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Two summers ago, my wife and I were jumping into home ownership for the first time. We hit the ground running and started to tackle our mortgage. We have always had a goal of paying off the mortgage early and used this mindset to make extra payments on our mortgage.
Last year, we were on fire and paid off a lot of our mortgage. I am going to recap where we stood last August, then we will move into the year 2 mortgage update. By August of 2016, we had made 12 mortgage payments, plus multiple extra principal payments.
Year 1 Stats (includes extra principal payments)
- Total Principal Paid: $25,002.81
- Total Interest Paid: $7,782.08
In year 1, we paid off $25K of principal, which actually would have put us on track to pay the mortgage off in 9 years. That's a pretty good start and left us with $200,000 left on our mortgage after one year of home ownership.
Related: One Year into Our Mortgage: How's it going?
A huge benefit of paying off the mortgage early is the savings in interest charged. When you take out a mortgage, they show you an amortization schedule. This schedule shows you how much interest will be paid over the life of the loan. In year 1, we knocked this number down drastically.
Anticipated Total Interest Paid over the Course of the Loan
- Beginning of Mortgage, Aug. 2015: $67,019.89
- After 1 year of Payments, Aug. 2016: $58,356.43
- Savings: $8,663.46
In year 1, our extra principal payments saved us $8,663! With any loan, the more principal you pay early in the loan, the more interest you save at the end. Being a math nerd, we took this knowledge and aggressively paid as much as we could on our mortgage.
Even though we had a great year 1, our mortgage payoff was slower in year 2. This was caused by one big decision and one big life event. First, we decided to refinance the mortgage. We made this decision for a couple of reasons:
- Interest Rates were low in Aug/Sept 2016 and we were able to drop the interest rate to 2.99%. That decision alone will save us lots of money in the long run.
- Because we aggressively paid down our mortgage in year 1, we now owned more than 20% of the value of the home. By refinancing, we were able to remove Private Mortgage Insurance (PMI) a year early.
- Because we refinanced so close to our original home purchase, we were not required to get another appraisal, which was required to remove PMI off of the original loan. This saved us $500 in the refinance.
- To calculate if a refinance is a good deal, you have to take the refinance closing costs and divide by the monthly savings for each mortgage payment. Most financial experts say that this calculation should come out to less than 24 months for it to be a good deal. In our case, we would make up for the closing costs in 14 months. That's a good deal!
- The mortgage payment will be smaller. We liked the idea of lowering the mortgage payment with a little one on the way in November 2016.
With all of that said, we decided to refinance our loan and it was official by mid September. The refinance decreased our total interest paid over the course of the loan, as shown below.
Anticipated Total Interest Paid over the Course of the Loan (no extra principal payments)
- After 1 year of Payments, Aug. 2016: $58,356.43
- After Refinance, Sept 2016:: $56,871.82 (includes $7,782 already paid in year 1)
- Savings: $1,484.61
By making the decision to refinance, we saved $1,484 in interest over the entirety of the loan. That's doesn't seem like a lot, especially when you include the amount of the closing costs into the equation. Luckily, we will make up the cost of closing costs in just 3 short months.
In year 2, we only made eleven mortgage payments. Most loans offer a grace period after you sign them. Since we signed for the refinance in September, we weren't billed our first mortgage payment until October. Thus, decreasing our payments to only 11 in year 2 of the mortgage.
Year 2 Stats (includes extra principal payments)
- Total Principal Paid: $14,132.88
- Total Interest Paid: $5,557.93
As you can see, we did not put as much money towards the mortgage in year 2. This was due to a major life event in the birth of our daughter. This life event was a joyous event for our family! Medical bills and time off slowed down our mortgage payment, but she is totally worth it!
Due to the slowed down mortgage payments, total amount of interest did not change much after the refinance:
Anticipated Total Interest Paid over the Course of the Loan (no extra principal payments)
- After Refinance, Sept 2016:: $56,871.82 (includes $7,782 already paid in year 1)
- After 2 years of payments, Aug. 2017: $55,512.29 (includes $7,782 already paid in year 1)
- Savings: $1,359,53
As you can see, we made some extra mortgage payments in year 2 of our mortgage, but not a lot. Based on our current amortization schedule, we have knocked off 3 months of our new mortgage. Therefore if we don't make any extra payments, we will be debt free after 14 years and 9 months. Of course, we plan on continuing extra mortgage payments, which will lead us to pay off our mortgage earlier.
Lastly, let's look at the amount saved since the beginning of our loan:
Anticipated Total Interest Paid over the Course of the Loan
- Beginning of Mortgage, Aug. 2015: $67,019.89
- After 2 years of payments, Aug. 2017: $55,512.29
- Savings: $11,507.60
In two years, our dedication to make extra mortgage payments have decreased interest paid by $11,507.60! This puts our estimated mortgage payoff date to July of 2031. Dang! That's a long time to have a mortgage hanging over our heads!
What are your thoughts? Do you have any struggles with your mortgage payoff? Do you want more frequent mortgage updates?Let me know in the comments section below.
