This month marks the 3 year anniversary of my first home purchase, and can you believe I’ve already been able to save time and money off my mortgage?
A home will often be the most expensive purchase you’ll ever make. It’ll also likely put you in the most debt you’ll ever have.
Many people simply can’t afford to own a home due to rising costs, lower wages, and increased debt. On the other hand, many choose to invest in the stock market, arguing that the return on investment will be higher over time.
While many shy away from homeownership due to these reasons, it remains a staple of the American Dream and a goal for many people despite what the numbers may say.
Coming from a family where almost everyone owns a home, I was conditioned from a young age to strive toward that goal. Despite the many challenges facing younger generations, I was able to achieve it due to hard work, careful planning, and of course, family help.
Where for most the end-goal is the home purchase, I’ve taken things a step further and made it my goal to not only own a home, but to pay it off much faster than the 30 year time frame my mortgage is based on.
This post represents an update 3 years into my journey of homeownership, where I’ve already saved time and money off my mortgage.
I was incredibly lucky in the purchase of my home.
Unfortunately, I was a little off in the optimal timing for purchasing a home in the Portland area. By the time I had saved enough of a down payment to begin looking, the market had flipped from a high inventory of lower-priced homes with few buyers to a low inventory of rapidly increasingly higher-priced homes with many buyers.
In this situation, classic supply and demand ensued. Decisions had to be made quickly, offers had to be strong, and prices were driven up.
There was no negotiation like you see on House Hunters. You had to come in with your best offer, which included YOU paying all closing costs and often offering far more than the asking price.
In fact, I put in bids on 5 homes that were well above asking. Once, I bid $10,000 more than the asking price. I wasn’t even in the top 3 offers.
So I was incredibly lucky when my agent suggested we look at a house that had just come on the market. It was a 3 bedroom, 2 ½ bath. It was a little on the small side at 1,350 sq. ft. and it was a flag lot. But it was updated and newer. Perfect for a single person buying their first home.
We were first to see the home and first to put in a bid ($12,000 above asking). I’ll never understand the reasons why, but the owner decided to accept my bid without waiting for other offers.
I’ll save all the details of closing for another post, but 3 years ago this September I purchased my first home for $280,000.
After the down payment, my starting mortgage balance was $224,000 with a 4% interest rate.
3 Year Mortgage Update – Saving Time and Money Off My Mortgage
Ahead of Schedule
It’s now been 3 years since I purchased my home and began making payments.
When you calculate the payoff schedule for my mortgage parameters with an amortization schedule calculator (check out ours here), at 36 months in the balance should be roughly $211,677.
My 36 month balance is actually at $206,328.04.
I’ve paid an extra $5,348.96 toward my mortgage over the last 3 years, which has put me significantly ahead of schedule on my mortgage. However, that’s not all it has done.
Going back to the amortization schedule, if I had been paying my mortgage according to schedule (without extra payments), I would have paid roughly $26,175 in interest.
What I’ve actually paid is $25,282.72 in interest.
I’ve saved $893 in interest so far.
While that may not look like a lot, over the course of a 30 year loan of such a large amount a little goes a long way. This is especially true toward the beginning of the loan because the balance is bigger and a larger portion of your payment is going to interest.
Thus, the earlier you begin making extra payments the more you’ll save on interest.
In fact, making just one extra principle payment equal to your monthly payment at the beginning of the mortgage can save you over $1,000 (depending on the loan amount). One payment alone!
Similarly, putting a small amount extra toward the principal on a monthly basis can save you upwards of $30,000 in interest over the course of the loan.
But big interest savings aren’t the only thing making extra payments has done for me. It’s also saved me time.
The last thing making extra principal payments has done is allow me to cut significant time off my mortgage, even in just 3 short years.
