My Castle Is Not My Own, At This Rate It Never Will Be
Yesterday we had dinner with my parents, my dad and step mother. We do not see them much even though they live 15 minutes away, which is completely odd since we see them as much as we did when we lived 1,100 miles away. How does this happen? Time seems to be a rare commodity when you are raising three children, working and grasping for sanity on a weekly basis. Looking back I would imagine it is because we are no longer taking specific vacations to come “home” and see family during the holidays, summer time, or any other vacation trips from our past. Now it seems that since we live so close it is easier to say we are too busy or maybe next weekend.
Anyway, the reason for this post is that over dinner conversation somehow it came up they only have 1.5 years left on their 15 year mortgage. That must be an amazing feeling. I know they haven’t paid any of it off at an accelerated rate as they moved into the place in 1995. I didn’t ask for details on their situation other than why they opted for a 15 year mortgage versus the common 30 year. They had said it was a decision based on how much of a down payment they made from the sale of their previous home. There was no concern on how long it would take them to pay it off and I wonder if maybe they would have taken a 30 year mortgage instead if not for such a large down payment.
This made me think about our current home and our 30 year mortgage. 2009 will be the fourth year in our first home and being first time home buyers we were clueless on mortgages, amortization schedules and how long until we really put a dent in our principal. Looking at our balance statement from our mortgage company makes me sick. It has been three and half years and our balance has been reduced by a mere $3,500. Our mortgage payment amounts to just under $700 a month including escrow for taxes. Essentially we are paying $400 a month to the bank for the mortgage. $400 multiplied by 42 months equals $18,900. Approximately SEVENTEEN THOUSAND DOLLARS and our balance has only been reduced by $3,500? Unbelievable.
With a 15 year mortgage the amount we paid off would have been triple at $11,000 versus the $3,500 now.
Lesson learned? Never ever get a mortgage for 30 years. If we cannot afford the home on a 15 year mortgage, we cannot afford it.
February 24th, 2009 at 1:18 pm
Dear Mr. Plasectomy: (cool name, ps!)
Although our finances and sizable downpayment would have allowed it at the time, we also opted for the 30 year mortgage term. Our reasoning was that with the longer term, the required payments were lower, so that if we lost a job or had some other unseen financial disaster, we would still be able to make those lower payments.
We sure aren’t tied to that 30 year term - opting to write the mortgage in such a way that allows us to make direct principal payments without penalty – so we make significant payments against the principal whenever we’re able.
February 24th, 2009 at 2:57 pm
Hi Suzanne
I agree that having an affordable payment and rationalizing the “what if’s” are extremely important. You never know when disaster will strike. It is great that there is no prepay penalty clause in your mortgage. For us, we were first time home buyers with only 5% down. We kinda shot ourselves in the foot in two ways. The 30 year mortgage where we have built up very little equity in the home and a result of that plus the 5% down we are still paying PMI. If we had opted for the 15 year fixed the PMI would be gone by now, however I don’t think we could have afforded the 15 year mortgage on our current residence.
February 26th, 2009 at 12:20 pm
Hi,
If your bank will let you do this, here is a good way to save some interest. Because loans are set up so that your payments are first applied to accrued interest, then the remainder is applied to principal, you can save interest by dividing the same amount of payment per month into more frequent payments. For example, if your monthly payment is $1000, pay 250 4 times per month. Because you are paying off the accrued interest each week, you are also paying on principal each week. So, for the last 3 weeks of every month, the daily accrued interest is slightly less, because your principal has gone down. It seems like a small savings, but over the course of your 30 year loan, you will pay it off nearly 2 years faster. If you are able to add an extra 5 or 10 dollars to each weekly payment, (or also pay every week, so 4 months per year will actually get an extra payment) it will go that much faster. I own a business so I am at the bank every day anyway, so I actually make daily payments on my mortgages.
February 26th, 2009 at 12:53 pm
Hi Kathy,
That’s a great idea and I completely forgot about this tactic. I wonder if my bank would allow something like this and if by chance it would alleviate some of the stress of that big payment at the beginning of each month and having to go another 14-18 days without significant income coming in.
Thanks for the idea!
January 27th, 2010 at 11:54 am
This is my 4th time here now. I really enjoy your site and look forward to more reading!