YNAB BLOG

How to Beat the Living Crud Out of Your Mortgage – Round 1

houseI (Jeremy) almost put the word “easily” in the title of this post, as in, “How to Easily Beat…” For most of us, however, it’s gonna be a fight. Don’t sweat it, Champ. I’m in your corner, so let me show you how you can dodge a blow or two while setting up the knockout.

If you want to put the hurt on your mortgage, you gotta punch it in the principal.

[squinting and using my surly boxing coach voice] “Keep chippin’ away at ‘im! He’s big, but he’ll go down just like all the others. You gotta keep hittin’ where it hurts!”

The principal is the amount you initially borrowed. Let’s pretend we borrowed $100,000 just to make the math easier (we are boxers, after all) at a 4.5% interest rate. Mortgage payments are structured so you pay mostly interest at first.

Before you pound your fists and growl, “Why I oughta…!” at your local banker, remember real people and real money are involved. If a stranger borrowed a few hundred thousand dollars from you, wouldn’t you want to get a return on that risk as soon as possible? (If you answered “No,” please contact me directly and right away.)

As the principal gets paid down, however, it flips. In our $100,000 loan scenario, the monthly payment would break down like this:

 

Monthly payment: $506.69 Principal Interest
First Mortgage Payment $131.69 $375.00
Last Mortgage Payment $504.79 $1.89

 

The more shots you land on your principal, the closer you get to knocking out that last payment. Capiche? It’s gonna be a formidable fight. No two ways about it.

Trust me, this is not a fight you want to lose. You want to absolutely rock this one, and you can. Spit in the bucket, tighten the laces, and find places in your budget you can slim down to attack that mortgage with intensity. Your YNAB training partners are cheering for you.

Next time I’ll share three of my favorite strategies to give brass knuckles to your mortgage payments. Rip off! Tell me now! I don’t mean to tease, but unless you’ve seen for yourself how impactful paying down principal is, the greatest strategies in the world won’t tip the fight. Check out this link, plug in your own numbers, and see for yourself. Until next time.

29 Responses to “How to Beat the Living Crud Out of Your Mortgage – Round 1”

  1. Chris @ Flipping A Dollar

    So true! We figured out that if we could pay an extra 1k per month we could shave off over 100k total on our mortgage. Definitely pie in the sky but every little bit helps even if its not a full 1k!

    Reply
  2. Lydia

    Almost related, but my favorite thing to do with our student loans is to see how much interest we’re saving by being super aggressive. If we pay ___ extra per month, we save this much on interest. The best is to compare our plan with the 30 year plan. (We save 150K in interest! and still eat bacon! This is the best!) It really helps when I get tired of thinking long term and want something RIGHT NOW.

    Reply
    • jeremypeyton

      Absolutely, Bridget. You can even use the calculator I linked to to show exactly what it’s saving you. The results are usually very encouraging.

      Reply
  3. Kristen

    My husband and I paid off our mortgage about six months ago–it’s a great goal to have! It might be overwhelming at first, but it’s amazing how fast it snowballs. It’s definitely worth the sacrifice and will almost always happen faster than you think if you’re intentional about it.

    Reply
  4. Nicole

    Jeremy,

    I would love to hear some details about this! My partner and I debate over this, but I don’t know much about the math behind mortgages, so I can’t sit down and do the calculations myself.

    He has a 30-year fixed. Let’s say the house is $350K. He argues that staying on time with the payments and investing the remainder results in a higher return (assuming it compounds at 7% in the long-term) versus paying down the principal on the house because the rate is…less than that…let’s say 3% (???), and so you should never bother making extra payments since that money could be working harder elsewhere. (We’re dollar-bill slave drivers.)

    The structure changing DOES make sense to me (since as you pay down the principal, the loan interest becomes less and less? is that what it is?).

    I would like to have the house paid off in 15 rather than 30, but don’t know how to prove that’s the way to go.

    The rest of our money gets dumped into IRAs, 401k (his company matches, mine doesn’t), and a general investment fund. We’re trying to retire early. (Maybe by 40 or so, we are currently in our early & mid 20′s.)

