Mortgage Amortization Strategies for Mortgage Reduction
Of course, in order to pay off a mortgage early it means sending in more money, there’s no way around that one! But even paying a little bit now makes a big difference towards reducing your mortgage and what you’ll pay over the long run.
For example, we’ll use a $200,000 loan at 7% interest rate as an example. The principle and interest payment is $1330 a month for 30 years. In that time you would have paid a total of $479,000 in mortgage payments. Now here’s some ways to improve on this:
Extra Mortgage Payment
Pay $25 more a month. This pays off your loan in 28 years, at a total of $450,000. You basically save $1,000 per year by sending in $25 times 12, or $300. So your $300 makes $1000. That’s a 233% return on your money. Not too bad, right? I hope this gives you a little motivation to send in that extra 25 bucks.
Additional Mortgage Payments
Pay $100 more a month. This pays off your loan in 24 years, at a total of $386,000 and a savings of over $93,000!
Biweekly Mortgage Payment
A less painful way of sending in that extra money is to pay your mortgage every two weeks. This works great if you get paid every two weeks. Just pay half of your mortgage payment when you get paid, or $665. This pays off your mortgage in 23 years instead of 30. The reason it works is because you will send in 26 half payments, or a total of 13 full payments. So you made an extra payment each year.
Be sure that a full payment is received by your lender before your grace period ends to avoid any late charge. Also setting up electronic payments from your account to your mortgage holder can reduce mail delays and attack your principal balance a few days sooner.
Refinance a Mortgage
If you’re really going for the gold, you can refinance to a 15 year loan. Because this loan is less risky for the lender, you can get a better interest rate which adds to your savings over the typical 30 year loan. For example, we used 7% for our 30 year loan example, but you might get 6 3/4% for a 15 year loan.
At 6 3/4%, that’s a monthly payment of $1769, and a total of $318,000. You saved over $132,000 by paying an additional $439 per month! So the 15 year loan is the way to go if you’re really aggressive about paying off your mortgage.
Here’s a pitfall to avoid if you have an adjustable loan – don’t pay the minimum amount! Some loans have a negative amortization feature that lets you pay less than standard payment, and then increases your principle. You end up owing more each month instead of less!
So check the payment coupon carefully. Make sure you pay at least the payment which fully amortizes the loan, and not just the minimum payment.
Sometimes borrowing on the house is a good idea because the interest is tax deductible in most cases (consult your tax advisor). For example, you can buy a car using your equity which could make the interest paid tax deductible.
But if you’re going to use your equity to purchase a car, consolidate bills or for some other purpose, consider a second trust deed and not a refinance. Refinancing makes you start over again at 30 years!
Refinancing essentially means you’re taking out a 30 year loan on a car that won’t last that long, so it’s not a good investment. It’s better to get a second and make that payment just like it was a car loan, with the goal of getting rid of it in 3 or 4 years.
A reusable credit line second mortgage is great for this purpose. Once the credit line is in place, you only pay interest on the balance and it is reusable for the next purchase without going through another application process.
I hope you begin today to implement some of these valuable strategies to improve your net worth.
If there’s anything you’d like to discuss regarding real estate and your finances, give me a call anytime at 760-889-2272.