Buying a house is a serious, expensive, and a long term commitment. It’s also a fun time, and if you plan it correctly, it won’t have to be as expensive as it first appears to be. If you have not bought the home yet, consider this:
Fixed-rate loans mean that your monthly payments remain the same for the life of the loan. Variable-rate loans mean that your payments can fluctuate up or down, based on index rate changes (the regional average amount of interest paid by financial institutions). If you choose a lower variable-rate loan instead of a higher fixed-rate mortgage, you may ultimately end up paying more, when the variable rate goes up. You will also lose the advantage of knowing exactly how much your payment will be each month, which impacts your overall household budget.
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First-Day Payment Strategy
In some instances, a thirty-year mortgage can be shortened four years or more by making the first mortgage payment on the same day that you activate the loan. This strategy will also save you thousands of dollars in interest.
What is the amount of the down payment you are planning to pay? Paying 20 percent down has advantages over lower to zero money down:
• Smaller monthly payments
• Lower interest rate
• No (PMI) private mortgage insurance required
• Immediately equity is put into the property
If you are already into a mortgage, and you want to speed up the payoff process, research these possibilities:
A 15-year mortgage will have higher monthly payments than a 30-year mortgage. However, the advantage is the savings in interest charges and time. If you have not bought a home yet, consider a 15-year mortgage. If you have been in your home for awhile, think about refinancing into a 15-year mortgage.
You could also refinance your loan to a lower interest rate yet keep paying the same monthly mortgage payment amount. It’s important to know that when you refinance, you do not have to change the original maturity date. Instead, you can choose to have the loan amortized for the original date.
Automatic bi-weekly payments are an option that can work well for you if you are paid weekly or bi-weekly. Every two weeks half of the mortgage debt is paid. By the end of each year, you will have made one extra payment, saving thousands of dollars in interest payments, and reducing years off of the loan. Not all banks will accommodate this, and some of them charge a fee to enroll and each time you make payment. It’s worth looking into this policy where you have your mortgage.
It is possible to achieve the same results as bi-weekly payments (13 payments annually) by adding one-twelfth of a payment to your regular monthly payment. No fees, no enrollment, no binding commitment.
Another strategy is to round up your payments so that you are paying something extra each month. For example, if your scheduled payment is $1310.10, find a way to pay $1325.00 or $1350.00, etc. Consistency is vital for this method to make an appreciable difference.
(Let’s take a moment and brainstorm “find a way”. Review your budget so that you know where you are spending money. Probably, there are some items that you can live without, at least for now. You could cancel cable T.V., and buy fewer lunches, bringing them from home instead. Brew coffee yourself, instead of buying it. Get a second job, devoting that entire paycheck to your mortgage payments. Reduce your entertainment and clothing budget. If paid overtime is offered at your job, work it.)
Anytime extra money is available, from a bonus, income tax return, inheritance, etc., add that money to your next mortgage payment. As CDs or bonds mature, instead of reinvesting, apply the earnings (or the principal, or both) to your house payment. You could also add the amount of a pay raise, and consider that additional amount to be your new mortgage payment.
Making an extra house payment quarterly is another option that will pay off the loan years earlier and save you thousands of dollars in interest payments
The planned increase is another method of paying off your mortgage quickly. This process involves having enough discipline to increase your house payments each year by a predetermined percentage (i.e., increase 1% each year).
Be sure to contact your mortgage company before making additional principal payments. Some businesses charge prepayment penalties or only accept extra payments at certain times.
If your priority now is getting out of debt by getting out of a long-term mortgage, you could sell your current home and buy a smaller one with cash from the profit of the sale.
Planning is the key ingredient to paying off a mortgage ahead of schedule.