It’s hard for me to believe, but this month marks the 5-year anniversary of my first home purchase.
These 5 years have gone incredibly fast, and a lot has happened in the meantime, but one constant is my dedication to making extra payments in order to pay off my mortgage early.
Yes, a good argument can be made for putting your extra money elsewhere, but if you’re fortunate to be able to do both, as I am, then the piece of mind of having a paid off mortgage is a powerful motivator.
After all, a home is likely the largest purchase most of us will make and will put you in the most debt you’ll likely ever have. As someone averse to debt, having a large amount of it is a weight on my mind that I’d like to eliminate sooner rather than later.
So where homeownership is a goal for many, I’ve taken it 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 of my mortgage.
I wrote a post on my 3-year mortgage anniversary detailing the time and money I’d already saved, and I thought 5 years was a good milestone to rerun the numbers.
This post represents an update 5 years into my journey of homeownership, where I’ve already saved time and money off my mortgage.
Before I get into the numbers, here’s a quick reminder of my journey to homeownership, which wasn’t easy.
From my 3-year mortgage update:
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, but I purchased my first home for $280,000.
After the down payment, my starting mortgage balance was $224,000 with a 4% interest rate.
5-Year Mortgage Update
Still Ahead of Schedule
It’s been 5 years since I purchased my home, and I’m sure glad I was able to buy a home when I did. Prices have continued to skyrocket in the Portland area, and the value of my home has gone up an estimated $100k since I purchased it.
At the same time, my diligent payoff schedule has meant that my mortgage has also continued to fall.
When you calculate the payoff schedule for my mortgage parameters with an amortization schedule calculator, at 60 months in the balance should be roughly $202,602.
My 60-month balance is actually at $191,820.01.
I’m roughly $10,782 ahead on my mortgage payoff.
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 $42,767.05 in interest.
What I’ve actually paid is $33,531.84 in interest.
I’ve saved $9,235.21 in interest so far!
While that’s impressive in and of itself (to me anyway), what’s even more impressive is the snowball effect my extra payments are beginning to have.
During my 3-year update I noted that I’d paid roughly $25,282.72 and saved about $893 in interest. Fast forward two years and I’ve gone from saving just a little under $1,000 in interest to over $9,000 in interest!
This jump is because the balance is bigger at the beginning of the loan and a larger portion of your payment goes to interest. As you pay the balance down you pay less in interest with each payment. Because I’m paying extra on my mortgage every month the balance is decreasing at a quicker rate and my savings are really starting to add up.
Thus, the earlier you begin making extra payments the more you’ll save on interest, although it may take awhile to really see the difference.
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 principle 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.
Headed Toward an Early Payoff
Lucky for me, making extra principle payments hasn’t just allowed me to save on interest, it’s also allowing me to cut significant time off my mortgage. It’s the gift that keeps on giving!
But, let’s see if the time savings have snowballed as dramatically as the interest has.
It’s a little more difficult to calculate the exact time saved without getting a payoff schedule from my lender, but looking at an amortization schedule with my loan parameters and seeing where my current balance falls in the payoff is a good estimate.
My current loan balance is $191,820.01. Looking at the amortization schedule, I’d be at a balance of $191,918.13 at 7 years and two months into my mortgage.
Thus, my extra payments have cut roughly 2 years and 2 months off my mortgage so far.
I’d cut roughly 6 months off my mortgage payoff when I did my 3-year update, so again the benefits of time saved are beginning to snowball.
How Did I Do It?
The short answer is extra principle only payments, but I’ll break it down a little further so you can see that early mortgage payoff doesn’t have to break the bank.
Luckily, my method for making extra payments has not required 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’ve simply avoided lifestyle upgrades and applied extra money toward the mortgage.
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, emergency/sinking funds, and investments.
In the last 5 years I’ve used tax returns, birthday money, continuing education refunds, and pay raises to make extra principle payments. Initially, my principle only payments were sporadic and whenever an extra chunk of money came in.
Beginning in February of 2018, I’ve taken advantage of the increase in my income to begin making extra $200 principle payments on a monthly basis. I’ve also scheduled these payments to come out of my checking account automatically and they’ve now become a normal part of my mortgage payment.
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 principle every month.
I’ve paid off my truck and am investing in several accounts along with making these extra principle payments. I don’t want to go all in for one or the other (investing or paying off my mortgage), but rather like to work on both at the same time.
I’ve recently had to divert some of my normal investments to help pay for needed siding/painting work on my home, and even took on a part-time job this past summer so I could avoid taking on any debt for the work.
While I didn’t enjoy working during the pandemic (or foregoing my summer break), I’ve worked too hard on paying down my mortgage and eliminating debt to allow the house to fall into disrepair or to just take out another loan.
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 that $36,908.
Moral of the Story
I’m 5 years in and I’ve continued to save time and money off my mortgage.
The key to paying down your mortgage ahead of schedule is to make extra principle payments as much as you can, as often as you can, and as early as you can.
Especially early in the mortgage, extra principle payments will bring the balance down faster, which will cut the interest paid and time off the loan term. It may take awhile to see the effects, but if you keep at it, they will begin to snowball relatively quickly.
While not everyone will be able to do it at the same pace as I have, putting a concerted effort into making extra principle 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 largely eliminated lifestyle creep despite increases in my income. I’ve also continued to use side hustling as a way to pay for needed expenses rather than cut back on my savings/investing/debt payoff or add more debt via loans.
No tricks, just self-control, careful planning, and hard work.
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 5 years I’ve already saved time and money off my mortgage to the tune of $9,235.21 in interest and 2 years 2 months off the life of the loan.