    Reply
    • Trent D.

      What you’re referring to here is opportunity cost. He is correct in that you can realistically get a 7% rate of return if you invest right (sounds like you are). From a purely numbers perspective it doesn’t make sense to pay down the mortgage in that instance. However, we are humans and thus have emotions that play into this as well. For some people the emotional security that paying off the mortgage brings can be worth it. It all comes down to what your goals are.

      Reply
      • Nicole

        Thanks Mary for that link! Iron Mike & Karl, thanks for the clarification too.

        I guess the math is more basic than what I thought: you’re continually paying down some principal, but the (slowly shrinking) principal compounds at 3%. Meanwhile if you assume an average return of 7% on money you are investing (slowly growing) then…you win out.

        Having the debt doesn’t bother us that much, so I think we will continue investing.

        Reply
    • Iron Mike Sharpe (@IronMikeSharpe)

      I’m with your partner. I have a 15-year mortgage at 3%. I’m sending my extra money to investments instead of to paying down the mortgage. I’ll take the risk that I can earn more than the 3% return I’d get from paying down my mortgage.

      Reply
    • Kristen

      It’s really an individual decision. We were already investing before paying down the mortgage, and decided to knock out the mortgage for peace of mind. My husband is in sales and because his income is quite volatile, we knew we’d sleep better if we didn’t have a house payment.

      Only you know what’s right for your situation, but I’d encourage you to ask yourself which direction you’d rather go in all sorts of scenarios…..not just the scenario where everything goes right and nothing goes wrong. If you’re going to invest instead of pay off the mortgage, have a plan for the unexpected. What if one or both of you were out of work for awhile? What if there was a death or disability? Or a divorce? Do you understand what you’re investing in? You get the idea.

      The good news is that you’re young and paying attention to your money. Sounds like you’ll do great either way!

      Reply
    • jeremypeyton

      Great questions, Nicole. Lots of moving parts here, so I don’t think I can give you what you need as far as proof goes. Your partner may be right, but it’s all about the rates. If you can borrow money at 3.5% interest and reinvest it safely at a significantly higher interest rate, you can come out ahead. Ask your adviser or partner to run the worst case scenarios for you and that might help you. This is all on the more serious side and it takes commitment to pull it off. Most people, given more income, do not invest it further which is why I don’t lead with that advice.

      Reply
      • Taylor

        A wise person once told me: Many people will claim that they’d rather invest the extra money instead of paying down the mortgage, but few people actually follow through on that. The money often finds its way into other, more “urgent” things. If you’re the type that is good at actually following through and investing that excess, that could indeed be the right strategy. If you’re like me though, and aren’t sure you’ll definitely invest the excess, “investing” in the mortgage might be a safer, more realistic bet.

        Reply
  5. Carrie

    I am 4 years into a 30 year mortgage and have been making extra principal payments for the last 18 months. This month, every extra dollar I send toward the principal saves me $1.59 in interest over my original loan amortization. Looking at that number keeps me motivated!

    Reply
  6. Hannah

    This is great! We just made our first house payment. Hoping to knock that thing out in 10 years or less, which would make us 100% debt-free by 40. Dream big!

    Reply
  7. Tammy

    I bought my house in Feb. of 2004. Started by paying an extra $100 per month. With raises and such, have increased that to over $300 per month now and use bonuses and Federal Tax Refunds to pay even more.

    Then a year or more ago, started the bi-weekly payments. Assuming continued refunds and/or bonuses, I hope to pay off my mortgage in 2018 (just over 14 years). If no refunds or bonuses, looking at late 2019 (closer to 16 years).

    I am a get out of debt person, so I want to get this last piece of debt gone. Looking forward to seeing if you have any other strategies I am not using, I already have a fixed-rate mortgage which I refinanced a year or more ago with a lower interest rate. This is a 30 year mortgage – I didn’t make it 15 years because of the economy. If I lost my job and times got tough, I only have to pay a 30 year payment and not a higher 15 year payment. A little higher interest this way, but a little more security for an uncertain economy. I just pay more of a 15 year payment while I can.

