Up trap
To take or not to take
After 12 years of renting, you get a bit tired of constantly living with the fear of being kicked out without notice. Each time I thought about looking for a new place, meeting a new landlord, negotiating the rent, signing a new contract with an internet provider, and moving all my stuff, I felt anxious. Even though most of the flats I rented were nice and felt like home, and the owners were decent people, the illusion of a temporary residence never left.
From a financial perspective, it was still much cheaper to rent in Belarus than to pay monthly mortgage installments, even though all that money was going down the drain. However, after meeting the ONE (my fiancée) and moving to Poland, I reevaluated a lot. Now we own our first place and are really happy with it! (Well, the bank kind of owns it for the next 30 years.)
By the way, the pressure of renting has now transformed into something new—a fear of losing regular income.
Oh, Crap!
Master Strategist
Nobody wants to stay in debt for 30 years, so the urge to close a mortgage as soon as possible is pretty motivating. And the bank, being so “kind”, offers two options for paying extra:
- Reduce monthly installments
- Reduce the total mortgage term
But which one to choose, and does it make a difference in the end? I gave it a try to find out.
The math here is pretty simple: our goal is to pay an extra amount equal to half of our monthly installment. By doing that, we’d be able to close the mortgage in 150 months instead of the 350 we have left. This would result in interest payments totaling around 50% of the mortgage’s initial value.
These calculations can be checked by increasing the monthly installment while keeping the original mortgage term (signing a contract for 150 months instead of 360), which gives the same result.
A completely different story is putting all extra payments into reducing the mortgage term, month by month. Pity, I couldn’t find any clear explanation of how the bank calculates this reduction, my guess is that they start reducing the principal from the end—taking the last scheduled installment and subtracting from it. If the extra payment covers the last scheduled installment, then you save one month. For this calculation, we can use the following rough estimation:
Months saved = ( Extra Payment * Months Left ) / Monthly Installment
In this case, the “formula” gives only 170 months saved, which means you would still need to keep paying for 180 months. And that is about 63% of the mortgage value going toward interest.
Let’s compare both approaches in terms of how many months we would save from the original 350. Additionally, how much interest payment, based on the original 150% of the total mortgage value, would be avoided?
| Months saved | Interest saved | |
|---|---|---|
| Principal reduction | 200 | 63% |
| Term reduction | 180 | 54% |
God knows I want to break free…
The strategy is clear, but there are still plenty of obstacles along the way. Our current interest rate is fixed for the first 5 years. After that, it will be adjusted to the economic health and inflation. Who knows if we’ll still be able to pay extra 50% each month? Maybe we’ll refinance the loan with another bank for better terms. Maybe my “stonks” game will pay off!
Hold the helm and keep reducing!