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, April 30, 2011

Monthly Summary: April 2011(Paid in Full)

This may be a bit anticlimactic considering my previous entry, but for completeness I'll summarize our April mortgage activity using the format I've become accustomed to for more than three years now.

Our April mortgage payment was the 26th of 120 scheduled payments on our ten-year loan. It was the 40th payment since we began our DTM project at the start of 2008. And it was also the last mortgage payment we'll ever make on this house, as the loan is now paid in full.

We began the month with an outstanding balance of $19,107.10. After careful consideration, we decided to transfer enough money from our savings to pay off the remaining balance. Because we paid off the balance before the last day of April, the interest was charged at a daily rate (24 days). Along with the remaining balance, we paid our lender $58.91 interest and a $17 recording fee. Our bank charged us a $25 wire fee for the privilege of sending certified funds to the lender. So the total cost of dealing the mortgage its fatal blow in April was $19,208.01.

Until now I've been listing the amount of interest we save each month by comparing our actual interest payment to the amount of interest we would have owed the lender if we hadn't made prior payments to principal. I call this the "realized" amount of interest. Since the loan is gone, we not only realized the interest savings for the month of April, but also for all future months until the loan would have been paid on the standard amortization schedule (March 2019). Because we would have owed the lender $37,133.57 of interest over the full life of the ten-year mortgage, and because we only paid the lender $9,735.76, we have now realized $27,397.81 in interest savings on the ten-year loan by killing it this month. (This doesn't include interest savings from our original 15-year mortgage which we refinanced in early 2009 -- by including that amount, the total is $28,435.55).

If we had never made any extra payments on our ten-year loan, the remaining balance at the end of April would have been over $121,461.

We reached our original five-year goal last month. We reached our revised four-year goal this month. From start to finish, it took us three years and four months (40 months total) to pay off the mortgage once we made up our minds to do it as quickly as we could manage.

Strangely enough, our achievement doesn't yet seem real. I think it will take at least another month (when we start seeing more unallocated cash in our budget) before we start reaping the benefits, both financially and psychologically.

Although the mortgage is finally dead, I plan to keep this blog up and running for a while. I would like to reflect a bit on our experience over the past few years, and describe our new mortgage-free (and 100% debt-free) existence. At some point in the not-too-distant future I will probably decide that I've had my final word, and can close the book on this project. But then, of course, a new project will begin.

I'd like to dedicate this month's entry to my loving wife, who provided us the courage to set bold goals, the tenacity to help keep ourselves on target, and the hard work (and paychecks) to back it all up. Congrats, girl! You deserve it.

Tuesday, April 26, 2011

Goal Complete

Sunday, April 24, 2011

Decision Reached

This will probably not surprise anyone who knows us (or who has been following my blog), but my wife and I ultimately decided that we were comfortable with the choice to pay off the mortgage this month. We weighed the risks against the rewards and are mentally ready to aggressively move forward. Tomorrow I will head down to the bank to send a wire to my lender for the remaining balance and interest, with a little extra thrown in to cover recording fees and the cost of the wire itself.

Our lender has an automated telephone number which provides information about the loan (balances, history, etc). One of the options provides mortgage payoff details. However, the lender only offers two choices after selecting the "Loan Payoff" branch of the phone menu: "Press 1 if you are selling your home. Press 2 if you are refinancing your loan." Well, of course we are doing neither. I guess not too many people elect to pay off their mortgages in the way we've chosen.

The lender is also very clear that they will only accept final payoff in the format of certified funds (bank wire or cashier's check). I doubt they would make an exception in our case, even though they were happy to cash our personal check last month for an amount which is larger than our remaining mortgage balance. At this point I'm not interested in pleading or arguing with customer service anyway. I'll just follow their standard procedures in an attempt to minimize the chances that something gets fouled up in the process.

For the sake of disclosure, here are some of the reasons we made the decision to go ahead with the loan payoff now, instead of waiting a few more months so we wouldn't have to dip so far into savings. This list is in roughly descending order of importance.

