A home mortgage is something that all people expect in life. It is almost like a right of passage in the adulting world. It’s crazy to me how going in to so much debt can make someone so happy. Yes, we all need a home to live in but to know that for THIRTY years you are going to be paying this big chunk of money makes me super stressed out! As my husband tells me, “It is unavoidable.” I tend to think he’s wrong, it IS avoidable if you’re smart about it. Of course there aren’t many people who can outright pay for their house, I by no means am close to doing this! But you bet my bottom dollar I am going to do everything I can to make sure it doesn’t take me THIRTY years to pay it. My secret? Remembering to pay the PRINCIPAL.
Story Time
The following is a true story about my sweet in-laws who I aspire to follow in their money footsteps.
My father-in-law has been in the trucking business for years now and has done very well. For years my husband’s mother would take any leftover money they had after the month’s expenses and put it towards the mortgage. My father-in-law would tell her as she went in to the bank, “Make sure you tell them to put it towards the PRINCIPAL.” They did this for years until, finally, their mortgage was paid off (while they were still in their forties). Because they paid this off early they ended up saving half of what they would have spent, just in interest, if they had simply paid the same amount over the next thirty years.
This is probably one of the most important financial decisions they have ever made because a few years later my father-in-law took his trucking business through a different company. He started doing well, even better than they were before, until the oil prices dropped. This drastically changed his workload and he ended up going three months without working.
If you, or your spouse, did not work for three months could you survive financially? How would it effect your family?
Because my in-laws were smart about their mortgage and paid extra on the PRINCIPAL they were not hurting financially. He was out for three months and they were completely fine.
By the way, the story does have an even happier ending, he is now working again and is busier than ever!
Moral of the Story
The reason why this story is key to understanding the concept is because it shows that anyone can do it. You don’t have to be financially savvy to understand this. You don’t have to invest in some random stocks just to try to make extra money to pay for your mortgage. It is something as simple as taking anything extra you have, even if it’s $5, and putting it towards your PRINCIPAL. This kept my in-laws out of a financial mess and it could keep you out of one, too.
Have you ever looked at your monthly statement to see how much of your mortgage payment is going towards INTEREST and PRINCIPAL?
Understanding the Principal
Many people, like I used to, don’t understand much about the principal. Yes, we know that there’s the mortgage and then there’s interest. But, did you know that every month when you pay your mortgage (or other loans such as auto) it first goes towards the interest, then the rest of it towards the principal. Say you have a mortgage loan for $250,000. Your monthly payment first goes towards the INTEREST on that loan then the rest of it goes towards the actual loan (or principal) of $250,000.
Mortgage’s are a month behind, which is why you’re paying the interest FIRST.
If you just happen to pay extra on your monthly payment than the majority of it goes to interest. If you tell them specifically that you want to put extra towards the PRINCIPAL then you are paying on the actual loan.
How cool would it be to pay off your house EARLY??? How satisfying would it be to know that just by doing one simple thing you saved thousands in interest that you didn’t have to pay.
Steps to Take
Step 1. When looking for a house the banker will qualify you for the MAX that you can buy. Never go for the max that you can buy and instead back off at least 10%. This allows you to put more monthly income towards your principal. Therefore, paying off your mortgage faster and saving you more money.
Step 2. Never miss a payment. I know this is sometimes easier said than done, but if you aren’t able to make the full payment on your mortgage then at least pay what you can. Then the next month budget it in to pay the full amount + what you had left over.
If you are wanting to pay off your mortgage in HALF the time then simply make an extra payment towards the PRINCIPAL every month.
Step 3. Any extra income put towards the principal. Remember to specifically tell them to put it towards the PRINCIPAL and not just an extra payment. If you don’t say it is going towards the principal than it will go towards the interest.
Step 4. Get motivated. Whatever motivates you to get things done then do it when it comes to paying off your mortgage. This is a very achievable goal and is also very rewarding.
This is something so simple that anyone can do it. There were some months that my in-laws had no extra money and didn’t pay any extra. That’s the beauty of it, you can do it at your own rate. YOU can choose if you want to spend more in interest or not.
I know that it can be hard to find extra money, especially when you don’t feel like you have any more to give. I’m here to tell you that it is doable. You control your choices and you control your how financially free you are. Don’t wait the full thirty years just because you can, save yourself some money that YOU deserve.
If you need some extra advice on HOW to save money check out my post → How to Start on a Successful Savings Plan
If you are just a beginner and want to know where to begin check out my post → Step-by-Step Guide to Starting a Budget
How would you feel to own your home?
Katie says
This is such great advice. I was lucky enough to have a short segment of high school where we actually discussed home finances (it seems most schools don’t do this) and we learned about this. I don’t have a house yet, but I do this with my car whenever I can. Sometimes it’s literally just rounding the bill from $298.26 to $300 even, but every little bit I can make towards the principal of the loan feels like a win.
Thanks for sharing this!
McKenzy Potter says
I know it’s funny how schools seem to ignore this subject anymore. That is great and an important point, this doesn’t just apply to a home mortgage it’s any loan. Sometimes it’s just the littlest amounts that you put towards it that make the biggest difference in the end! Thanks for reading 🙂