Now that you’ve been through the various steps on expenses and budgeting, saving, pensions, investing and planning for your future, it’s time to go back again to the bit on debts with one debt in particular which is probably your biggest debt: your mortgage (providing you have one – otherwise you can skip this step). We of course spoke about paying off debt at the start of our mission, but as we said there, since your mortgage has a lower interest rate than most of your other debts, chances are you haven’t yet started paying it down faster.
As commented before many people would argue that a mortgage is a different type of debt and therefore not to worry about as much as they see having a mortgage as an investment. At the end of the day they say, your house is an asset that will probably increase in value over time. I disagree for several reasons:
- first of all it isn’t the same type of assets such as stocks and bond that you can just sell to generate some extra money. The only situations in which you can argue that your house is an asset like any other is when you don’t need it anymore for example because you decide to:
- move in with somebody else
- live in another house that you already own or rent
- scale down and don’t need a mortgage on a new house
- live on the streets
- secondly, you never know when you can sell your house. Some houses are on the market for years, so liquidating that asset isn’t as easy as with other assets.
- thirdly nothing guarantees your house will truly increase in value or have increased in value by the time you need or want to sell. During the recent house market crash, many houses were sold below their original purchase price.
- fourthly you are still losing money by having a mortgage in the form of interest payments and you are tied to paying back regularly so until you pay off your mortgage in my eyes this is a debt that takes a big toll on your monthly finances.
Paying off a mortgage
Just like any loan, a mortgage generally involves a loan of a specific amount that will be paid back in installments, which might be monthly, bi-monthly or something similar. The amount of money that you pay back consists of two parts: the principal amount (or the amount that you pay back of the original amount borrowed) and the interest (or the percentage that you get charged as a “fee” for borrowing the money).
Any extra payment towards your mortgage usually pays off your principal amount directly (i.e. you don’t pay off interest with this), meaning the amount can go down relatively quickly, which in the long-term might save you considerable amounts of money.
One point of caution however: some mortgage providers don’t want a mortgage to be paid off faster and might include this in the agreements. If that is the case you will likely be charged a fee for speeding up paying off your mortgage, meaning it might cost you money. In that case you’ll need to calculate whether what you save on interest by paying down your mortgage faster is more than the fees you’ll be paying as a penalty.
Step 70 – Start paying off your Mortgage – in detail
Lots to do so let’s get straight to it:
- Open up a new spreadsheet in Excel or a similar programme or start a new page in your financial handbook and label it Mortgage Overview.
- Find your last mortgage statement and find the following details. (If you can’t find your statement or if it doesn’t have all the details, contact your mortgage provider).
- Your starting balance or loan amount;
- Your annual interest rate;
- The date of your first payment;
- The total length of time of your mortgage that you agreed to (in years);
- The current balance or amount that you still owe.
- Copy these categories into the first column.
- At the top of the second column write the current month and year and complete the categories with their amounts.
- Using an online mortgage calculator (I personally like the one that Dave Ramsey has on his website, as it’s easy to use – but there are many other ones available, including excel downloads such as the one by Vertex42 if you’d like to get slightly more advanced information) and fill in the specific details of your mortgage. Don’t worry if the currency if different to yours, the amounts will be the same whether they are in dollars, euros, pounds or something else. You don’t need to use exchange rates to convert your numbers, just fill it in as if it were in your currency.
- The online mortgage calculator will give you some extra information that you might like to add to your own Mortgage Overview. Often times they give you:
- total interest paid til present date
- total principal paid til present date
- expected total interest paid at end of mortgage date.
- The total interest paid at the end of the mortgage date might be a bit of a shock! This is at the end of the day the way that banks make money..
- Find the option of “making extra payments” in the mortgage calculator and fill in a certain amount that you feel you could possibly, maybe, potentially get together each month or couple of months to throw at your mortgage – let’s say $100 to start with. Note what happens to: your end date which of course goes down by a certain number of years / months and your total interest paid.
- Add this information to your spreadsheet, i.e. add a category: “extra monthly / quarterly / annual payment” in which you put $100, then “months saved” and “interest saved” and add the information.
- Repeat this procedure with a higher figure (say $150 or $200 or whatever figure you feel might be feasible) and again note down in your spreadsheet or notebook what effect this would have on your mortgage and payments.
- Lastly, find and read through the conditions and stipulations of your mortgage, or contact your provider, to find out if there is a fee or forfeit for making extra payments into your mortgage and add this information to your spreadsheet. If there is check whether this fee is more or less than the interest you would save in order to decide whether you really want to start paying off faster.
- Discuss your findings with your partner to make a decision on whether or not to start paying down your mortgage and if so how much to go for. Remember that you might have or soon will have money freeing up from other debts once they are paid off. Get your plan together and go for becoming totally 100% debt free.
Becoming debt free is a big but important step on your way to financial independence and having paid off your mortgage will be a great milestone to aim for and then once achieved of course celebrate a little!
Read more about my 100 steps mission to financial independence or simply decide to take control today and join us on our step-by-step quest on how to make your finances work for you, starting with step 1.