Accelerate Your Mortgage Payoff for Debt-Free Living
Tom Kerr writing on financial freedom…
If you yearn to be free of your mortgage payment, it may be easier than you think. There are some realistic strategies that can help you transform a pile of debt into a nest egg of equity.
The first step is to understand the basic mechanics of the mortgage. Examine your mortgage documents or monthly statement to find how much your principal balance is. Principal is the original amount of money you borrowed, not including interest payments or money set aside for taxes or insurance.
Next, take note of what portion of your monthly payment goes toward paying off interest, and how much – if any – is earmarked for paying down the principal. In the beginning of a loan, monthly payments may be largely, or entirely, dedicated to interest. As the loan matures, you will gradually pay larger chunks of principal…which is the goal.
Paying off the principal is the key to erasing your debt, and if you can voluntarily increase your principal payments that will accelerate the process. So ask yourself, how much you can afford to apply to the principal. Determine the amount based on your unique financial situation. Then be sure that when you send in your payment you designate those extra payments to be applied only toward principal, not interest.
By paying an extra $100 a month in principal on a 30-year, $200,000 mortgage at 6% interest, you can shorten the life of the mortgage by about five years and generate savings of approximately $25,000.
A foolproof way to shorten your payoff – and the length of time you are charged expensive interest – is to borrow with a shorter timetable. A 15-year loan, for instance, will mean substantially higher monthly payments – but if you can afford those it will slash your repayment period by 50%, compared to a 30-year mortgage.
Usually the interest rates on shorter-term loans are slightly cheaper. Consider, for example, a $200,000 loan at 4% interest. A 15-year mortgage, versus a 30-year loan, will save you nearly $25,000 over the life of the loan. A 20-year versus 30-year loan will save you more than $15,000.
You can use free, online mortgage calculators to experiment, by plugging in different variables, or have a loan officer crunch those numbers for you.
Sending a payment every two weeks, instead of once a month, is another way to more quickly pay down the balance on your mortgage. You don’t double your payments but instead divide your normal payment into two increments, so the amount you pay each month remains the same.
But by paying half of your payment every two weeks you wind up paying a full, extra, month worth of mortgage payments each year. That beneficial result is a function of mathematics and how our 52-week, 12-month calendar operates.
Here’s an example, based on a $200,000, 30-year mortgage at an interest rate of 4% with monthly payments of $950. If you make two payments of $475 each, every two weeks, that still comes to $950. But the total interest paid over the life of the loan saves you approximately $35,000.
Many people pay a fee to have their lender set up an official biweekly payment program and enroll them in it. But the monthly service fees and restrictive terms usually undermine the potential savings. As long as the terms of your mortgage allow you to pay in biweekly increments, you don’t need that kind of costly assistance from your banker. All you need is a little discipline and organization and a calendar to remind you every two weeks that it is time to submit a payment.