I’ll never forget how scary it was signing all those papers to buy our first home, but I think the scariest part of all was when we got to the financial disclosure portion. They explained that we would end up paying double for our house after 30 years’ worth of interest was added in. From that point forward I knew that I would want to pay it off early.
Alison and I were 25 and 24 years old. We weren’t making that much money, It was 2009 and the real estate market had been smashed. It was an uneasy time for sure. With our journey to financial independence really getting started in 2009 as we were just starting to climb out of the depths of the great recession of 07-09 there were lots of people scooping up killer real estate deals. Luckily we were one of them, timing the purchase of our first home just right.
When we first started looking at houses in late ’07, and early ’08 we began looking without a real estate agent. This meant that we mainly went to new construction neighborhoods because we could easily see houses. One of the first neighborhoods we went in and toured with an agent was memorable. We looked at this new construction, open concept house that was very nice. But the whole time we were looking my wallet was screaming NO NO!! The house was over our budget for sure, I knew it. Although I wasn’t sure if Alison knew it or not. So when we got in the car I asked her how she liked it. She said she “Loved it!”… Me being annoyed that she didn’t immediately dismiss it or prepare a spreadsheet with our monthly income and expenses, I asked her “So you would move in today….” and she said, “of course”. As you can imagine what came next was a lovely “discussion” that newlyweds have as they learn to communicate with each other. I’m sure she will make a comment after I publish this post and defend herself. We were mostly on the same page.
Our house search continued for months and months as the economy got worse. We stopped looking at new builds because construction had come to a screeching halt. We looked at resales but couldn’t find what we wanted in our price range. We looked at many foreclosures because there were a lot of them and many of them were disturbing. Appliances ripped out, carpet that smelled like urine, toilets, and mirrors that had been smashed with sledgehammers. People were so angry, and it was very sad.
Then one day, something amazing happened. I got an email from that first neighborhood that we looked at. The builder was trying to sell off their last 5 houses. The buyers who had put money up to start construction had backed out or couldn’t qualify for a loan anymore. We went and looked at the two smallest houses. We ended up making an offer and buying a house in that very same new neighborhood that we had fought about a year prior. The difference was that the home we bought was originally under contract for $222K, we bought it for $171K. 11 years later we sold that house for $319K.
It was God’s timing, and we are so thankful. What is cool about the story is that we could have qualified for the house the first time we looked at it, but we knew it didn’t fit in our budget. We knew it would be a purchase that didn’t bring peace and margin but instead brought anxiety and stress. We were patient and it worked out.
Ok enough feelings, let’s get back to math…
We scraped together every dime we had to put down 20% on a 30-year loan at 5%. We paid $171k for the house with the plan to put 10 percent down. However the week before closing we crunched enough numbers to see the benefit of scraping together every last dollar and making it a 20 percent down payment in order to avoid PMI. Our initial loan was $971 total. Recently I found a budget comparison I made in buying that house where I agonized over a 15 vs a 30-year loan. The 15 years would have been a payment of $1251. I was too nervous about the extra $280 a month. Which seems comical now. The funny part is we refinanced two more times over the next 5 years on our path to paying off the house early.
So yes, we timed our real estate purchase well. But if I would have known the real estate market would grow like that, I should have bought all 5 of those houses. I always knew I wanted to invest in real estate in the long term but I told myself I would wait until I had at least a $1million net worth. I was too worried that I would be too focused on too many things. I wasn’t educated enough on property managers. I was already dealing with blessed with a wife, a house, kids on the way, a home-based business, a growing career in sales, church, and a million other things. I was afraid a rental house would eat into all of that. Maybe it would have… maybe it wouldn’t have. But regardless, I waited. Not to mention we just threw every last dollar to come up with 20% down. While I would have loved to buy all five houses, there was no way to do it.
The Payoff
After two years of making payments totaling $23,304, we had only reduced our balance by $3k. It was depressing, to say the least. I decided it was time to get serious with our financial goals and a debt payoff plan. Over the next two years, I refinanced to a 15-year mortgage twice while paying extra. That brought the balance down to around 105k. Over the next 14 months, we paid off $105k of mortgage debt. We pulled $50,000 out of savings that we had managed to save over the last two years. We had basically been banking Alison’s salary while we tried to find margin and learn about investing. We weren’t taking advantage of all our retirement accounts because I hadn’t learned it yet. For the next 14 months, we threw every other bit of cash flow at the mortgage. We paid the house off on February 1st, Alison stopped working on February 14th and our first child was born on March 1st.
The freedom of no rent and no house payment has been amazing. It allowed us to not even miss Alison’s income. It feels amazing to have your biggest monthly bill be your cell phone bill and your electricity bill. To have more monthly freedom with cash flow feels like a giant exhale. For the next two years, we were able to save over 50% of our income, while dropping back to one income.
