Paying Down Our Mortgage is Very Addictive

Last month my wife and I made a $10,000 payment against the mortgage on our primary house in an effort to paydown the balance so we could cancel PMI after I realized we would earn a 6.7% after tax return at least initially on the paydown.

After we made our monthly mortgage payment this month it was surprising to see the effect on amount of interest we paid.

Date

Description

Amount

Principal

Interest

Escrow

Balance

4/4/2008

Gen Esc Disb

$0.00

$0.00

$0.00

<$44.41>

$95,837.71

4/2/2008

CURTAILMENT

$2,000.00

$2,000.00

$0.00

$0.00

$95,837.71

4/1/2008

PAYMENT

$879.18

$202.39

$479.99

$196.80

$97,837.71

3/27/2008

CURTAILMENT

$3,000.00

$3,000.00

$0.00

$0.00

$98,040.10

3/17/2008

CURTAILMENT

$5,000.00

$5,000.00

$0.00

$0.00

$101,040.10

3/14/2008

CURTAILMENT

$750.00

$750.00

$0.00

$0.00

$106,040.10

3/13/2008

CURTAILMENT

$1,000.00

$1,000.00

$0.00

$0.00

$106,790.10

3/11/2008

CURTAILMENT

$250.00

$250.00

$0.00

$0.00

$107,790.10

3/4/2008

Gen Esc Disb

$0.00

$0.00

$0.00

<$44.41>

$108,040.10

3/3/2008

PAYMENT

$879.18

$152.69

$529.69

$196.80

$108,040.10

I know that we could achieve potentially better returns elsewhere, but its really nice to see ~$50/month in additional principal paydown in our monthly mortgage payment. Once we cancel PMI that will be an additional $44.41 per month that would be saved.

I even briefly dreamed being mortgage free by making monthly $10k payments for the next 10 months. It would be a huge mental relief and a boost to our free cash flow to be mortgage free. However, we are looking at purchasing our more permanent and more expensive home in the not too distant future so it would be a dream short lived :-(.

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Comments (8)


If your goal is truly to have a net worth of $2 million+ then you are working against yourself. It is not a good idea to pay down a mortgage, even if it feels good.... Here is a very good blog I read on the subject, it makes total sence and is written by a guy who had made it rich. http://7million7years.com/2008/04/11/applying-the-20-rule-part-i-your-house/

You are doing what many people are doing and for these many people it is not working very well. You have been at this for well over 2 years now and at this pace it will take you at least 7 more years. You have the resources, and with a few changed habits and ways of thinking you could do it in MUCH less time. I hope you make it, I hope to get the knowledge you need.

Jason Dragon
http://www.capitalactive.com/

Jason,
Not sure I follow. The blog you reference suggests you should have no more than 20% of your net worth tied up in your home equity. Since our net worth is ~$470k, and the house equity is now only about $17k -- I could have $94k immediately and probably pay off the balance within the next year and still be in these guidelines.

Also, for reference, Michael Mastersonpoints out the average multimillionaire has only 10% of their net worth in their home (assuming no mortgage, otherwise its less).

I agree $2Mill. ... you have two rentals as well as your primary, and you could pay your primary off and still fit within the 20% rule ... but, I also agree with Jason [I'm such a diplomat ;)] in that having so much equity in a house reduces your long term ROE.

BTW: why did you choose to pay $10k towards your house rather than the 'done thing' in PF circles ... pay off your c/cards? I presume you have calc'ed cost of primary mortgage + PMI is greater than c/card interest??

See this post on calculating the return I would be earning my making this move.

As I previously stated this is the best return on my money that I have found. The alternative is putting it in a online savings account maybe earning 3.0% interest before taxes. The money is to be used as the down payment on the next house - by making this move I am earning a higher rate of return with minimal risk than the other options I could consider.

Aaah, I see the 'problem':

Rate of Return IS important - when comparing savings vehicles and/or debt instruments; the comparison is the Cash-on-Cash return that you are getting on your properties ... so you increase your cash input to get a better rate of return on it. Right?

A better measure for real-estae, in fact any income/appreciating investment, is the Internal Rate of Return ... as that factors in the varying future cash-flows from the property (plus some estimate of future capital gains ... you can be reasonably comfortable of at least a v conservative capital gain over a, say, 15 - 30 year period, surely?).

If you did this, it would swing WAY over to NOT paying down principal on your properties, whether lived in or rented.

You seem to understand this, as you already own 3 properties and other investments, so I would be interested if you still have a alternate view? We are all here to learn from each other ... AJC.

AJC,
I'll admit my 6.7% after tax rate of return is not an IRR. About 40% of the return puts money in my pocket by canceling PMI premiums, the rest increases my principal paydown, but does have the effect of temporarily lowering my IRR because I am adding additional investment, but not really driving our cash flow significantly higher from it.

But its ok -- take a look at the assumptions made in my orginal analysis....We plan to make some sort of real estate transaction in the next year so we are going to have the oppurtunity to pull this cash back out if desired. I simple found this investment vehicle the easiest place to park my money and earn the highest return till we are ready to make our next transaction. The alternative till then was to park it in a saving account -- this gave me a better return so I believe it was the best thing to do given our circumstances.

"Paying Down Our Mortgage [as an Advanced Savings Strategy] is Very Addictive ... Stay Tuned For More ..."

... got it. Thanks!

We are in the minority here when we do plan to pay down our mortgage and even "own" our house. Consider this, you are at greater risk when you pay down your mortgage. Keeping the equity separate from your house is the safest position to be in. What if you need that money that's trap in your house?

Here's our advice. Keep the equity separate growing in a safe, liquid, and interest earning account. This money is ear marked for our mortgage but it is in our control, not the bank's.

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A personal finance weblog of my journey to reach my goal of $2 million + the value of my primary residence.
Current Net Worth: $1,574,185

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