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Little Known Secret: Eliminate your Mortgage in 23 years or
less!
by Tom Levine
Wanna know a little secret? There is an ingenious method you
can use, to pay off your 30 year fixed rate loan, in 23
years or less. It’s straightforward, simple, and easy to understand.
In this article, we’re going to explore this
little known secret, and we’ll provide several examples of how it works,
a few methods on how to implement, along with
some information on where to go and how to get started.
1. Accelerated Payments:
By accelerating the payment structure on your loan, the life of the loan is reduced:
In a normal 30 year fixed rate loan situation, your monthly
payment is applied towards principle and interest. It is
amortized over the course of 30 years.
So any money above and beyond your normal payment is applied solely towards the principle of the loan.
By reducing the principle of the loan, you are reducing the
total amount of interest that must be paid, and that equates
to an early loan payoff.
2. An Illustration:
You bake a cake (principle), and put it in the oven. Once the
cake is out of the oven, you’ll need to frost it with
icing (interest). Let’s say your cake is 12 inches in diameter, and
let’s say you need 3 jars of icing.
But you’re hungry, so you eat half the cake early. Now,
the cake is only 6 inches in diameter. Because of this, you
only need 1 jar of icing. By reducing the cake (principle), you’ve reduced
how much
icing (interest) you need. Furthermore, it takes less time to frost 1 jar
of icing.
So, by paying a little more in principle, you reduce the interest owed. That reduces the life of the loan.
3. Methods:
Think of it this way: All you have to do is make 1 extra monthly
house payment a year. Do that and you reduce the
life of your fixed rate loan by about 7 years! You can be as creative as you
want to accomplish this, but here are 3
known methods:
Bi-Weekly Payments: Normally, you make your house payment once
a month, or 12 times a year. But with a Bi-Weekly
payment structure, you take your normal house payment, and divide it by two.
This is the amount paid every two weeks,
instead of once a month. By doing this, you basically make 1 extra (monthly)
payment a year.
Double Payments: Double Payments simply means an extra house
payment. Once a year, you write out a check for twice
the amount. So, if your house payment is normally $1,000 a month, then on
December 1st, for example, you’d write out a
check for $2,000. This, in essence, accomplishes the same thing that Bi-Weekly
Payments accomplish. You make 1 extra
payment a year.
1/12 increase in payment: Increase your monthly mortgage payment
by 1/12, and you accomplish the same thing. Let’s
say your house payment is normally $1000. 1/12 of your house payment is $83.
So, you start making payments for
$1,083. Guess what? Your loan is paid off in about 23 years instead of 30.
Sidenote: A “Bi-Monthly” payment is not necessarily
the same thing as a Bi-Weekly payment. It may just mean that
you are paying ½ your monthly payment on the 15th and ½ is paid
on the 30th. The key is this: Are you paying a little
more each year, such as 1 extra house payment? If you are, then early payoff
is your ripe reward!
4. Here’s an Example:
Bob has a $300,000 loan at 7% interest, and his monthly mortgage
payment is currently $1995.91. Each year, Bob
pays $23,950.92. Bob calls his lender, and his payment schedule is restructured
as a bi-weekly payment. Every two weeks, Bob writes a check out for $997.96.
Because of the two extra payments this year, Bob will have paid $25,946.83.
His loan
is reduced by about 7 years.
Or, on December 1st, Bob writes out a check for $3,991.82. Because
of this 1 extra payment, Bob will have paid
$25,946.83. His loan is reduced by about 7 years. Or, Bob pulls out his calculator,
and adds 1/12 to his
monthly payments, which equates to $166.33. Bob now writes out a check each
month for $2,162.24. At the end of the
year, Bob will have paid $25,946.83, and his loan is reduced by about 7 years.
5. The Next Step:
How disciplined are you? Because, if you’re not disciplined
at all (like myself), then what are the chances of you
sticking with the program? Call your lender, and set up the bi-weekly payment.
This way, you are totally hands off and
it will all become automatic and habitual. You can always change it back if
times get rough, but at least there’s no
temptation to revert back to cheaper payment.
Or, do you have online bill-pay with automatic payments? If
so, go into your bank online, and add 1/12 to your monthly
payment.
Can you afford to accelerate your payments even further? Adding
2 extra monthly payments a year, for example, reduces
your loan by about 10 years. Of course, now it might be time to consider examining
a new secret strategy, the 15
year fixed-rate loan!
We’ve enjoyed providing this information to you, and we
wish you the best of luck in your pursuits. Remember to always
seek out good advice from those you trust, and never turn your back on your
own common sense.
----------------------------------------------------
Copyright 2004, by LoanResources.Net Tom Levine provides a solid, common sense approach to solving problems and answering questions relating to consumer loan products. His website seeks to provide free online resources for the consumer, including rate-watch, tips and articles, financial communication, news, and links to products and services. You can check out Tom's website here: http://loanresources.net , or you can email Tom at info@loanresources.net .
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