It’s difficult to calculate the exact time I’ve saved without getting a payoff schedule from my lender, but according to Sebastian’s calculations I’ve already cut roughly 6 months off the mortgage. The extra payments add up to roughly five monthly payments, but the interest savings are equivalent to almost one payment within the first 36 months at no cost to me.
Again, this may not seem like a lot, but the impact can be felt more when you consider that I’ve only been making payments for 3 years. Extrapolate those figures over 12 years (3 years x 4) and I will have cut 24 months (6 months x 4) off the mortgage.
How Did I Do It?
While all these numbers may be impressive, the bigger question is not what I’ve been able to do in 3 years, but how I was able to do it.
Clearly I’ve made a good number of extra principle payments ($5,348.96 worth), but for many grappling with the adjustment to homeownership the thought of making extra payments is probably overwhelming.
Even for seasoned homeowners who may be maxed out making extra payments may not seem feasible.
Luckily, my method for making extra payments does not require me to take anything away from my monthly budget. In fact, I haven’t had to cut anything in my lifestyle to afford these extra payments.
Most of you are probably rolling your eyes at this point, but I promise there’s no trick to my method.
I simply avoid lifestyle upgrades when I have extra money.
What do I mean by lifestyle upgrades? I mean that whenever I get a chunk of money outside my normal paycheck, or when my paycheck has increased, instead of buying more stuff I put that extra money toward my debt and investments.
In the last 3 years I’ve used tax returns, birthday money, continuing education refunds, and pay raises to make extra principal payments. For the most part, my principle only payments were sporadic and whenever an extra chunk of money came in.
More recently, however, I’ve taken advantage of the increase in my income to begin making extra principal payments on a monthly basis. Since February of this year I’ve been putting $200 extra toward the principal every month, and have scheduled it to come out of my checking account automatically.
By avoiding lifestyle upgrades and making my extra payments automatic, I’ve been able to stick to the same monthly budget since purchasing the home. I’ve been able to work toward my goal of saving on interest and paying off my mortgage early without making sacrifices to my lifestyle.
What Does the Future Hold?
My plan is to continue to put at least $200 extra toward the principal every month.
I’m still making payments on my truck and investing in several accounts along with making these extra principal payments. I don’t want to go all in for one or the other (investing or paying off debt), but rather like to work on both at the same time.
Once my truck is paid off (which should be by early next year) I’ll have to decide how I want to put that payment to use: more investing or more debt payoff, or both.
In other words, once I’m done with this short-term loan I have a choice between paying off other debts early, investing for the future, doing both, or upgrading my lifestyle. I can easily eliminate the fourth option.
I expect the next several years to be a constant period of readjustment as my debt is lowered and my income increases. One thing that will remain the same is my commitment to avoid lifestyle upgrades, which is a nice way to cut your debt fast without sacrificing your current lifestyle.
If I continue at the same rate of $200 extra a month I’ll save roughly $36,908 in interest and cut 6 years and 8 months off my mortgage.
I could do a lot with $36,908 extra.
Moral of the Story
I’m 3 years in and I’ve already saved time and money off my mortgage.
The key to doing what I’ve done is to make extra principal payments as much as you can, as often as you can, and as early as you can.
Especially early in the mortgage, extra principal payments will bring the balance down faster, which will cut the interest paid and time off the loan term.
Not everyone will be able to do it at the same pace, but putting a concerted effort into making extra principal payments of any kind will save you significant time and money over the course of your mortgage.
The best part is I’ve been able to do it without sacrificing anything from my lifestyle, but only because I’ve kept my lifestyle the same despite the increase in my income.
No tricks, but effective nonetheless.
Sebastian always emphasizes fiscal discipline and consistency. More importantly, when it comes to your lifestyle don’t try to copy others. Do what you can afford, what makes you happy, and avoid making choices that throw you into the deep end of the debt pool.
At 3 years I’ve already saved time and money off my mortgage to the tune of $893 in interest and 6 months off the life of the loan.
How’s your mortgage journey going?
Talk about Money Saved.