Without Inducing a Noticeable Strain on Your Budget
For most Americans, their mortgage loan is their largest debt. Think about your own mortgage for just a minute … how many years do you have left before it is paid off and you own your home free and clear?
If you are like me, the possibility of owning your home with no mortgage payment is an exciting thought. However, a lot of homeowners do not have a sizable amount of extra money in their monthly spending that could be re-allocated to paying down the mortgage principal. Did you know there are several ways to accelerate the process of paying your home off (even without inducing a noticeable strain to your monthly budget)? Let’s look at a few of the options:
• The first option (and the easiest) is to pay extra on your normal monthly payment. Always remember to mark “principal” when paying online or write “apply payment to principal” if paying by check (believe it or not, there are still some check-writers out there who mail their payments in every month!).
• The second option is to set up bi-monthly payments. These are typically an automatic draft that drafts half your mortgage payment on the first of the month and the other half on the 15th of the month. This is very useful if you are paid twice a month, because you can coordinate the payment draft dates and your pay dates. Paying bi-monthly is kind of a built-in budgeting tool. Bi-monthly payments also help ease the sting of applying extra payments to your principal balance. For example, if you are paying $200/month extra toward principal every month, with a bi-monthly payment that equates to only $100 extra every 15 days. Also, if you have a conventional loan, this plan will help because the interest is compounded on the current balance, which is getting chipped away twice a month instead of once a month.
• The next option is bi-weekly payments. This payment plan is kind of like bi-monthly payments on steroids. This plan can be very effective if you receive your paycheck every two weeks. Once again, you can coordinate the bi-weekly draft dates to coincide with your payments and, voila, the magic happens. With bi-weekly payments, you can also add in extra payments to the principal … but the beauty of this payment plan is that even if you do not add extra to the principal, you will still pay your mortgage off early because 26 annual bi-weekly payments equals 13 normal monthly mortgage payments! See what we did there? This trick alone, if applied when you first get a 30-year mortgage, will chop off five to seven years of your mortgage term!
One important thing to keep in mind is that some mortgage-servicing companies can set up accelerated payment programs in-house and some require outside companies to facilitate. If you receive outside solicitations, call you mortgage servicer first and ask them if they can set it up for little or no cost instead of paying a third party to facilitate. If you do have to pay a third party to facilitate a bi-weekly or bi-monthly program, you usually recoup the setup fees in the first year of the accelerated payment period in interest savings.
(Charles Foster is the Moore branch manager at Supreme Lending, a leader in the mortgage industry. He can be reached at Charles.Foster@supremelending.com.)