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?