No Debt Plan

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Example amortization graph from Karl’s Mortgage Calculator

You “own” your home. The bank really owns your home, but you are making payments. Every month you write the check or send in the payment online. Do you really know how much house you buy each time?

How to do the Math

We are locked into a 30 year, fixed rate mortgage. Actually, a regular mortgage and then a second mortgage for the other 15%. We’ve been paying off the second mortgage as quickly as possible.

There are two different ways to get a number for this. One is to figure out how much you are currently getting for each regular payment. The second is to figure how much house you are buying with each extra payment to principle you are making.

Amortization Schedule

The first method is tricky because it is constantly changing. For example, when we made our first payment to the house we paid $150 in principle to the first mortgage. Last month, we paid $154. It gradually increases over time. Thankfully, our mortgage company breaks down the payment information online. If your mortgage holder doesn’t do this, you can set up an amortization schedule in Excel. You can Google how to do this.

Extra Principle Payment

As I mentioned, we are paying off our second mortgage at a steady pace. In fact, we should have it knocked out by the beginning of 2012. If you’re doing the same thing, maybe you’d like to know how much each extra payment is “buying” you in house equity. Let’s use an example:

Your purchased the house at $200,000 and put 10% down, or $20,000. You have one mortgage that was originally for $180,000. You’ve achieved free cash flow and now have $300 per month to put toward paying off your mortgage. How much house is that really buying?

Simple. Just divide $300 by the total cost of the house. That comes to: $300 / $200,000. Result? 0.15%. Not a whole lot of extra, but you are chipping away at the debt.

Some caveats to remember:

• It doesn’t matter if your house has increased or decreased in value. You agreed to pay $200,000 for it, so that is what your calculations should be based off of. Even if the home value was $400,000, you still bought at $200,000.
• As you make extra principle payments — even as little as 0.15% at a time — you also increase how much your normal monthly payment will get in principle. It may only add an extra dollar per month at the beginning, but you will really start to chip away at it with time.

Of course some of you will argue that you shouldn’t be paying off your home. I’ll tackle that topic in the future, but you’re welcome to share your opinion.