When we got home from being out of town for ten days, we had a voice mail that said, “We just wanted you to be the first to know that as of 12:00 PM today we paid off our house. We have no car debt, no house debt and no credit card debt. This has been such a blessing to us and we thank God for it. We appreciate all you have done to teach us and inspire us.”
This 30-second voice mail summed up what Compass Catholic is all about—freeing people from the grasp of debt. When we first met this couple years ago, they were not managing their money in any way, let alone doing it according to the Bible.
After the first week of the Bible study, they asked us for a one-on-one meeting to help them go through their monthly bills vs the monthly income. They were horrified to discover that they were spending $800 more each month then they were making. WOW! That is a pretty deep hole to dig month after month.
After many years, much prayer and a concerted effort they were able to do what many people dream about–becoming totally debt free. What a feeling!
Previous blogs were about paying off credit cards and car loans. Today we’ll concentrate on paying off the mortgage. Many people think it’s beneficial to keep their mortgage because of the tax advantage. But that thought process is fraught with error.
If you have a $200,000 30-year mortgage at 6% interest, your monthly payments are about $1,200. Or the thirty years of the mortgage you will spend $431,677 in total payments. Of the total, $231,677 is interest payments, which averages about $8,000 per year.
If you are in a 25% tax bracket, your tax savings will be about $2,000. So you are paying $8,000 to save $2,000! I’m open to that deal every day of the year. If you pay me $8,000 today, on April 15th I’ll be happy to give you back $2,000!
After purchasing a home, people do not consider the advantages of paying off the mortgage and they get into even more trouble by using home equity loans for renovations, loan consolidations or to supplement overspending. This is very dangerous. Understand that a home equity loan uses your house for collateral and if you default on the loan, your home may be taken away from you.
Instead of borrowing more, develop a strategy to payoff your mortgage as quickly as possible. The next few charts will show you an example of a $200,000, 30-year mortgage amortization schedule with an interest rate of 6 percent. Take a look at how much interest you would be paying during the first twelve months of the loan:
In twelve months you will have paid over $14,000 in mortgage payments, yet you only reduced the principal balance on your loan by $2,500.
That means almost $12,000 was paid in interest. You want to get to the point where more money is going to the principal than to the interest when you pay your mortgage.
Look at the last year of the mortgage:
Interest is calculated on the remaining balance. So in the last twelve months of the mortgage, your total mortgage payments are still a little over $14,000, but almost $14,000 is going toward the principal and only $450 is going toward interest. By reducing the principal as quickly as possible, you reduce the amount of interest you pay, allowing even more of your monthly payment to be paid against the principal.
The following chart shows the amount of interest that can be saved over the life of the loan if you increase your payment to reduce the principal. If you make one extra payment per year, a thirty-year mortgage is paid off in 24½ years and you save almost $50,000.
To pay off the same loan ($200,000, 30-year mortgage at six percent) in twenty years, add $234 extra per month, and you will save over $87,000.
And paying off the loan in seven years saves you almost half of what you would pay during a thirty-year payoff.
Even if you can’t pay a lot each month, every little bit helps. The next chart shows how much you will save and how many months you can take off this same mortgage by adding even a little bit to your monthly payment: mortgage.
Paying off the mortgage early may not be how our society tells us to live, but it follows the principles of how God tells us to live. God never wants us to live the way society influences us!
Just like our friends at the beginning of this article, you too can become debt free with much prayer and a concerted effort.
Romans 13:8 ~ Owe nothing to anyone, except to love one another; for the one who loves another has fulfilled the law.