It has been 1 year since we re-financed our mortgage. At the time, I posted two posts about it; the first was going over my to-do list for the renewal, and the second was all the details of our new mortgage.
While I am still waiting for the renovations to be actually completed, I am happy with our decision to use money out of the equity in our home for that purpose, even if it goes against a lot of traditional personal finance advice. And, I am still happy with our decision to not make paying off the mortgage a priority at this point, since we have a nice low fixed rate of 2.34% for four more years. Since rates have already started to increase, we will have to revisit that decision when we go to renew in four years, but until then we will probably just let it go on auto-pilot. That being said, I wouldn’t be a personal finance geek if I didn’t play with numbers in a spreadsheet… And so, of course, I have done that with our mortgage…
How much interest do we pay each month?
A while back, someone posted something about their mortgage payment where they calculated how much of their monthly payment is going to principle, vs how much is going to interest… (I’m sorry, but I can’t remember where I read it, so if you have posted about this, let me know in the comments and I can link to your post.) I found it an interesting idea, so I thought I’d figure it out for our payments too. The issue is, of course, that every month that passes, the amount of principle goes down, so the amount of interest charged goes down, so the percentages change… That meant I needed to do the calculation a few times…
The initial payment distribution when we started the mortgage was 41% interest and 59% principle. We have now moved in to the phase where we are paying 40% interest and 60% principle. Based on my rough calculations (more along the lines of rough estimates, instead of calculations), when our mortgage is up for renewal in four years, we will have made it to a 34% interest and 66% principal with our biweekly payments.
|Balance||Interest Portion of Payment||Principle Portion of Payment|
What would the numbers look like if…. ?
We all like to play the “what if” game for various topics or scenarios. Sometimes it is productive, like planning for potential emergencies, or for future events. Sometimes it is super counter-productive, and can cause people to get paranoid of things that are not likely to happen… But today I’m going to play the “what if” game with our mortgage and look at a few scenarios.
Scenario #1: Nothing changes – literally. Our mortgage rate and payment remain the same forever… This has us with a mortgage of $515,000 at the end of the 5 year term. I could forecast the rest of the 20-ish years left in the amortization period, but I’m not going to do that today… That’s too much work and probably not realistic.
Scenario #2: We take advantage of the allowable 20% increase to our biweekly payments each year… This has us with a mortgage of $423,000 at the end of the 5 year term.
Scenario #3: Instead of the increase in biweekly payments, we make use of the allowable 20% lump sum payment each year… This one isn’t very realistic… I doubt we will get an extra $125,000 each year to put on the mortgage… But, it would mean that we could pay off the mortgage completely by the end of the 5 year term. Wouldn’t that be amazing?!?
Scenario #4: The most realistic of the non-status-quo scenarios is taking partial advantage of the lump sum payments. If we were to put an extra $20,000 on the mortgage per year (might not totally be possible, but more likely than $125,000), we could end up with a mortgage of about $430,000 at the end of the 5 year term.
What sort of “what if” games do you play? Have you done something similar with your mortgage?