Wednesday, July 24, 2019

Cheat The System, How To Pay Your Mortgage Off Early



New data shows that nearly 40 percent of all homes in the United States are owned free and clear, with “the highest share” in West Virginia at 54%,” reported Bloomberg.com “Maryland and the District of Columbia were on the other end of the spectrum with rates of 27% and 24%, respectively.”

When many a real estate dream is focused on the idea of buying a home and staying just long enough to earn enough equity to move up to something bigger and better, this may come as somewhat of a surprise. If you have considered the idea of buying a forever home (or if you’re already there!) and want to be amongst the almost 40 percent of owners living mortgage free, there are some tips that can help you move toward that zero balance.

Switch to biweekly payments
Say your mortgage payment is $2,000. Pay it once per month, and you’re paying $24,000 per year. Switch to biweekly payments of $1,000 every two weeks, and you end up paying $26,000 for the year. That adds up.

“This will have the nearly the same impact on your budget as one monthly payment, but because there are 52 weeks in a year, a biweekly payment schedule will result in 13 full-sized payments a year instead of the normal 12,” said The Motley Fool. You'll be making an entire extra payment every year without having to scrounge around for the extra money. To look at some real-life numbers, if you have a 30-year $200,000 mortgage at an interest rate of 5%, making biweekly instead of monthly payments would save you $34,328 in interest and allow you to pay off the loan almost five years early.”

Make extra principal payments
Especially in the early years of your mortgage, your payments are likely to be mostly interest. But you can eat away at your principal by making an extra "principal only" payment. “The benefit of paying additional principal on a mortgage isn’t just in reducing the monthly interest expense a tiny bit at a time,” said Bankrate. “It comes from paying down your outstanding loan balance with additional mortgage principal payments, which slashes the total interest you’ll owe over the life of the loan.”

Let’s use their example of a $120,000 mortgage at a 4.5 percent interest rate, with monthly principal and interest of $608.02. Pay an extra $25 principal payment every month and you can save more than $9,000 in interest over the life of the loan.

You’ll want to make sure you’re allowed to make these extra principal payments per the terms of your loan, however. “Check with your mortgage company first,” said Dave Ramsey. “Some companies only accept extra payments at specific times or may charge prepayment penalties.”

Refinance into a shorter-term loan
Can you swing a higher monthly payment? Refinancing out of a 30-year mortgage to a 15-term can save you an enormous amount of money. “A mortgage amount of $250,000 over 30 years at a rate of 4% would cost $429,674 in principal and interest payments by the end of the term,” said Investopedia. “The total interest would be $179,674 for borrowing for 30 years. The same loan amount and interest rate over 15 years would cost $332,860 by the end of the term. Total interest would be $82,860 for borrowing for 15 years. At 4%, you'd pay only about 46% of the total interest for a 15-year than you'd pay for the 30-year.”

There is a secondary benefit to refinancing to a shorter term; these rates are typically lower. At press time, Wells Fargo’s 30-year fixed mortgage rate was 3.875%, while the 15-year fixed rate was 3.125%.

Make small sacrifices
“Other small sacrifices can go a long way to help pay off your mortgage early,” said Dave Ramsey. “How much could you save if you took your Starbucks money and added it to your mortgage payment each month? According to the Acorns Money Matters Report, the average American spends $3 per day on their coffee. That’s around $90 a month added to your mortgage payments—which will save you $25,000 in interest and four years on the life of your loan!”


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