Finally Time to Move
In 2020 we decided that it was time to move on to another house. We had really been thinking and preparing for this for the previous 3 years or so but a lot of things happened to just push us on to make the move. We timed it into one of the best seller’s markets in history that occurred as Covid started to wrap up and interest rates dropped into the 2’s. Great news as a seller, rough news for a buyer. Don’t get me wrong, the interest rate drop was great but it also opened everyone’s budget even more to a housing market that was low on inventory. Combine that with the fact that lots of people are still working from home and want bigger houses so we had ourselves a tough time ahead.
The great news is that since we had our house paid off and had a down payment saved outside of the house, we had some great flexibility. We were able to wait until we found the perfect house and we got it under contract before listing our house. The closings ended up being about 6 weeks apart but there was such peace and freedom in the fact that we didn’t have two mortgages to support. Then when we finally sold the first house we were able to pay down a nice six-figure chunk on our new mortgage to put us on track to pay off the 30-year mortgage in less than a few years.
Mortgage Recast
After closing on both houses and waiting a few months we decided to recast our mortgage. I have heard very few people talk about this over the years but it can be useful. Since we were only able to put 20% down on the new house our mortgage payment was around $1800, but after we sold the old house we had $300K in cash we were sitting on. After lots of debates and back and forth we decided to throw an additional $200K at the mortgage. Of course, paying ahead helps reduce your interest and the amount of time it takes to pay off the mortgage but it doesn’t reduce your monthly payment. A recast does just the opposite – it recalculates your payment based on the full term and current balance. For us, this meant our payment went from $1800 to $793. The great news is that if we kept making the same $1800 payment we would still pay off the house just as fast, but this lowered our obligated monthly payment if times got tight.
That’s the story of paying off the starter house and the math behind it, but does anyone want to hear the rest of the story? One of my goals with this blog is transparency. I feel like the transparency of others is where I learn the most and find people I can relate to mistakes or wins. It shows me that I can do it, or recover from it.
The Month after we paid down that big chunk on the new house and recast the mortgage I realized it was a mistake. That was when the rental house opportunity showed up and I had literally just used up all my seed money paying down this new mortgage. The next post I have planned will talk about Rental Real Estate, Setting up LLCs, our journey to explore Real Estate Syndications, and more. I know you can hardly wait, right?
Alison Here!
Well, you made it to the end. It’s fun looking back and tracing the twists and turns of the purchase of our first and second homes. During the moments we were anxious, impatient, and sometimes felt hopeless. I am thankful that we were never in a time crunch or had a financial burden pushing us to make foolish decisions. We had built up time and financial margin during these times and that allowed us to wait on God’s perfect timing. We put offers on the wrong homes during both buying seasons and we are thankful we slowed down enough to know it was that wrong choice.
Honestly, we probably should have waited longer to purchase our first home, but I was so ready to have a home and get out of the apartments. As they say, hindsight is always 20/20 but it all worked out and because of that first house, we learned so much.
Paying off the house was an adventure and all-consuming. We printed off a picture of a house and it was divided up into a bunch of little squares. Each square represented a certain amount of money and we colored them in as we paid down the mortgage. We had it on our bathroom mirror and it was fun watching it get filled up with color.
It kept us focused along with me leaving my job and having a baby on the way- those were big motivators too. We had planned it all out.
After paying off the mortgage our expenses didn’t really change. We continued with our regular spending. Previously we talked about living in that house with mismatched furniture, well here is the proof.
We didn’t put that mortgage payment toward a new car payment, new furniture, or a big vacation. We just directed it to our savings and investment accounts and stayed steady. We worked hard to pay off our first home, but because of that, we did not tell ourselves that we deserve a break or deserve to spend on something new. We may have gone out to dinner to celebrate, but I can’t really remember. We were working hard for our future selves and our future family. It was hard to visualize such a broad future-focused goal at the time, so we really just focused on the next financial goal and took small steps. But boy, do we thank those young kids now!
Loved reading this. For a future post, I’d love to see a discussion on paying off a mortgage early vs not paying mortgage early and investing. A lot of us that have bought homes in the past 2-3 year have been blessed with 1-3% interest rates and comparing that to the 12% average return from the market, almost seems crazy to try and pay your mortgage off early
That’s a great point. We are planning on doing a few more real estate focused posts. You are right, Paying off a 5-7% mortgage vs 2.5% mortgage is two totally different conversations. We do have a mortgage currently on the new house and aren’t rushing to pay it off. I wouldn’t have changed paying off the first house, it gave us margin when we needed it and supercharged our ability to save. But today’s world is different. Thanks for the feedback.