It’s always exciting to move into a new home, however most homeowners also are 20 or 30 year mortgage owners and you will be happy to know as a new homeowner there some simple ways to accelerate mortgage payoff. It is a fact buyers remorse could set in if you only focused on the duration of a mortgage. There are many benefits for a homeowner, far more benefits than being a renter. I say this often to people, whether you rent or buy you will pay for the place you live. If you are going to pay for the place you live then smart financial sense would suggest it would be wiser to build equity in your home and take the tax benefits that come with being a homeowner. When mortgages are amortized evenly for the term of the loan in the beginning payments most of it is interest and as the loan ages more is applied to principle. All the interest paid on your home is tax deductible, meaning you have just given yourself a pay raise by the tax you avoided. Historically even with the mortgage and Real Estate meltdown in 2007 and 2008 homes have appreciated (gained in value) so for the average American a home is a good investment. Solid financial planning for a family often begins with a home. Most recently one of my clients, a very organized, planner type of personality wanted to determine whether to do a 20 year fixed mortgage or a 30 year fixed mortgage. Her concern of course was building equity quicker and paying off their home. When I laid out one simple payoff plan the decision for her and her husband was quite simple. The most common 3 ways to pay a mortgage quicker is making additional mortgage payments. One way to do this is to 1/2 of your monthly mortgage payment every two weeks instead of once a month. Quick math works like this, 12 months in a year is 12 payments, 52 weeks a year divided by 2 = 26. Paying 26 payments every 2 weeks equals 13 full payment in a year. How much this saves you roughly 8 years of payments. WOW!!! Therefore 30 year mortgage can be paid to a zero balance in 22 years. The interest saved by applying extra money towards the principle adds up to thousands of dollars. If you are a homeowner and considering this you should contact your lender and see if they offer an accelerated monthly payment program. The mortgage lender servicing agency can prepare an analysis that will show you how much you will save and set a payment program to establish this.
You may believe that to accelerate mortgage payoff you need a large amount of money. Certainly a large sum of money applied may see immediate results in the balance owed remember the old adage, ” its easier to to eat an elephant one bite at a time than all at once.” Paying a small additional amount monthly over the minimum due will be applied towards the principle, the principle being smaller means less interest accrued, therefore less interest paid. I use this example, if your principle and interest is $1200.00 monthly adding an additional $100.00 monthly will give you one extra payment in a year, reducing the pay off roughly 8 years earlier. As mentioned above in the early part of the mortgage you pay more interest than principle, by paying down the principle less interest is accrued and therefore you have accelerated mortgage payoff. Those small additional add-ons to your monthly payment applied to the principle make a big difference and will allow you to payoff your mortgage years earlier.
Many working Americans receive bonus pay whether it be performance based or sales based or profit sharing based on growth. Whatever the reason the bonus, many people (I’m guilty) will use their bonus for non beneficial reasons. A nice dinner out is nice, and there are some benefits that cannot be measured in dollars an cents but once you have spent this type of money it is forever gone. Adding bonus pay to your principle will save $$$$ thousands of dollars. There are many homeowners that get annual bonuses that if applied to the principle of your mortgage loan amounts to a huge amount of savings. What about tax return money? Applying this towards your mortgage loan will accelerate mortgage payoff substantially.
All mortgage lenders are not equal, surprise right? Bi-weekly payments as described in paragraph one equal 26 half payments in a year equivalent of 13 payments as opposed to 12 payments made in a year. However, as stated not all mortgage lenders are equal and not all mortgage lenders will permit borrowers to change their scheduled monthly payment to bi-weekly payments without any costs and fees. I attempted to force this upon a lender (Wells Fargo, but who’s talking) one time by paying it anyway and they held the money in what they referred to as suspended account until the full amount was reached and then credited it to my mortgage, in essence I was 15 days late and cost me more interest. Basically they were holding partial payments into an escrow account. The better plan would be to keep the additional money in your own account and pay one full payment towards the principle if the lender will not establish a bi-weekly payment plan with you. Bi-weekly payments accelerate mortgage payoff years ahead of scheduleSavings By Paying Extra Every Month
I think every time I have assisted families from Renter to Homeowner they say I am never going to move. The facts are average Americans will move 5-7 years. Keeping this in mind it still makes good sense to accelerate mortgage payoff. When paying additional money towards principle you are building equity at a much faster pace than paying just the minimum. A home is most often the single largest investment in their life. Accelerate mortgage payoff offers financial security and is a huge accomplishment. The Larry Stepp Team at Gustan Cho Associates is available 7 days a week, holidays and weekends for your resource and guidance.