salary, so we've had more cash to allocate to the debt (I'm definitely not complaining about this).

Our January payment was the 23rd of 120 scheduled payments on our ten-year loan, and the 37th payment since we began the project a little over three years ago.

We began 2011 with a balance of $58,121.17. We scraped together $4,000 to include with our required monthly payment, which in total reduced the debt to $52,802.39 by the end of January.

We realized $260.53 in interest savings this month, bringing our running total to $3,896.52 since the beginning of the project.

Our mortgage balance is now $71,859 less than it would be if we had never made any prepayments on the loan. Because of our prepayments to date, we're guaranteed to pay off the mortgage 5 years early (on a ten-year note) even if we never make another extra payment from this point forward. That's right...we cut the term in half in under two years.

We have 23 months left in our five-year goal period (but only eleven months considering our revised goal to rid ourselves of this mortgage in calendar year 2011). We must average $2,295.76 per month in principal reduction to pay off the loan within our original goal, or $4,800.22 per month to meet our revised 2011 goal.

These next few months are going to try my patience. Now that I can see the light at the end of the tunnel, I'm tempted to take all of our free cash and dump it on the loan to get rid of it once and for all. But for now, at least, we are sticking to our plan. Hopefully we'll be able to meet our updated goal and be done with mortgage payments by the end of this year.

Thursday, January 20, 2011

Pay Down the Mortgage Early, or Invest?

A popular Personal Finance topic of debate concerns the wisdom of using extra cash to either pay down a mortgage early, or to invest. By now, it should be clear which side of the fence we fall on: DEATH TO THE MORTGAGE!

This article makes the opposite argument. I completely disagree with the author's point of view, but I was amused by the numerous comments offered up by readers. Some are logical, some are emotional, and some are truly novel.

The reasons we choose to pay off our mortgage early (redux):

  • Paying off a fixed-rate mortgage offers a risk-free, guaranteed rate of return. When comparing this to other risk-free investments (government bonds, CDs, and the like), the mortgage debt reduction almost always offers a higher rate of return. Investment classes which have posted higher historical returns (stocks, corporate bonds, high-yield bonds, etc) carry a significantly higher degree of risk, including the risk of losing the entire investment.
  • Eliminating mortgage debt has an immediate, lasting effect on monthly cash flow. Sticking with a mortgage through 15 or 30 years requires a steady income during the same time period. By paying off a mortgage early, there is less dependency on sustained employment to meet this monthly obligation (the modern version of indentured servitude). Once cash flow improves, the ability to invest (and even to contribute to old-fashioned savings) gets an added boost.
  • Our house is not an ATM, nor is it a chip to be gambled away. A house is a place to live -- a home, a shelter, a place of refuge and strength and solidute. If someone had given us our house as a gift (mortgage-free), we would not have taken out a home equity loan and used the proceeds to invest. If we wouldn't put our home at risk in that scenario, why would we make the same decision when we're paying down a mortgage?
  • Nobody can know the future. Nobody can predict the future behavior of the stock market or the bond market. Very few people can predict the future of their employment situations. Investing involves risk. Debt elimination adds certainty to a very uncertain world.

Sunday, January 9, 2011

Goal for 2011

As I've stated many times before, my wife and I set a goal in December 2007 to pay off our mortgage in five years. Three years into the project, we're ahead of schedule. Because of this, we've decided to set an aggressive goal for 2011: kill the mortgage by the end of this year.

Even though we managed to exceed our yearly goal ($37,796.76) in each of the past three years, the outstanding balance ($58,121.17) is larger than the total principal reduction in any prior calendar year. So how will we manage to meet this lofty goal? We have a few things going for us.

  • 1. The interest portion of our required monthly payment continues to drop with each month. This means more principal reduction without any extra effort. Running several hypothetical scenarios for 2011, I see we'll have somewhere in the neighborhood of $2,000 to $3,000 additional principal reduction from this trend, compared to interest we paid in 2010. However, smaller interest payments alone won't be enough to help us eliminate the mortgage debt in 2011, so I'm glad that...
  • 2. We should have a smaller income tax bill due in April. Since we owed so much in each of the past two years, we made estimated tax payments for 2011 during 2010. I don't know yet how much of a difference this will make, but I'm guessing it will be at least $2,000, and possibly as much as two or three times that amount. This will help us weaken the debt, but not eliminate it, so it helps that...
  • 3. I expect to receive some deferred compensation in the next few months. Several years ago, when the economy was better than it is now, I was awarded a bonus which required me to (a) remain with my employer for specified period, and (b) maintain a certain level of performance in order to collect. I met the eligibility as of December 31, 2010, so I'm expecting a boost in one of our mortgage payments this spring. Exactly how much this will amount to remains to be seen, so I can't yet predict the impact it will have on our overall progress. However, we have an ace in the hole, which is...
  • 4. Even as we've worked hard to pay down the mortgage debt, we've been adding to our savings. This is cash we set aside for emergencies and property tax payments. We've had to draw on it a few times over the past three years (for example, when our furnace died, or when our water heater broke), but we've always built it back up, and at our current rate of saving (and barring any major unexpected expenses -- knock on wood), the amount of our emergency cash on hand should eclipse the outstanding mortgage balance at some point during 2011. We'll have to come to a joint decision on when the time is right for a significant reduction in our emergency savings, but I expect that this project's nail in the coffin will come in the form of a transfer from savings over to the mortgage, wiping it out in one swell foop.

Paying off the debt in 2011 is definitely a best-case scenario, since so many obstacles could prevent us from achieving this goal, but it's best to aim high, right? I'm looking forward to focusing our efforts and ending this project on a high note. It's exciting to think that by reaching this goal, we'll send our final mortgage payment sometime in the next twelve months!