Our family has never experienced the typical deluge of American debt. We haven’t taken on a car loan or carried a credit card balance.
However, we’ve been perfectly average about one consumer debt: our mortgage. We took on a mortgage when we built our home in 2004. Since then we’ve refinanced to a lower rate 3 times. Haven’t mortgage rates been amazing?
In order to pay off our mortgage quickly we pay an additional amount towards the principal each month. A few years ago we decided that we wanted to put even more zeal into paying off this debt. We plan to have our entire mortgage paid off by December 31st, 2018.
The Moment That We Tasted Financial Freedom
We looked at our budget and realized that a large amount of money was going towards paying off our home. The American culture assumes that families will engage in life-long house payments to a lender.
Entangling a half-centurial man with a 30 year mortgage is seen as normal. We had always viewed the mortgage as a necessary appendage to our financial portfolio.
That day, while staring at our budget, we had a lightbulb moment. What if we started to pay more towards our mortgage each month? In that moment the cultural fetters of debt were loosened.
In order to pay off our mortgage we started off small, adding an additional $40 per month towards the principal. As my husband earned pay raises we would evaluate and contribute additionally towards this goal. As we watched our mortgage balance drop, our excitement grew.
By 2012 we were contributing a significant portion of our budget towards this debt. At that point we decided to begin setting aside a share of our income into a separate account. The money in this separate account is then added against the mortgage at the end of each year.
We chose to make this additional payment through a once-yearly method rather than adding more to our monthly principal payment because of one simple reason: it allows us to extend our payoff of this loan but still affords our family the ability to adjust the year end amount if an emergency arises.
Why an Annual Mortgage Prepayment Works For Us
This method of mortgage payoff is preferable to making an additional payment toward principal because it allows us to accumulate liquid savings in the event of an emergency.
We prefer to maintain a large savings buffer for the following two reasons:
- Potential income loss. My husband’s job as a utility worker is relatively secure, but he is a union worker and during times of negotiation there is no guarantee that there won’t be a strike or that his wage won’t be renegotiated.
- Our family size and fiscal security. We have five children aged 10 and under. The good news is that they don’t yet cost a lot to feed, clothe, and house. The bad news is that they are dependent on us for their every fiscal need.
Annual Prepayment Isn’t for Everyone
I don’t recommend this method for every situation. If you’re just getting started paying off a large debt (such as a home loan) it is imperative that you pay monthly towards the principal.
Developing the discipline to pay off debt is a learned skill that must be practiced. Developing the discipline to pay off debt is a learned skill that must be practiced. Click To TweetSaving into an account each month without first strengthening this muscle leaves you vulnerable to burning through that money at the end of the year rather than putting it towards the debt goal.
I would highly recommend looking into this annual prepayment (or yearly AND monthly) method if you have developed some financial discipline and have children in your family, or if other reasons make this additional annual payment attractive to you.
Do you make extra payments toward your mortgage balance? What gives you added zeal for achieving your goal?