  • We are mentally ready to be done with this debt
  • We have budgeted for major expenses through the end of 2011, and paying off the mortgage now would not negatively affect our ability to meet expected future obligations
  • We do not feel our employment situation is at risk for the near future (at least through 2011)
  • We have already transferred cash out of our savings account and are comfortable with the balance
  • We expect to rapidly replenish our savings after the mortgage payments are history
  • We have dealt with a lot of maintenance issues (repair and/or replacement of appliances, etc) over the past five years, so the risk that something will break or need repair in the near future is relatively low (knock on wood)
  • By paying off the mortgage now, we will avoid paying some additional future interest
I'll provide an update over the next day or two when the transaction is complete.

Saturday, April 9, 2011

Mortgages and Emergency Funds

A widely accepted personal finance "best practice" is the establishment and maintenance of an emergency fund which can be used to cover unexpected expenses, such as appliance failure, car replacement, home repair, or income/job loss. Depending on the source, typical recommendations for emergency fund goals range between six and twenty-four months of living expenses.

As our outstanding mortgage balance is now less than the amount we have saved in our emergency fund, it occurred to me that there is a direct relationship between the two. After a mortgage is gone, monthly expenses will suddenly drop. Therefore, when basing an emergency fund goal relative to future monthly expenses, it's possible to find a point at which it is beneficial to use the emergency fund to pay off the mortgage using the amount of savings which is earmarked for future mortgage payments.

Here's a hypothetical example using nice round numbers. Imagine I have a mortgage with a required monthly payment of $1,000. I also have a goal to have one full year (twelve months) of living expenses covered by an emergency fund. Regardless of my other monthly obligations, if my emergency savings are fully funded, $12,000 of the total saved amount should be allocated to future mortgage payments (twelve months of $1,000 payments). Now assume I have paid enough of my mortgage debt that the outstanding balance is $12,000. It probably makes more sense for me to take the $12,000 out of emergency savings and use that to pay off the rest of the mortgage. If I don't, then I'll end up paying the $12,000 eventually (month by month), but because a portion of my monthly mortgage payment goes toward interest, it will take me more than twelve months to pay off the remaining debt. This means I will end up paying more than a year of extra interest, and my total mortgage expenses (including interest) will exceed $12,000.

Of course, by withdrawing the $12,000 from the emergency fund, I'll miss out on the opportunity to earn interest on my savings. But since an emergency fund will typically be invested in fully liquid cash or money markets (not tied up in CDs or other investments which may need to be sold at a loss on short notice), I'll likely be earning a very low rate on my savings. If the savings rate is less than the mortgage interest rate (also likely), it will provide me a greater financial benefit to get rid of the mortgage right away.

If my required monthly mortgage payment also includes an escrow amount (intended to cover property-related expenses like taxes or interest), it will make it even more favorable for me to pay off the mortgage right away, because less of the monthly mortgage payment will be allocated to principal. So in the example above, it might take me fifteen months to pay off a mortgage with a $1,000 required monthly payment (principal + interest + escrow) if the remaining balance is $12,000. This means I would be on the hook for fifteen months of interest. As for the escrow portion, it's probably a wash -- once the mortgage is paid, my lender will return any accumulated escrow balance to me (the former borrower), which I can drop into my emergency savings, likely earning a higher rate than the pittance which is usually paid on escrow accounts. Of course it will be my responsibility to pay my own taxes and insurance after the mortgage is gone, but if I've been responsible enough to pay off my mortgage, it's probably safe to assume I'll be responsible enough to pay my own taxes and insurance as well.

Since the emergency fund is meant to cover lost income as well as unexpected expenses, I might expose myself to more risk if a sudden major expense were to crop up after I'd used my emergency savings to pay off the mortgage. It's this consideration -- trying to predict the unpredictable -- which keeps my wife and I from immediately using our savings to pay off the rest of our mortgage right away. It is tempting, however. Once the mortgage is gone, we'll be able to replenish our emergency savings in short order. There is a window of time where such a move would leave us vulnerable, though. We're still working on this decision. I'll likely elaborate on this again when we've run some numbers and come to an agreement on how to move forward.