Financial Analysis- Paying off my mortgage early
For this assignment I’ve decided that I would like to pay off the mortgage on our full-time residence early. I’ve never liked the thought of debt, while I have credit cards I never carry a balance on them. For me personally debt stresses me out a little bit. I like the thought of fully owning everything that I have. Luckily for me my husband also shares in my idea of being debt free. Currently the debt that we have is from two mortgages and our student loans. Our rental property pays for itself which is why I have chosen to pay off our primary residence first. My husband Aaron and I bought our primary residence 6 months ago. The house is located in Central Oregon and is a 3 bedroom 2 bath home located on two and a half acres. This home is special to both of us because it’s where we plan on living for the next thirty plus years. We’ve always had homes in suburban neighborhoods with small lots and not a lot of privacy. My husband has always wanted a house that was located in the country and that had a decent amount of property. We figured that since we are only in our late twenties that owning a house with a decent amount of property would be out of the question, at least for the next 5 or 10 years. Months prior to purchasing our home we were renting a home because we had just relocated back to the area. We weren’t planning on buying but with the interest rates being so low and home prices in Central Oregon being at all time lows we decided that it couldn’t hurt to look. It took about two months before we found a house that we both loved and after viewing it and having it inspected we knew we wanted to make an offer. A month and a half later we closed the deal and moved into our new home.
In order to make this dream happen we will need to pay more than our normal mortgage payment every month. According to an article on Money Smart Guide.com there are a few ways in which people are able to pay off their mortgages early (other than winning the lottery and robbing a bank). Switching to a bi-weekly mortgage payment plan is one of the suggested methods to pay down a mortgage (MoneysMA, 2011). By making bi-weekly payments instead of your normal monthly payments you would be making one extra house payment a year. While this doesn’t seem like much it adds up fast. Another option is to use your tax refunds in order to make a large lump sum payment every year. “According to the IRS, the average refund is $2,900” (MoneysMA, 2011). Depending on your normal mortgage payment this amount would usually equal two or more payments. A third option is to refinance your home with a lower term such as refinancing a 30 year mortgage in order to take out a 15 year mortgage (MoneysMA, 2011).
Some barriers that we could run into are unexpected bills or life experiences such as having a baby, losing a job, household repairs, or having a medical emergency. We have a rental home and if we were to lose our renter for any amount of time then we would be paying two mortgages out of pocket which would prevent us from putting additional funds towards our primary residence. I believe that the best support system would be to see a financial planner or analyst in order to ensure that using our savings to pay down the mortgage would be the wisest choice for our short and long term goals. Another support system would be using tools such as mint.com in order to create a budget and ensure that we stick to it whenever possible.
After researching ways to pay off mortgages in shorter amounts of time and after talking with friends and family I believe that the best approach Aaron and I could take would be one that combines three or four of the ideas that I have learned about. We currently have a 15 year mortgage therefore refinancing to a shorter loan term would not be logical for us. I like the idea of switching to a bi weekly payment option so I’ll call our mortgage lender to discuss this option further. I also like the idea of using our tax refund in order to pay down the loan in lump sum payments. In addition I like the idea of cutting out a task or activity and putting the money that we saved towards the mortgage. Switching to a bi weekly payment would mean that we pay $10,000 extra over a 10 year loan. I’m going to be on the safe side and say we average a return of $2,000 per year for taxes which means that we could pay an additional $20,000 over 10 years. We also go out to dinner about every two weeks, and our bill averages $50.00. That would total $100 a month which results in savings of $12,000 over a 10 year period. These savings combine could result in us putting an additional $42,000 towards our loan in 10 years.
A look at our current household finances;
|Income/Expenses||Monthly Household Average|
|Financial Aid Loans||$3,500|
|Tuition, Books, Fees||$3,200|
|Pet Food, Supplies, & Medications||$450|
|Primary Mortgage w/ Insurance||$900|
|2nd Mortgage w/Insurance||$1,000|