Countdown to Financial Fitness: Paying Off Your Mortgage

Countdown to Financial Fitness: Paying Off Your Mortgage: Several months ago, I wrote a post about the pros and cons of paying off your mortgage early. I promised that in a future post, I'd tel...

Paying Off Your Mortgage

Several months ago, I wrote a post about the pros and cons of paying off your mortgage early. I promised that in a future post, I'd tell you how to do it. Well, here goes.

The best forty dollars I ever spent was to attend a one-day class at a community college near my Seattle home on how to prepay your mortgage. My husband talked me into going.

I had heard people mention "making double payments" to accelerate repaying their mortgages. But our mortgage payment was already over a thousand dollars a month, a big chunk of our income; how could we possibly make double payments?

Early in the life of a mortgage, the bulk of your payment consists of interest. "Double payments" simply means paying two months' worth of principal. When you make a principal payment before it is due, you cut out the interest associated with that payment.

When you purchase a house and secure a mortgage, you should receive an amortization schedule from your lender. If it's not included in the huge packet of papers you receive at closing, ask for one or create your own. An amortization schedule states the amount borrowed, the terms, and the total amount of interest that will be paid by the loan's end date (assuming you stay in the house and make regular payments throughout the life of the loan, without ever refinancing). There will be a breakdown of each month's payment showing how much of the total goes to principal, and how much to interest, as well as the loan balance after each month's payment.

Our teacher ran an amortization schedule for each student in the class, using the loan parameters we provided. We could then use this schedule to track our own prepayments and reconcile with our lender's statement at the end of each year. Now it's easy to create your own amortization schedule online, in Microsoft Excel, or using one of many other readily available computer programs or apps.

For example, let's look at a thirty-year fixed loan for $200,000 with a five-percent interest rate. The payments would be $1073.64 a month, and you would have spent a total of $386,511.57 by the payoff date, assuming you never moved or refinanced. After thirty years, the total interest paid would be $186,511.57, almost as much as the original amount borrowed. Those numbers can be quite intimidating the first time you sign your life away to acquire a mortgage. When my husband and I bought our first home, our interest rate was 10.5 percent on a thirty-year loan, so the figures were even more dramatic.

Here's what an amortization schedule for the thirty-year, five-percent loan for $200,000 with a monthly payment of $1073.64 would look like: 

Payment #	Amount	Interest	Principal	Loan Balance
1	$1073.64	$833.33	$240.31	$199,759.69
2	$1073.64	$832.33	$241.31	$199,518.38
3	$1073.64	$831.33	$242.32	$199,276.06
4	$1073.64	$830.32	$243.33	$199,032.74
5	$1073.64	$829.30	$244.34	$198,788.40
6	$1073.64	$828.28	$245.36	$198,543.04
7	$1073.64	$827.26	$246.38	$198,296.66
8	$1073.64	$826.24	$247.41	$198,049.25
9	$1073.64	$825.21	$248.44	$197,800.81
10	$1073.64	$824.17	$249.47	$197,551.34
11	$1073.64	$823.13	$250.51	$197,300.83
12	$1073.64	$822.09	$251.56	$197,049.27

If you decide to make double payments, you don't need to pay $1073.64 x 2. You simply pay next month's principal along with this month's payment: $1073.64 + 241.31. Now your loan balance has been reduced to $199,518.38 instead of $199,759.69, and you have saved $832.33 in interest. Next month, you will be on payment #3. If you send month #4's principal (243.33) along with it, you'll be on payment #5 by the third month of your loan. Continue these steps and in six months you'll have knocked a full year off your loan payments and saved almost $5000 in interest over the life of the loan. Notice how much faster the loan balance declines; in this example, your balance after six months is the same as it would have been after one year of normal payments:

Payment #	Amount	Interest	Principal	Balance
1	$1314.95	$833.33	$240.31	$199,759.69
		$832.33	$241.31	$199,518.38
2	$1316.97	$831.33	$242.32	$199,276.06
		$830.32	$243.33	$199,032.74
3	$1319.00	$829.30	$244.34	$198,788.40
		$828.28	$245.36	$198,543.04
4	$$1321.05	$827.26	$246.38	$198,296.66
		$826.24	$247.41	$198,049.25
5	$1323.11	$825.21	$248.44	$197,800.81
		$824.17	$249.47	$197,551.34
6	$1325.20	$823.13	$250.51	$197,300.83
		$822.09	$251.56	$197,049.27

Of course, when you use this prepayment method, the principal payments increase a little each month, which could become difficult to manage eventually if your income is not going up. But the beauty of this system is that you are not locked into making the additional principal payment, so if money is tight one month, you can skip or reduce it, or you can stop any time and go back to your regular payment schedule. The initial savings has still been realized.

