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If you have a mortgage that is only a few years old, then likely the majority of the payment goes towards interest.  While mortgage interest is tax deductible, it definitely is deflating to see how much money is going towards the bank and not toward paying down your mortgage.  It takes several years of paying out massive interest before you actually start putting a dent in your loan balance.

I have been thinking a great deal about paying down my mortgage and what that might look like.  The encouraging aspect of paying extra money against your mortgage is that paying extra money now will have an effect on every future payment – namely, by paying an extra $1000 today, every future payment will have more of my money towards the principal versus interest.

I decided to take a look at various mortgages and see at what point in the amortization schedule would I at least half of my payment go towards principal versus interest.  This “tipping point” is a great place to get to since more of your money is going towards your own equity / savings versus paying a bank interest!  The tipping point is determined by the interest rate on your loan as shown here:

• Interest rate: 4.75% / Tipping point: 34% of loan balance
• Interest rate: 5% / Tipping point: 36% of loan balance
• Interest rate: 5.5% / Tipping point: 39% of loan balance
• Interest rate: 6% / Tipping point: 41% of loan balance

These are approximate values and assumes a 30 year fixed mortgage

So, since my mortgage is a 30 year fixed, 4.75% interest loan, I am shooting for that 34% mark as my tipping point.  When I have 34% of the loan paid off, more than half of my payment every month is going towards additional principal on the mortgage.  As such, I may aim to viciously attack my mortgage until I get to that point.  By attacking the mortgage early on the front end, you make a difference for the remaining time that you service the loan (as opposed to waiting 10 years and then going after your loan).  The process is similar to compounding interest, the more you do early, the larger the impact.

The psychological impact of getting past the tipping point is fairly large.  Many people tend to talk about owning a home as this wonderful thing and renting as “throwing money away”, but most people pay tons of interest and hardly any money towards the equity of their home.  Passing the tipping point will allow you to actually get to a point where you’re not throwing money away.  Your monthly housing expense IS actually putting money away.  Psychologically, knowing that my payment every month is having a large impact on my financial picture would be huge.

Getting To The Tipping Point

Getting to this tipping point is no easy accomplishment.  Like most things in personal finance, the earlier you start and the more you do during the early stages, the better.  The problem is that the early stages are often the hardest times to make these strides.  During your younger years, your earning power isn’t as high and you might still be paying off debt or recovering from financial mistakes.

Couple this with a massive recession and decreased incomes everywhere you look.  How the heck am I supposed to pay down my mortgage these days?  Well, you might not be able to or it might just require some pretty tough choices.  I’m doing my best to sacrifice in some areas and move towards this goal.  I encourage you to do the same.