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How to Eliminate Mortgage Debt: Every Little Bit Helps!
- payments are made fortnightly
- $200,000 mortgage
- interest rate 7.5%
- term of 25 years
- extra amounts paid from the start of mortgage
Pay an extra $5 a week and save 1 year off the term and $11,883 in interest. You could probably pay this much extra our of our spare change. You probablywould not even notice it.
Pay an extra $10 a week and save 1 year 11 months off the term and $22,484 in interest. You could easily find this by giving up 2 cups of coffee a week or a takeaway meal, or videos.
Pay an extra $20 a week and save 3 years 6 months off the term and $40,701 in interest. Find this by taking your own lunch to work instead of buying it.
Pay an extra $30 a week and save 4 years, 10 months off the term and $55,820 in interest. You could easily save this amount by shopping more carefully and saving on your grocery bill. Shop at the farmers markets and buy what's on special.
Pay an extra $40 a week and save 6 years off the term and $68,626 in interest. Stop the cable TV and cut down eating out, takeaway meals and going out so much. Limit a night out to once a month. Have friends over for a barbie or a pot luck meal instead of going out.
Pay an extra $50 a week and save 7 years 1 month off the term and $79,643 and in interest. Stop spending money on Internet marketing products, joining mlms and otherwise wasting money online. Stop spending so much money on clothes. Do you really need them all? Stop spending money on the latest 'thing' for kids. Find free entertainment, fly a kite, go to the park, make a billy cart, plant a garden or just kick a ball around with them in the yard. Help your kids work out ways to earn their own money. Honestly how much 'stuff' do kids have that they don't need? How many lessons, clubs, music and sports etc are they doing?
Pay an extra $100 a week and save 10 years 9 months off the term and $118,000 and in interest. Get a few hours extra work to save this much. Get that second pay paid straight into the mortgage. Cook more home cooked meals and treats. Take a cheaper holiday. Sell of stuff you don't need. Get serious about tracking spending and cutting expenses. Think about a cheaper car.
When you really start looking, there are many ways to save and earn a bit of extra money. When I first started this blog our family was earning almost three times the income we now have. Yet I truly believed that we could not afford health insurance. As I started sorting out the mess it became very apparent that we could, if we stopped wasting money. I just had to choose differently. Now we pay $105 a month for health insurance without even thinking about it.
Small amounts add up over time. By paying some extra off your mortgage from the start you can painlessly save money and time. Finding the extra money is about focus. By making myself blog everyday and read other blogs every day I found that instead of thinking about my debts all the time I started thinking about how to pay more instead.
My thinking changed from "I can't do this, we will never get ahead" to "HOW can I find the money to pay my mortgage of in 5 years? "What can I do TODAY that will help me pay it faster?"
Anthony Robbins says "Ask yourself better questions". It works! And I still think about those same every day.
*If you are a blogger trying to pay your mortgage off early can you please leave a comment so I can find you.
Posted at 6:38 AM | Labels: How to Eliminate Debt, Reduce mortage, Saving |
10 comments:
This is a great article! I like the way you have show examples of what the "extra repayment" is worth and where it can be found!
- brilliant Louise- where can I find the calculator for 8.57% on a $510,000 mortgage (yes - that is ours unfortunately living in Sydney isn't cheap)
I want to show my husband and son.
I really like the way you show how $5 or $10 extra a week still makes a difference. It is something we all know, but there is a bigger impact when you see it in black and white.
I really liked your examples too. I think people get overwhelmed by those big numbers and think there is no light at the end of the tunnel.
My house cost the same as a nice SUV (not a lot, I live in a low cost of living town) and I paid it off in three years. Not a single penny wasted, it can be done if you decide that is what you want to do!
hi tehnyit, it makes it a bit more 'do-able' when you break it down to weekly I think. Otherwise it just feels overwhelming.
babyamore, sydney prices are awful at the minute, it must be so difficult for young families to even get a start in the market.
about the calculators:
this is the Australian calculator site that is my favourite: http://www.realestate.com.au/cgi-bin/rsearch?a=loan&t=res
the other really good site which has calculators for different countries and many different types of loans is:http://www.dinkytown.net/
I use this site as well. To really get a clear idea of the mortgage use a amoratization calculator. This type of calculator shows you how much is paid off the principle and in interest at the end of every year. I will write it up in a post to explain it better.
links for calculators are also in the sidebar
1stop mum & kim, welcome!
Helpful data!
I don't yet have a mortgage. My DH and I live in an apartment for now, but we hope to buy our first home within 2-3 years.
Our plan is to take out a 15-year fixed rate mortgage and pay that thing off as fast as possible.
Great article. I don't include my mortgage amount in my debt total; if I did I'd feel overwhelmed looking at that total :) I paid off the credit card, working on the cars now. The mortgage will be next.
I want to save up for my first home. I have always enjoyed your posts, I would email louise.
Incredible job on this article!
It's hard to think that an extra $5.00 a week would really impact the bottom line like that!!
I have a 30 year loan that's still relatively new - but seriously - who couldn't afford $5. a week? That's a Vente Cappucino at Starbucks! LOL
Before I make post my blog I want to copy in a recent blog. This is the typical point of view with mortgage debt.
Ever since I started listening to John Cummuta and Dave Ramsey, I keep hearing people say but, "I don't want to pay off my house. I would lose my tax deduction on mortgage interest. Besides I can invest the extra money and earn more money."
