Mortgage pay-off plan

Now that I have a condo and a mortgage, I need a plan to pay it off, all $286,000 of it.

I chose a 5/1 ARM to get the lowest rate without the high payments of a 15-year fixed mortgage. This gave me the super low rate of 3% on my mortgage. Sure, it’s only fixed for five years, but even if the balance is $50,000, that balance can’t reset to payments too high such that I can’t afford them if I’ve already been making total payments at a rate of $2,800 per month.

I want to make sure that the entire mortgage is paid off before the rate resets in 5 years.

To pay off my $286,000 mortgage, my average pre-payment over the course of the 5 year period needs to be $3,933.06 per month.

  • There are 5 payments in 2012 (August, September, October, November, and December), which means that I would need to make 5 x $3,933.06 = $19,665.30 in pre-payments.
  • There are 12 payments in 2013, 2014, 2015, and 2016, which means that I would need to make 12 x $3,933.06 = $47,196.72 in pre-payments.
  • There are 7 payments in 2017, which means that I would need to make 7 x $3,933.06 = $27,531.37 in pre-payments.

End of year balances on this schedule:

  • 2012: $263,769.89
  • 2013: $209,271.51
  • 2014: $153,115.52
  • 2015: $95,251.49
  • 2016: $35,627.47

And then the mortgage will be paid off in 2017!

How am I going to do this? Money in my Savings Plan that would have previously gone to cash (i.e. condo down payment) savings will now go to mortgage pre-payment. Even if I only do that for the rest of 2012, it will shave 3 years off of the 30-year amortization and if I continue through 2013, it will shave 10 years off.

I’m keeping my existing spending plan. I’m not going to do this without maintaining some semblance of a normal life. My travel budget is set at $5,000/year right now. I may reduce that a bit, depending on where I want to travel – we’ll see.

With my current income projections, paying off the mortgage in 5 years seems like a pretty attainable goal, but if my income goes up at some point, the mortgage could be paid off sooner. If my income goes down, it could take longer.

Why am I doing this? Before buying the condo and taking out this mortgage, I had been saving $1,600 each month towards cash savings. I’m worried that if I don’t make a plan for that $1,600 each month, I’m going to spend it on something that I don’t really need or want. I don’t need to save up for any large purchases in cash right now, so I’m going to direct my “cash savings” towards mortgage principal payments instead for now.

I could split discretionary money 50/50 against the mortgage and cash savings towards maybe buying a house in the future. But I don’t know if I want to buy a house, ever. And you know what? When the mortgage is paid off in five years, I would have $3,000 in spare cash flow with today’s salary. Between that and RSUs, I could be looking at a spare cash flow of $70,000 for the year. That could quite easily turn into a down payment on a house. Or, you know, I could just sell the condo and buy a house with the proceeds, plus maybe a small mortgage if necessary.

With only needing $30,000 in net income to live off of with a paid-for condo, I could go work at a start-up and not care if it crashes and I lose my job. I could *gasp* get married and have a kid or two. Cash flowing a wedding and an extended leave of absence from a job would be pretty easy with $70,000 in spare cash flow while working.

No mortgage = OPTIONS, people.

Have I told you how much I adore math yet? Writing these types of posts keeps me up thinking late at night when I should really be sleeping so I can get out of the apartment in the morning and off to that job of mine that I love. Math -> sleep deprivation. But I am still in love with math.

From now on, the main attraction on my monthly net worth updates will be the mortgage paydown, with a side emphasis on my investments.

I’m already certain I’m certifiably insane, so you readers don’t need to tell me that. Do you have any awesome golden goals you’re striving for? If you have a mortgage, do you have a plan for paying it off?

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23 thoughts on “Mortgage pay-off plan

  1. For your readers, I’d like to recommend the GRS amortization spreadsheet. I love playing with it (and you don’t have to set it up yourself). http://www.getrichslowly.org/blog/2007/10/01/accelerated-mortgage-payments-and-the-grs-amortization-calculator/

    We update ours every month, including today! We keep going back and forth on pre-payment vs. extra retirement savings (since we’re state workers we can save ~72K/year tax advantaged!). Our post today is about how the monetary benefits of prepayment start diminishing with a fixed mortgage as you get closer to the end. (Check out our mortgage tag for more contemplations and insights on housing/saving etc.)

