For 2016 I paid an extra $8,400 on my house. Considering that my house payment is $570 per month, this amounts to paying a full extra year of payments (and then some). How did I manage to accomplish this, and more importantly, Why?
Why Pay Extra On The House?
Our home, like most Americans, represents our largest yearly expense. Paying off our house greatly reduces our yearly outflow of cash, which means we need to generate substantially less total income to maintain our lifestyle. In addition to lowering our cash outflows, paying off our house allows us to use money that was previously going to our house payment, and the extra we were putting on the house, towards investments. Since our house payment totals $6,840 per year, and our long term extra payments on the house will be $17,400 for the next few years, that’s $24,240 that will be able to go into our investment accounts once the house is paid off.
Why Not More?
In 2016 we had several large expenses that won’t repeat themselves in 2017, so it is highly likely that our 2017 payment will be significantly higher. In 2016 we paid cash for a new vehicle (-$10,000), paid cash for a chunk of land (-$3,000), paved our driveway (-$2,150), and went to Universal Studios (-$3,000). Had we not done all of this we would have put an amazing $24,000 on the house this year. By putting an extra $8,400 on the house in 2016 we exceeded our 2015 extra house payments by $1,000. For 2017 my goal is to put a minimum of $17,400 extra on the house.
If we can put $17,400 on the house each year, then in December of 2020 our house will be paid off. We only have 4 years to go!
How I Paid $8,400 Extra On My House:
When I first bought my house the difference between a 30 year mortgage and a 15 year mortgage was around $200 per month. Mrs. C. did not feel comfortable getting the 15 year mortgage because she was apprehensive that the higher required payment would be impossible for her to pay solely with her income if something happened to me. We got the 30 year mortgage and I planned to pay that extra $200 per month….which I ended up not doing for the first 2 years because we needed to focus on rebuilding our cash reserves. We have now been paying that extra $200 per month steadily for a few years. This $200 per month represents $2,400 of the extra principal payments we have made on the house this year. These payments alone took 10 months off our loan duration and saved us $3,506 in interest.
The big change in our mortgage balance came from our end of the year payment. At the end of each year, whatever amount of money we have in excess of our emergency fund goal we put towards the house. This year that ended up being $6,000, a 20% increase from last years $5,000 payment. This chunk took 2 years of payments off of our mortgage and saved us $7627 in interest over the life of the loan. Not too bad.
How Did I Come Up With An Extra $8,400?
Mrs. C. and I cam really close to hitting a 50% savings rate in 2016. With an income of around $80,000 that’s about $40,000 in total savings. What we want to do is put half of our savings and the house and half in tax advantaged accounts. This works out to us having no tax liability and also allows us to pay off the house at an accelerated rate. Because of the one time expenses mentioned above we cut into our yearly savings on the house fairly substantially.
Income: We worked really hard to increase our income for this year. Mrs. C. and I both worked about 100 more hours each this year over last year, which made a pretty big difference. I also was able to get a modest raise from one of my three primary employers. Increasing income makes a big difference in savings rate, especially if you can keep expenses from increasing. We also made around $2,000 from this blog! That’s a pretty big deal. Hopefully blog income will continue to rise, it took 3 years to reach this income level, but this is not an insignificant amount of income. If you are interested in starting a blog, check out this article.
Expenses: This year we didn’t cut any major expenses, but we did stay roughly in line with our $36,000 yearly budget (excluding the major one time expenses we had this year). We did save a decent amount on our property taxes by challenging our assessment. This resulted in $263 a year in savings.
I track my extra principal payments using my House Payment Spreadsheet. Not only does this recalculate the amortization table for me when I add in my extra payments, it also calculates how many months I have taken off my mortgage and how much interest I have saved. To date I have saved $26,981 on mortgage interest and I have taken 77 months off my mortgage duration, that’s over 6 years, and I’m just getting started!
Have you paid off your home early or are you in the process of paying off your home early? What steps are you taking to make it happen?