Think about this option when you first apply for a loan; the sooner you begin prepayments, the more interest you'll save. As you can see from any amortization schedule, the lender collects the bulk of the interest up front, when the loan balance is highest. People who refinance over and over don't reduce their loan balance much over time; most of what they pay is interest, and they perpetually carry a mortgage. ("But it's tax deductible!" they argue.) If you're afraid you might not be able to manage the payments on a fifteen-year loan, take out a thirty-year loan and prepay it, using the double-declining principal strategy to cut your repayment time in half.

You can also customize your amortization schedule to prepay a fixed amount each month, for example, sending your lender an extra $100 toward reducing the principal. Every little bit saves way more interest down the road.

Have you ever thought about pre-paying your mortgage? I'd love to hear your comments.

Sharon Marchisello is the author of Live Cheaply, Be Happy, Grow Wealthy.

Countdown to Financial Fitness: Saving Money on Conferences

Countdown to Financial Fitness: Saving Money on Conferences: Going to conferences can be a great way to advance your professional career. It's an opportunity to build skills, share best practices,...

Saving Money on Conferences

Going to conferences can be a great way to advance your professional career. It's an opportunity to build skills, share best practices, and network with peers. But unless you work for a company that pays your expenses, attending an out-of-town conference can be costly. Here are a few suggestions to reduce those costs while still deriving benefit from a conference.

When you register, ask about available discounts: early booking, senior citizen, student, affiliation with a sponsoring company or professional association, first-time attendee, etc. Some organizations offer scholarships to encourage their members to attend conferences. For example, I'm a member of Sisters in Crime, and they offer $150 scholarships for members to attend writers' conferences deemed to be educational. By attending Killer Nashville this summer, I qualified. The scholarship money is paid as reimbursement after the conference is over and I've submitted proof that I attended.

Staying at the conference hotel is usually preferable. No commuting involved, and you can slip up to your room during downtime to unwind. And of course, you're more apt to participate in after-hours networking activities. There are usually discounted blocks of rooms for conference attendees if you book early enough. But these often fill up quickly, or the conference hotel might be considerably more expensive than other accommodations.

Most hotel rooms have at least two double beds, so consider sharing with a colleague or friend headed for the same conference. At Killer Nashville, our conference hotel was the Embassy Suites, and we were able to fit three people into one suite, which further lowered our accommodation cost. If you don't know anyone who is going, contact the organizer or your professional network to inquire if there are other single attendees looking for a roommate.

If you have friends or family living in the area who don't mind hosting you, you can save a lot of money on hotel and meal costs, but you might not feel as connected to the conference and other attendees staying in the middle of the action. However, visiting with someone you might not otherwise have seen could make the trade-off worthwhile.

If you book a different hotel from the one where the conference is held, try to find something within walking distance, or with free, frequent shuttle service to transport you back and forth. Otherwise, transportation and/or parking costs could eat up any savings from staying "off campus."

Some conferences include meals, but with others, you must factor in additional costs for food. And in a high-end downtown hotel, nothing is free. It's ironic that the budget hotels often provide free breakfast, free Wi-Fi, free parking, but the upscale places charge extra for everything. If you're staying at a hotel with a breakfast buffet, and you'll be on your own for lunch, slip a couple pieces of fruit or a bagel in your bag for later.

Be on the look-out for receptions and hospitality suites where snacks are offered. For example, I just returned from Bouchercon, a conference for mystery readers and writers, and almost every day, various sponsoring publishers hosted the hospitality suite, laden with coffee and carbs.

A refrigerator in your room is a plus; you can store leftovers that might get you through another meal. (Just don't touch anything from the mini-bar!) If you don't have a refrigerator, check with management to see if one can be brought up. I'll drink tap water rather than spend money on bottled water, but I like it cold. Most hotels have ice machines so you can cool beverages in your room, but an ice bucket is not as flexible as a refrigerator.

Hotel restaurants tend to be pricey, so when you're going out for lunch or dinner, grab some new conference friends and explore the area. You might find a tastier meal for less money.

Educational sessions are wonderful, but most networking at conferences happens in the bar. Embassy Suites had a free happy hour for hotel guests, but most hotels gouge you on bar drinks. Having to pay ten to twelve dollars for a glass of wine keeps me from overindulging. Maybe that's a good thing… Learn to drink slowly and don't be afraid to ask for a glass of water instead of a refill.

Depending on your profession and whether you're a sole proprietor, a volunteer for a nonprofit, or an employee, many of your costs to attend a conference may be tax deductible. Save your receipts.

What are your thoughts on attending professional conferences? I'd love to hear your comments.

Sharon Marchisello is the author of Live Cheaply, Be Happy, Grow Wealthy.