I had to revise my money page up above. I had written that we paid off our mortgage on the first house in 2005. That was incorrect. We actually paid it off in September, 2004. Since we bought the house in April of 1999, this means we paid it off in 5.5 years. We paid off $150,000 in 5.5 years. And we didn't make that much of an income then. We just lived very, very simply. We contributed at least 10% of our income to our retirement plans back then, but of course we didn't come close to maxing them out at the time. Our priority was definitely to pay off that mortgage during those 5.5 years. And we did it. In 1999 if you had told us that we were going to pay it off in 2004, we would have laughed and said that the only way that would happen is if we won the lottery. We didn't win the lottery, we didn't inherit any money, we just lived a lifestyle that was below our means to generate enough savings to put toward the house mortgage balance.
So here we are in late 2010 with the dust starting to settle on our new house, after having done the major kitchen remodel, some bathroom remodeling, refinancing, and whatnot. We have a mortgage again, and that does make me nervous. I hate, hate, hate debt. But it was a priority of ours to have a very nice house, and we did take advantage of the real estate bust to make it happen sooner rather than later. That was the big battle in my head a year ago (do it now at a great price with a mortgage or wait longer and pay cash), and we decided to go for it. Hence, the big downside is having a mortgage again. A mortgage amount that is 40% higher than the mortgage in 1999 even. We refinanced to a 15 year fixed rate mortgage, and that makes me feel better because at the latest it will be paid off before Julia starts college.
The husband and I talked about the mortgage again this week since our refinancing went through last Friday. What is a realistic but yet slightly ambitious goal for paying this off? Times have changed a little because we have the big daycare expense that we didn't have in 1999. The daycare expense will likely go down when Julia goes to kindergarten, but then we'll be paying for the half day of kindergarten that our taxes don't fund + possibly before school or after school care. So our daycare bill will likely only go down slightly. Starting in first grade, we'll only have before and/or after school care. Probably starting in third-fourth grade, she probably won't need before and/or after school care. (It depends on her maturity level.) We max out our retirement accounts now, which we didn't do back in 1999. We don't want to compromise that. That should and will come before paying off our mortgage balance.
So we talked about it, and we came up with a 10 year figure. 10 years is a reasonable amount of time to pay this thing off. We are already amortized to pay it off in 15 years, which results in substantially higher payments than if it was amortized over 30 years. Based on my calculations, over the next 10 years we need to contribute $70,000 over and above our monthly payments to be mortgage free by the end of 2020. That works out to $7,000 per year. Hopefully that is do-able. It should be do-able if neither of us loses our jobs for an extended amount of time.
If we just pay our monthly payments, then we will be paying $69,500 in interest over the life of the loan. If we prepay the $70,000, we will approximately be saving $20,000 in interest, bringing our total interest paid down to $50,000 over the life of the loan.
Paying the mortgage off in 10 years is a nice goal because Julia will not yet be technically a teenager, and we'll be in our low-mid 40s (cuz hubby's much, much older than me :0) ). By that point, maybe we'll be starting to get the itch to travel, and at that point Julia will be more independent and can withstand keeping up with us physically on excursions. So then we can divert more money to travel and entertainment when we are completely and utterly debt free.
We both agreed to the plan, so now we have to come up with the extra $70,000. Hmmmmm
I said at the beginning of October that our budget is tight this month because we had to pay for the second half of 2010 property taxes, and I wanted to see if we could do it without touching our savings. So far, we're doing pretty well by just watching what we spend, and we don't need to touch our savings to make up the difference. Yay! November is going to be nice because we don't have our first mortgage payment until December (when you refinance in the middle of the month, you don't have your first payment until the month after your first complete month with the new bank). So we're anticipated to have a surplus in November. However, December will be nasty. We have our 2011 homeowner association fees, we have an annual internet bill for all of 2011, we have car insurance due for the first half of 2011, and we have our 2011 homeowner insurance premium. Oh yeah, and Christmas. I'm projecting that we'll have to take $1,600 out of savings to take care of the increased December expenses. My goal is to cut back spending in other areas over the next few months so that we end up taking less or maybe even NO money out of savings to accomplish this. It would be most awesome if we can get through December without touching our savings.
For what it's worth, when I say savings, I mean an account that I have at ING Direct that is specifically designated for yearly expenses with timing issues (i.e., annual and semi-annual lump sum expenses). My goal is for this account to always have at least $5,000 in cushion, and right now it is well above that. This account is completely separate from our other savings accounts, which are actual savings accounts. While the annual expense account is technically a savings account, it more or less operates like an escrow account would for your property taxes and insurance with your mortgage company. But instead of the mortgage company controlling it, we control it. Dave Ramsey would call this a sinking fund for our annual expenses if you're into his lingo.
I suppose I've blabbed enough about finances for the night. Have a great weekend!
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