Friday, December 16, 2005

Early Mortgage Payoff Analysis

As stated in my 2006 Financial Goals and Objectives, in January 2006 I will start making extra principal payments toward my mortgage. I own a one bedroom, one bathroom new construction condo that I purchased in April 2004. My mortgage is a 7-year arm that is at 4.75% interest. I discuss my decision to pay off my mortgage early as opposed to investing the extra money in the post of my long-term financial goals. I purchased my condo in April 2004 for $269,000. I put $79,050 toward a down payment, the result of appreciation from the sale of a house I owned in Seattle. I built an amortization table in Excel to calculate the impact of extra principle payments. Here are the key figures:

Loan amount: $189,950
Interest rate (until April 2011 - 7-yr ARM): 4.75%
Monthly payment (principle & interest): $990.87
Mortgage balance (as of Dec. 2005): $184,727

It is staggering to see that I have made 21 payments against this loan totaling $20,808 and I have only reduced my balance by approximately $4,000. Ouch.

My objective for 2006 is to contribute $10,000 in extra principle payments throughout the year. If I reach that goal, by December of 2006 I will have knocked 3 years off the term of the loan and reduced the mortgage balance to $171,633 (versus a balance of $181,543 if I chose not to make extra payments). This will have a negligible affect on my net worth as I believe the extra principle payments would have just gone into my money market account if I hadn't chosen this objective.

I chose the $10,000 target to pay toward principle based on three factors:
(1) I thought it was an achievable yet ambitious number,
(2) if I continue this trend through 2011 when my ARM expires, my mortgage balance will be close to $100,000 when I refinance, and
(3) it allows me extra funds each month for 'mad money.'

Read more about the controversial decision to pay off my mortgage early.

Follow my progress to see if I am able to meet this goal.

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