I started writing this back in 2015 when we still had a balance on our mortgage, but for some reason never hit the "Publish" button. Back then we had a refinanced mortgage of $120,000 that we were aiming to pay off before 2020. Around 2015, our monthly interest payment was somewhere around $300. We ended up having no surprises with the birth of #4, so we executed the plan as described below.
Our house was paid off before we had baby #5. If we had not been paying extra on our mortgage, we would have had a balance of about $66,000 when he was born. We did have some unforeseen medical expenses with him, so having the extra savings from pushing pause would have been extremely helpful.
You were buying your first home. Starter homes where we live are around $150,000. You are going to take out a 15 year mortgage with a rate of 3.79%. You have no kids yet. 6 months into the mortgage you get a $400/mo raise at work. You commit to put that raise towards your mortgage until it is paid off. Two months after moving in you conceive, and an additional two months later you find out about the baby. This is when you start to weigh the option of pushing pause on the extra payments.
In this scenario, you would be pausing additional payments around month 10 of the mortgage. The baby is born in the 17th month. After all of the bills are paid (out of your Health Savings Account) and everyone is healthy, you resume payments in the 19th month. You kick this off with a big $4000 payment - 9 months of pausing, plus the $400 that would have gone to month 19.
Bold indicates months with extra payments.
|Month||No Extra||Extra, No Pause||Extra, Pause||Savings|
|6 - $400 Raise||$146,250.12||$145,850.12||$145,850.12|
|8 - Conception||$144,984.32||$143,780.52||$143,780.52|
|10 - You find out, pause||$143,710.50||$141,697.83||$142,097.83||$400|
|17 - Baby Born||$139,188.34||$134,304.08||$137,539.68||$3,200|
|19 - Resume||$137,877.86||$132,161.43||$132,218.76|
All math was done using this Google Sheet.
If no other life changes happened - you never put any more of a raise towards the mortgage and continued paying $400 extra per month - the difference in interest would be less than $100. This is the opportunity cost of pushing pause. By building up extra savings for added security during a major life event instead of making extra payments, you end up spending a little bit more in interest over the course of the loan.
Is that $100 worth it for the added security?
For us it was.
Some Alternate Numbers
What if the numbers were a little bit bigger?
- $1,000 extra payments - $21,949.10 interest paid with a pause, $21,772.61 without. $176.49 opportunity cost to push pause
- $1,500 extra payments -$17,802.46 interest paid with a pause, $17,551.55 without. $250.91 opportunity cost to push pause
The Original Post
We are imminently (in Feb 2015) expecting the birth of our fourth child, and with that change, my wife will be taking off work for a few months. She has been working part time since we had our first, so that we can pay off all of our debts faster. With her being off of work for the next four months, we have to push pause on that big, final debt - our mortgage.
Our mortgage sits right now (January 2015) at a balance of $62,801. Over the past year I have been working side jobs like crazy, and combined with my wife's income, we have averaged $3,000 per month of principle payments. The actual principle payment around this time is $700, so we are paying about $2300 extra per month. If we continued to pay $2,300 extra per month for the remainder of the loan, we would be at $41,618.84 by July, 2015.
If instead we banked $2,300 from January through June, that would put $13,800 into the bank. If we made $0 in extra payments from January through July, and a $16,100 ($2,300 extra + $13,810 from savings), our mortgage balance would be $41,750.25.
By deferring extra payments for 6 months, we end up paying $131.41 extra in interest.
$131 is a small price to pay to have extra savings in the event that mom or baby have issues.