I say Horse Hockey!" As Ramsey says, only his "broke financial advisers" teach that. Let me try to explain to you the truth as both Ramsey and Cummuta tell it. First let me ask what tax bracket are you in? Let's say you, as Cummuta was, are in the 28% tax bracket. That means for every one dollar ($1) of interest you pay to your bank, you get to save 28 cents in taxes."
Now, let me say you will still get your tax deduction the entire time you are paying off your mortgage. It only ends when the mortgage is paid off. OK back to my explanation.
Each dollar of interest you pay to the bank (or mortgage company) is deductible from your taxable income, which saves you the 28 cents you would otherwise have paid to the government on that dollar as income tax. But think about that. You're giving up a full dollar to save 28 cents. Whereas, if you pay off your mortgage, you will indeed have to pay 28 cents federal income tax on each dollar not going to mortgage interest...but your getting to keep the other 72 cents (72%)! Ask yourself, would you rather pay a dollar (mortgage interest) to save 28 cents, or pay 28 cents (tax) to keep the dollar?
Does it still sound like a good deal? If so you can send me $100,000 and I will send you $28,000, as soon as your check clears in my bank account.
In the typical scenario, a full dollar is leaving your life on its way to the bank and Uncle Sam is giving you a 28-cent tax break to ease the pain. However, in this scenario, the only thing leaving your life is the 28 cents. You ARE 72 cents ahead on every dollar.
Paying off the mortgage early is better, because 72 cents will always be more than 28 cents.
Very well articulated. However, it seems that he examined this in it's simplest form. It's my belief that when you have enough liquid funds available to pay-off a home then your home is paid. You've just chose to keep your net worth working for you instead of tied up in your property and are willing to pay the monthly cost in the form of your mortgage in order to do that. If you share that point of view I would like to offer an alternative opinion. I'm sure I have no chance of changing the opinions of the experts that offer this advice, but maybe I can save hundreds of thousands of dollars for a nice family. A recent client I met earned approximately $120K per year. They just purchased a home and put $75K down on a $375K home. They took out a 30 year fixed rate P&I loan at 7% on the balance of $300,000. Okay, the stage is set. Now, first of all I have no problem with fixed rate loans. The cost of short term money is still comparitively high and longer terms are just too attractive. The real problem I have is how it's amortized. He should have an interest only loan and NEVER pay-off his home. Insane right? If you still think I've kept my sanity keep reading. I'm going to dig a little deeper than the simple claims presented by the columnist and the results may shock you.
1) If my client switched to an Interest Only loan his payment would be $1750/Month.
2) By contrast the Principal & Interest payment is just under $1,996/Month.
3) Annually savings on the Interest Only loan is $2,951.
Stay with me now.
If he moves to an interest only loan, he'll never reduce any principal so all the following numbers will never change.
1) The annual mortgage payment of $21,000 is also his interest deduction.
2) $120,000 gross minus the $21,000 deduction means $99,000 in gross taxable income.
3) Which, in Idaho leaves an annual tax bill of $24,704.
4) And again, these numbers will never change, unless of course the tax rates change.
By contrast keeping his P&I loan means less and less in deductions as each year goes by.
Obviously I can't list every year of what happens to him as his loan balance is being reduced, but I'll show a few. Notice the spendable income. That figure is simply his $120,000 minus the tax bill.
Year 5)
Interest Deduction $19,922
Taxes Due $25,067
Spendable Income $94,933
Year 20)
Interest Deduction $12,743
Taxes Due $27,510
Spendable Income $92,490
Year 30)
Interest Deduction $884
Taxes Due $31,311
Spendable Income $88,689
Again, I couldn't list every year. But to really look at whether it makes sense to reduce the principal balance of our homes, shouldn't we do the following:
We already know he's spending $2,951 more per year in payments. He looses more and more spendable income each year as his tax bill goes up.
Well, here's the exercise I did. I assumed that every year we took that $2,951 and added it to the money we lost on higher taxes. Then I plugged that into an investment earning 9%.
Bottom line after 30 years;
1) Keeping his Principal & Interest loan means.
Mortgage Balance - Paid Off
Money Saved - $0.00
2) Paying Interest Only.
Mortgage Balance - $300,000
Money Saved - $612,331.
I know that 9% may have been a little agressive in our crazy world of investing. But the point is, even if the client decides to pay-off the $300,000 loan after the 30 years, they would enjoy $312,000 left over. A pretty hefty profit considering he didn't spend 1 penny to impliment my suggestion compared to paying off the home. Many of the "experts" claim to have sound advice after only scratching the surface in terms of looking for the real answer. They all say you should pay-off your home, but they don't really break it down the way I just did. If you can achieve this in a tax free investment such as a Roth IRA, you'll enjoy tax favored contributions, accumulations and withdrawal of your funds. I know this because I'm a financial planner and my passion is helping families analyze situations like this. I also help them save for retirement faster by HAVING a mortgage. And yes...the bigger the better assuming they have the equity and can handle the payments. I've helped my clients get to huge sums of dollars tucked away in their IRA's and 401K's tax free. And yes. I know you'll hate to hear this. But I accomplish that using.... You guessed it. A Mortgage.
I 'm not a loan officer anymore. So I don't do loans for personal gain. But I do have an understanding of the many keys they can offer us to financial freedom. As a last word. I only wish that just one of the columnists would break down a problem like this the way I just did. When numbers are examined this way it offers us clarity and allows us to make the correct choices. I do wish that financial experts would show us some of their figures so we can analyze the logic behind their claims if there is any.
Tony W.
idahoinvestments@gmail.com
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