I originally wrote
this post in February 2012. I thought it
might be helpful to repost it for some of you interested in saving money on
your mortgages. It is amazing to me how
much money we can save by making a few simple changes here and there.
I like mortgages. That
kind of debt is OK, in my book, because it is a huge investment in your future. For most of us it is the largest single debt
item we will carry but I think it is well worth it. We all have to live somewhere and what could
be better than your own home. The key is
to purchase only as much home as you need and can well afford. I don’t want to become a slave to my home or
my monthly payment. I have other things
to do. J
I don’t like second mortgages or homeowner equity lines of
credit (HELOC). Unfortunately these
types of loan arrangements can be difficult to re-pay and most have adjustable
interest rates which cause payments to fluctuate. Many homeowners have found themselves unable
to afford to meet these payments when interest rates soared.
If you have a second mortgage or a HELOC get rid of it. Refinancing your home may be a good option,
especially with the current interest rates so low. Make sure when you refinance, however, that
you are doing so with a fixed interest rate and not an adjustable rate. Finance for the shortest duration possible or
plan for early payoff.
When I bought my house I personally took out a 30 year fixed
rate mortgage, just in case. I wanted
the option of a low house payment in case I was ever laid off from work or had
to take a lower paying job. This
actually did happen to me once and I was off work for ten months. I was grateful to be able to make my monthly
house payment while on unemployment without worry.
If you decided to take out a 30 year mortgage plan to add to
your monthly payment to reduce the overall length of your mortgage and pay it
off sooner. You will save yourself thousands
of dollars in interest. A simple way to
pay off your mortgage early and really impact your savings is by using the
power of compounding interest in your favor.
A simple math equation will get you started:
Take your house payment, divide it by 12 and add that amount to
your monthly payment. For example let’s
assume your monthly mortgage payment is $800.
$800 ÷ 12 = $66.67 + $800 = $867 new monthly payment.
Round up to $870 for even greater impact to savings. Round up again to $900 and you will be amazed
at how that will play out on an amortization calculator.
You can increase your savings and shorten your mortgage even
more by adding “balloon” payments periodically throughout the year. Say every quarter you pay an additional $500
toward your principal or you put all of your tax refund toward it every year.
Make sure that when you pay your payment that you specify all
the extra dollars are paid on your principal.
If you pay your mortgage online there is a place set up to do this. If you pay by check you will want to specify
this request on your payment coupon.
If you are unable to refinance to get rid of your second
mortgage or HELOC then you need to work on it first and pay it off. The same principals above will help you to
accomplish this as well. Sometimes these
loans just need to be paid down so that you can then refinance. Depending on
your situation sometimes it is in your best interest, no pun intended, to just
pay off the loans you have and move on.
Weigh and measure all your options. Whichever the case may be, it is always a
good idea to pay it off sooner than later.
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