Pay off mortgage, Save Money
Sam and Diane need the internet in their new home, so they look at internet packages. They decide to go for the second tier internet, saving them $10 per month. And of course, they apply that extra $10 per month towards their mortgage.
It’s just $10 per month, right?
Well, just $10 per month extra will save Sam and Diane $7,078.40.
High five! Sam and Diane will take that!
I was talking with a mortgage lender today, Brad Bailey from First Colony Mortgage. I showed him how my formulas work: $1=$5, and $2=$1,000. If the typical homeowner were to pay just $1 extra towards their mortgage, they would save $5. If they were to pay just $2 per month extra, they would save $1,000. If they prepay just a little more, they’d save a lot more.
Being a finance guy, he said he loved the idea and was always thinking about ways to save money. I told him about dropping cable TV, and how it was hard for me at first, but when you’re saving $100/month, and when you see that that $100 applied to the mortgage saves $10,000’s, it makes it much easier to live without cable.
Brad’s eyes lit up. We were speaking the same language. He said, “People just don’t realize how much they’re spending. If you are even talking about lunch every day, that’s hundreds of dollars every month! It adds up!”
I was excited to see him get excited, and I responded: “It doesn’t just add up. It multiplies up!” I hadn’t ever thought about it like that, but that’s exactly what compound interest does for you when you put it to work for you. It doesn’t just add up. It multiplies up! Just saving on lunch every day could add up to hundreds of dollars. But if you were to consistently invest the savings into your mortgage, you’d save thousands of dollars.
I don’t know if it is trying to share the joy of the season with the kids, or more probably if it is flexing machismo like Clark Griswold, but somewhere along the lines, we started hanging lights on our houses. And the more you hang, the better dad/husband you are, right? You might remember this exchange from the movie National Lampoons Christmas Vacation:
Bethany: Is your house on fire, Clark?
Clark: No, Aunt Bethany, those are the Christmas Lights.
For years, I’ve had the same white “icicle” style lights that have hundreds of lights per strand and dangle from the roof. But the problem with these little guys is — if one light goes out, a whole section of lights goes out. So 6 years ago, I probably had 10 strands. Then each year, lights would burn out or go loose, and entire sections would go dark. Last year, I was down from 10 strands to about 4 barely-functional strands.
So, this year I went to Costco (see another post about a $13,002 TV at Costco) and upgraded my lights:
I am just going off of the box, but it seems to make sense from what I know about LED technology. Let’s just compare sets of lights (even though I know there were a bunch more lights on the icicle sets.) According to the box, I’ll save approximately $15/strand in electricity expense.
Electricity Cost of old incandescent Strands: 10 strands * $15 = $150
Electricity Cost of new LED Strands: 3 * $0.14 = $0.42.
Season Savings: $149.58!
So that’s pretty good savings for a season. But don’t stop there!!! Now do something good with the savings! Some might say “That’s only $150,” or others might say “Yay! $150 more to spend!” But Homes in Order would tell you that investing in your mortgage is a pretty good way to use that extra money. You could just add that $150 to your next payment. Try it for yourself with the mortgage payoff calculator to see how much you would save. Or, here’s how to add that simple savings to the rest of a mortgage. Let’s divide $149.58 by 12 months. $149.58/12=$12.47 per month. Now, plug that into the Homes in Order calculator and you’ll be surprised at how much a typical new homeowner would save.
Pay off your mortgage early! It’s easy, and you will save a ton. When you have a mortgage, every little bit you can save literally pays off. Did you ever think that just upgrading Christmas lights could save $8,900 and almost 6 months of mortgage payments?
Saving is good. Saving + Investing is really great.
(If you want to get really wonky, consider this: these lights have an average life of 20,000 hours. So, 6 hours * 60 days = 360 hours per season. 20,000 hours / 360 hours = 55 seasons with these new lights! That’s about 10X longer than my last sets lasted. So, $15/strand * 10 strand * 10 more seasons replacing = $1,500 of saved replacement costs over 50 years. Multiply 50 years * 12 = 600 months. Divide $1,500 (savings) / 600 = $2.50 extra savings per month. Add $2.50 + $12.47 (electrical monthly savings) = $14.97. Now input $14.97 as a regular monthly prepayment into the payoff mortgage early calculator and see how much you would save on your mortgage!)
Your down payment will significantly affect your monthly finances for the life of your mortgage. How much do I need down? That depends on the type of mortgage you will be getting and your credit. Traditional down payments are 20% of the price of the home. 20% down is rare in today’s mortgage world. Typical down is usually 3% – 5%, though an array of mortgage options are available. Here is a great article that answers the question.
How much down should you have? Dave Ramsey has said that his favorite loan program is the 100% down program. I fully agree. As much as you can put down, the better. As most of us don’t have $250,000 sitting around and need the mortgage to get us into a home, let’s look at a couple of mortgage scenarios on the Homes in Order Mortgage Calculator.
So, as you can see, the more down payment you have, the lower your monthly payments will be. Now, let’s play with the calculator and see what would happen in different scenarios. Let’s say you go for a 0% down loan, but make a 5% prepayment up front. How much would you save?
Interesting. You’d save over $38,900 in interest, and you’d save over 3.2 years. In all scenarios, you would be repaying the principal. But let’s look at the interest obligation. When you look at interest, this would be the best option! Why? Well, notice that the monthly payment is higher, so you’d be paying more each month. Total interest in #3 is $221,482.49. Total interest in #4 is 194,229.86. You would save $27,252.63 in interest by making the prepayment up front.
Cool stuff! Every mortgage is unique, and every mortgagee has unique needs. But keep this in mind — the faster you can pay it off, the more you will save.