I’m so stinkin’ excited! We have only 38 months left on our mortgage.
What happens when I throw a little bit extra every month towards the principal? The scales tip towards paying less in interest and more towards a complete debt free date in the Stewart household, that’s what!
It isn’t like credit cards
When you pay down the balance of your credit card debt it reduces the minimum monthly payment they require next month. For example:
Minimum payments on a $10,000 card at 12% interest:
- First month’s minimum payment is $400
- $300 goes towards the balance, $100 is wasted in interest charges
- Second month’s minimum payment of $388 is based on the reduced balance of $9,700
- $291 goes towards the balance, $97 is paid in interest
- In 10 years your minimum payment is $15 and you still owe $229.71!
Minimum payments is maintaining debt, and maintaining the bank’s quality of life – not yours!
Mortgage payments are more like uneven scales
Every month you pay down a little principle (the balance owed) and pay less interest. The amount of interest to be charged every month can be forecast at the closing so the payment is set for the life of the loan. This payment of principle and interest never changes.
For example: A $200,000 mortgage for 30 years at 4.375% (not including taxes and insurance) has a payment of $1,000:
- The first payment is $1,000
- $270 goes towards principal reduction, $730 is interest
- The second month’s payment is still $1,000
- $271 goes towards principal reduction, $729 is interest
- 10 years later the payment is still $1,000
- $583 is principle, $415 is interest
I talk more about this in How to turn $100 into $120 in mortgage principle reduction
I can almost see the day we are completely debt free!
Just below the bottom of my excel spreadsheet is our final payoff date. It’s hiding like a little kid saying “you can’t see me”. I can’t help but play with the numbers to uncover the sneaky little prankster!
Our complete debt free date comes in a $402.71 payment on March 1, 2016. If I make an extra principal payment this month of $340 it will eliminate the need to make that last payment!
Check this out: $100 a month for the next 13 months will allow us to have a mortgage burning party on New Year’s Eve 2015. WOW!
What the heck are we going to do without a house payment?
I know what I want to do, but we aren’t quite there yet. It would be a good idea to stick to our financial plan of:
- Staying debt free (except the mortgage)
- Keeping more than three months of expenses in our emergency fund
- Continuing to save for our retirement
- Putting money away for our daughter’s car, college, and wedding (in that order please)
There’s less stress, a feeling of purpose, and…
It’s going to happen whether I do anything about it or not
Regardless of what I do, this house is going to be paid off as long as we make the payment. That’s all I can ask for. Stick to our plan, Steve, and things are going to turn out just fine.
I traditionally receive a little money for Christmas to spend on myself.
What do I want more? Get a gadget? Buy some clothes? Or to pay down my mortgage?