    Reply
      • Tammy

        Well, one thing that helped a lot is that I set a manageable goal for buying my house. I don’t remember the exact numbers, but I was approved for about $70k or $80k more than what I spent on my house. I didn’t want to put myself in a tight situation. Also, I am single with no kids so I didn’t need as much house, nor do I have the expenses many other do.

        Reply
  8. Shannon in Canada

    We’ve been putting some extra money on the principal every month in an effort to pay out our mortgage in its entirety when it comes due in four years. We are doing this at the end of our mortgage rather than the beginning (because we didn’t have extra money at the beginning- funny how that works), so there is not much interest savings, but it’s still worth it to free ourselves early from our final debt. The extra payment advantage is so little used that not all the tellers at the bank are familiar with how to key it in and have to get some assistance from the manager.

    Reply
  9. Karl

    Hate to burst people’s bubble, but with today’s rates it just doesn’t make sense to pay it off early. I ran the numbers and you have to have a rate of about 5.5% to break even.

    For example, a 150k loan at 4.5% is a $760.03 payment. You have to add $400 every month to the payment to pay it off in 15 years. Well guess what? $400 a month invested at 7% return is nearly $500k after 30 years.

    So you start making the $400 payment for a total of $1160.03. Your mortgage is paid of in 15 years, and then for the next 15 years you invest the whole $1160.03. That only comes out to about $375k.

    The interest savings doesn’t nearly make up for that shortfall. You “only” saved about $80,000 in interest by paying it off in 15 years. The final numbers for this example was if you paid the mortgage off in 30 years, your investment minus what you paid in interest is $361k. If you paid it off in 15 and invested what you were paying for the next 15 years, the investment minus interest paid is $318k.

    The numbers are even worse if you try to pay it off in 10 years. This is because you now have to add $800 to the payment, which if invested over 30 years is nearly $1 million. The numbers in this example are after taking away interest paid on the loan is 30 year: $846k, 15 year: $784k.

    The point isn’t necessarily that it is bad to pay off a mortgage early. It’s that you should be investing as much as you can, as early as you can. If you have an extra $400 in your budget to add to your mortgage, depending on your rate and situation, you’re probably better off just investing it each month rather than throwing it at the mortgage.

    Reply
    • Nicole

      This is exactly the explanation I was hoping for. Thanks!!

      Reply
    • Stepan

      That is of course if you are willing to take the risk of the investment. It depends if you are risk seeker or not. What can easily happen is that you even loose money on investment with aim of 7% yield, and in that case you are much worse off.

      I think most people will not be able to sustain 7% yields (heck it’s hell of a large yield, a lot of whole companies would be glad to achieve).

      But definitely if you are able to make higher net yield on 1$ then is you cost of mortgage, then it is better to invest rather than pay off. People just need to understand that getting those yield levels is not easy, at carries a risk.

      Reply
    • jeremypeyton

      That’s not a bubble burster at all, Karl! That’s a reasonable approach for someone who will leverage liquidity and is comfortable with those risks. For the debt averse, however, who want to retire early or will simply sleep better knowing they could loose their income tomorrow and have minimal expenses, paying off the mortgage is a great option.

      Reply
  10. tmpst

    The way I like to think of it, is that if you make a $506.69 payment but only $131.69 goes toward the principal, then by paying an extra $131.69 you pay down 100% more of the principal, while your total payment only goes up 26%.

    Pay 26% more to get 100% more? Yes please.

    Reply
  11. Lisa

    Great article… thanks!

    I wonder, though about how the mortgage interest tax deduction plays into the numbers. This is a huge tax savings for me (and one I’m paying attention closely to as some members of Congress are looking to reduce/eliminate it).

    As I pay down my principal, and the interest goes down, that would result in a higher tax burden, correct? May not be enough to offset the overall savings much, but not including this in the calculations is not telling the whole story.

    Reply
    • jeremypeyton

      Good point, Lisa. There is a tax advantage to paying mortgage interest. Since I don’t know what peoples’ tax brackets are, I can’t give specific guidance in that area and run those numbers. But, you are correct in your assumption that as the principal goes down that your tax break would decrease.

      Reply

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