    • I have a spreadsheet that I found, though I have no idea where I found it anymore. I have it integrated into my normal spreadsheet of stuff and I have a no pre-pay version, a paid off in exactly 5 years version, an estimated based on income/savings version, and the “actual” one, which is the one that I will update as I go along. I then have a graph of all 4 of those! It’s pretty cool to see that my forecasts show I’ll have paid down the first 5 years of the amortization in under a year.

      If I could save 72K a year tax-advantaged, this may or may not be a similar story. But the fact of the matter is that the only tax advantage I have is my 401(k), which is only 17K a year.

      I think that the monetary benefits of pre-payment start diminishing as you get closer to the end, but maybe the emotional benefits start increasing? I don’t know – I’ve never really had debt to pay down before.

  2. I do not think you are insane at all, this sounds like a great plan. Knowing you, this mortgage will be paid off much faster than the 5 year time period you have laid out.

    It’s so easy to get stuck in the ‘other’ math of early mortgage payoff, the math that says you might be able to earn more than 3% elsewhere. But you hit the nail on the head when you mentioned OPTIONS. I don’t understand why more people don’t put a huge value on having options and not being stuck with a 30 year mortgage.

    • I think it’s easier to make these kinds of choices when you can do both– both put a reasonable amount of money in tax-advantaged retirement savings AND pre-pay the mortgage. The retirement fund provides options too.

      For us, looking at a future paycut (with DH losing his job in a couple of years), we’re thinking about diversification, not just options. We don’t want all our saved money in one house in one real-estate market. So we do both. When we’re down to one salary, we will cut both extra retirement savings and extra mortgage pre-payments because we’ll need money for spending.

      • I’m going to do both, a little bit. I’m still going to invest 20% towards retirement, including maxing out my 401(k) and putting some money into taxable (where some is in the order of $10,000+). But I simply don’t have the tax-advantaged space that you guys do, so my next best bets are to build a good taxable investment account and to pay off the mortgage.

        • Yup, the decisions are easier when you don’t have so much room for tax-advantaged investments. Attacking the mortgage seems like a logical next step for diversification reasons (both diversifying over risk and over investment type).

        • p.s. what convinced me was how the one-month prepayment benefit is different early on vs. later on for the same size prepayment… with credit cards, the one month prepayment benefit is exactly the same. (To see the difference, you need to make a big prepayment because of rounding.)

    • Well, the 5 year plan being attainable is based on my income forecasting for 2013 being the same for all subsequent years. If my estimation is high, it might not be able to be paid off in 5 years. If my estimation is low, it might be paid off earlier.

      Sure, I might be able to earn 3% elsewhere, but what if I lose my job and I’m stuck with a mortgage? This is incredibly affordable now (not really any more expensive than renting), but it wouldn’t really be so if I lost my job.

      I’m pretty sure I wrote the OPTIONS part of the post at about 1 o’clock in the morning one night several weeks ago

  3. I don’t think you are insane at all. I’m hoping to have all our debt, including the mortgage, paid off by November 2017. Also a 5 year plan. If we can up our income a bit, then 3 years would be more ideal for us. I’m a spreadsheet addict and I update them daily. I try to pay extra every month. Kind of doing the snowball method for now. Congrats on the condo purchase as well! :)

  4. We’re on a five plan and hope to have our mortgage paid off by December 2015 – if not earlier if we sell up and move abroad (and buy a much smaller place).
    Good luck!

  5. Excellent. I would honestly bet $100 that you will have this mortgage paid off even more quickly than your plan. When you wholeheartedly attack a single debt, have an excellent income, and you’re strong-minded, you can move mountains. Other than MAYBE increasing your emergency fund, and making any mandatory/matched/tax-advantaged retirement contributions, put everything toward your debt.

    • My real goal is 3.5-4 years to pay it off, but the plan of 5 years is definitely attainable. Currently, I plan on continuing to make taxable investments, but I might change my mind on that in another year or two.

  6. First off, I am very happy for you and am wishing you the best in your goals. Personal finance should not be all about how to get out of the debt! My wife and I also think that mortgage is a chain-and-ball. We also paid off our home within years. Good luck!

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