This was a post from last year that I have since updated, but it is one of my favorite posts. In light of Financial Literacy Month I hope this can be helpful to some people.
I know that I shouldn’t even be thinking about paying off my mortgage or paying it down. However, when I am at the gym or in quiet moments when I am not thinking about Mrs. ROB, finishing my research, or teaching, my mind will drift to what it would feel like to pay off this debt. Now that isn’t going to happen in the next year, two years or probably even three. However, I could see it happening in 5-7 years depending on certain things happening.
Of course my immediate priority is paying off what I call my second mortgage or my personal loan of about $13000 (down to 12 as of next week–actually it is now down to $4800 and will be paid off in the next two months). But hopefully within the next year or even next 10 months I will have paid off the rest of that debt. Then what do I do? Do I tackle the student loans? Do I pay down on the mortgage? Do we pay off Mrs. ROB’s car? Take a trip, etc? My biggest goal would be, aside from saving more money, is to pay off the mortgage.
Mathematically, it might not make the most sense. I mean our interest rate is only 3.75% we have it on a 15 year mortgage (now about 13 1/2) I could/should take that money and invest more of it or whatever to get a better return. But there is just something about paying off that mortgage that appeals to me. I do promise not to stop saving for retirement to do that. That I will not do. And I certainly understand the math about putting more money in the market, but having no debt or knocking off that mortgage to me just seems like a goal I want to go after.
Anyway, I am not sure yet, but as I am prone to do, I was doing research about how to pay it off faster. Now there are the traditional things of refinancing, which I am not sure we can/will be able to do with a rise in interest rates and a loan to value that is still above 80% (not sure where our house is valued currently). There is also the strategy of paying your mortgage biweekly, which will reduce your mortgage probably by about 2 to 3 years on a 15 year fixed. You can also just throw wads of money at it. But I don’t get a bonus every year. I don’t get large sums of money thrown at me unless I do a lot of stuff in the summer, which can be hit or miss. So how can I be more consistent and achieve a goal of paying off the mortgage faster.
A Fantastic Plan From Gen Y Guy
Enter Gen Y Finance Guy. Gen Y Finance Guy is a fantastic blog. GYFG is a millennial who has a goal of hitting 10 million dollars in net worth over the next 20 years. Based upon his calculations and his saving I am thinking he can do it. I love his blog, but he has a great post about wanting to pay off his mortgage in 5-7 years, which is where I got the idea from. He calls it the Mortgage Snowball Strategy and here is how it works.
Now the strategy is to ensure that you really don’t experience any austerity to your life at all. In other words, I am not necessarily cutting back on anything.
- Buy less how than you can afford. That is something that Mrs. ROB and I definitely did. We bought a house that is only about 2 times our annual income, if that.
- Your income increases every year. For me, this is pretty doable. While I won’t see the increases that Gen Y does, I have gotten raises every year for the past 10 years. Now with budget cuts and the possibility of a coming recession (which I think will actually happen in the next year) that could be problematic. However, for the next year and a half I am guaranteed raises (in my job we have a union). Plus, I am up for a promotion this year. And if I get it I will get the salary bump from that. Plus, in the next couple of years I will also be eligible for another salary bump based upon my post-tenure review. If I receive that I could boost my salary more. It is possible, for me to boost my base salary 25% over the next 4-5 years. Now that would mean everything has to play out right, but it is possible. Not likely, but possible.
- Practice the “Pay More Tomorrow Strategy.” This strategy involves paying more principle payments when you get a raise. So let me use my case for example. I currently pay about $1350 per month in principle and interest. Let’s say I get a $2000 raise next year. I divide that $2000 by 12 months and add $166.67 to my mortgage for that year. If the following year I get another $2000 then I do the same. So in two years I have increased my mortgage payment by over $300 per month. And you continue to do this until you pay off the mortgage.
For me the beauty of the strategy is that you aren’t really sacrificing that much. I mean if you are able to live on the amount of money that you currently have then when you get a raise it is just more money to spend on stuff that you may or may not need. This helps you avoid lifestyle inflation, which I DESPISE!
And considering that I will have this second mortgage paid off soon I will have an extra $1000 per month to play with. I can certainly do a lifestyle inflation if I want because I won’t have this debt anymore. I could save more, take a trip, put it to my mortgage, in addition to the Mortgage Snowball Strategy, or whatever.
Now Gen Y Finance Guy is much better than I am at what the next seven years would look like with his strategy. I fully admit I haven’t calculated this out about how it would look if I were to put this strategy into place or how long it would take to pay off the loan. All I know I think the strategy, in of itself, is brilliant.
It involves you putting money that you haven’t even earned yet into a useful strategy of paying off your mortgage, it reduces the interest on the loan, it doesn’t necessarily cause any true pain in your house because you don’t get lifestyle inflation and you are putting your money to good use.
Not a bad strategy. What do you guys think? I like it. As soon as I get done with this second mortgage payoff I think I just might put it into action (additionally, I will have received word on whether I got my promotion or not and the money from the promotion will kick in, which will really allow me to project some harder figures–UPDATE: I don’t think I will be getting my promotion this year. I haven’t gotten the final, final decision, but my initial reviews were great, but up the food chain there were some issues. Truth is I knew I was taking a risk because I went up early, but I felt my record was deserving of it. I was somewhat upset, but I understand it at some level. Hopefully, I will have a greater update soon).