2017 Cash Flow Checklist: Part II
By: Mike Earl
Round Up That Mortgage Payment
What better way to ring in 2017 than by increasing the amount you pay each month on your mortgage?
When I recently told my wife that we will now be paying $150 per month of additional principal on our 15-year mortgage, she shouted for joy and ran gleefully into my arms for a 30-second embrace. It turns out she loves financial planning and speedy debt repayment just as much as me.
You doubt whether that happened?
The reality is that she replied with: "How much additional principal were we paying before?" -- a valid question. Basically, she just wanted to know how much of a change this was from the prior status-quo.
And that illustrates a good point: are most of us really going to miss a $25 or $50 change in our monthly budget? The Earl family had not been feeling the pinch in our family budget from the $100 of additional principal that was being paid each month, and we are probably not going to notice the $50 increase of additional principal being paid off each month going forward.
How do I even do that?
The easiest way to bump up your monthly mortgage payment is through your online access point with your mortgage lender. If you have automatic bank drafting of your mortgage payment setup, your lender should allow you to have an additional amount toward principal drafted each month.
If you're unsure about how to do this, give us a call to walk through it together. Or, we can log in to your mortgage company's website together next time you're in the office.
If you got a pay bump for 2017
For those whose pay increased from 2016 to 2017, why not use some percentage of that pay increase to pay down your mortgage more quickly? Even if your pay increase was just 1% or 2% or 3%, it's still worth making a minor increase in your monthly mortgage payment.
Let's say your take-home pay went up by $200 per month. Instead of raising your lifestyle by $200 per month, log in to your mortgage lender web site and increase the automatic principal payment by another $50 or $100 per month.
One positive aspect of mortgages is the absence of inflation. If you take out a 15-year fixed-rate mortgage, your required minimum payment will not change over the 180 month term of the loan. Hopefully, your income will at least keep pace with inflation over those 15 years. If that's the case, you should have a bit of extra wiggle room in the budget to increase those mortgage payments alongside your pay increases.
Does this even make a difference?
Yes, it really does.
Let's look at a two hypothetical scenarios.
Scenario One: $200,000 loan at 3.5% for 15 years.
The baseline monthly payment (just principal and interest) is $1,429.77.
In year one of the loan, you pay an extra $25 toward principal each month. In year two, that jumps to $50; in year three, it's $75; etc. By the end of the loan life, you are paying $325 per month of additional principal.
By doing so, you shave two years off the life of the loan (i.e. you have a 13-year mortgage instead of a 15-year mortgage) and save $6,000 of interest costs. Further, you will have only paid about $51,300 of total interest over the life of the loan. Therein lies the beauty of the 15-year mortgage.
Scenario Two: $300,000 loan at 4% for 30 years.
The baseline monthly payment (just principal and interest) is $1,432.25.
In year one of the loan, you pay an extra $25 toward principal each month. In year two, that jumps to $50; in year three, it's $75; etc. By the end of the loan life, you are paying $225 per month of additional principal.
By doing so, you shave more than seven years off the life of the loan (i.e. you have a 23-year mortgage instead of a 30-year mortgage) and save $48,500 of interest costs. Having said that, you will still have paid $167,100 of interest over the life of the loan.