16 Nov 2014
The biggest purchase you will buy is a house. The biggest expense you will have is your house. Most likely the largest debt you will have is your house. Most people finance a house for 30 years, some even 40 years. This financing is what is called your mortgage. Many don’t care about the length of time the mortgage is for, they just want as low a monthly payment as possible. Others don’t care because they know they will be moving every five to seven years. Either way, a mortgage is a huge financial responsibility.
There are many, who know they are staying in their home for longer than 7 years. People who don’t want to pay on a mortgage for 30-years, or even want to pay for 15-years for that matter, for some, 5 years is too long. If your goal is to be debt free, and you are wanting to pay off your home as early as possible, keep reading.
You can actually pay off your mortgage early without having to refinance to a shorter term mortgage or to reduce your interest rate. The following tips will allow you to reduce the amount of interest you pay over the term of the mortgage as well as reduce your term by several years.
Now before you start thinking about how it is better to have a mortgage so you can deduct the interest off your taxes, think about this. On average for every $100 you pay in interest you may be able to deduct around $25 off your taxes (rough estimate). So if you paid $7000 in interest, you may be able to deduct around $1750 off your taxes. As opposed to having your home paid off, and being able to save the full $7000 for yourself. Yes, your taxes may be a bit higher, but you still have more money in your pocket and/or savings for YOU to do with as you wish rather than paying it to the mortgage company.
This really isn’t a lesson in reducing taxes, it is a lesson in eliminating debt all together. No debt always means more money for you regardless of your taxes.
Caution: Before paying off your mortgage early make sure you know the terms of your mortgage (loan). There are some loans that were written with a clause that you will be penalized financially if you pay the mortgage off early. I don’t recommend those types of mortgages but that is a different topic than this article. The last thing you want to do is pay off a mortgage early only to find you will have to pay a hefty penalty for doing so, basically defeating the purpose of paying it off early. So please make sure you don’t have any of these caveats in your mortgage papers first before making any adjustments to your paying schedule.
Another thing to consider, the bulk of your payments for the first many years of your loan go to interest with a small portion going toward principle. So even though I encourage you to pay off your mortgage as soon as possible, you will actually save more in the long run if you start paying it off more in the beginning than toward the end. Again, this post is really about being debt free with no payment so that is where I will focus.
Three Strategies for paying off your house:
1. Make extra monthly principal monthly.
By adding even small amounts say an extra $25, $50 or a $100 each month can cut years off your mortgage.
Example: Let’s, say you purchased your home for $250,000, $50,000, down. You financed $200,000 to finance for 30-years on a conventional mortgage at 6% interest. Your monthly payments are around $1,200.
If you make an extra principal payment of $50 every month at the start of the loan, you will shorten the length of your mortgage by 3 years and save yourself about $27,000 in interest. Not bad for a such a small addition to the principle payment of the loan huh?
2. Make extra yearly principal payments.
You could pay a larger chunk of money toward the mortgage once a year. This is more difficult since most people don’t have a give chunk of extra money laying around at some point in the year. Some say you could use your tax refund, but I say if you have a tax refund that large you really need to look at your withholding settings because you just let the government use your money for a year for free. Extra money you could have used in tip one above. (again a different post topic).
3. Bi-weekly payments Be careful.
Many people get caught up in making bi-weekly payments. But, there are MANY banks and mortgage companies that won’t let you do this unless you “sign up” for that option. Sign-up usually means there is a fee involved. Yes, there are a lot of lenders that will actually charge you a fee each time you make a bi-weekly payment. Some even charge a fee to set up the option.
If you can make bi-weekly payments without incurring any additional charges, then yes, this is an excellent option. However, if there is even one cent extra billing for this don’t do it.
I reference you back to tip one (can you tell that is my preferred method) that way there are no extra fees involved, only your own personal discipline to make that extra payment each month.
The Status Symbol
Believe me, when you begin to see how the extra principle payment each month starts bringing down your mortgage balance so fast you just may surprise yourself into making even bigger extra payments
Go ahead, be weird, make extra principle payments have a paid off home mortgage. That is what I call a status symbol of success next to a loving family of course. 🙂