Season Livingston
This week's topic is one of the many reasons I love my job. I get to find ways to help people like you save money and take years off of your mortgage easily with small, simple steps most people don't even know are available to them.
Who really wants to be stuck paying off their home for 25 years? I know I didn't! And with some simple, strategic changes my fiancé and I saved 15 years! With that being said for the next five years our spending habits and lifestyle choices will be dedicated to putting all of our extra money to our house mortgage.
You may not be able to cut your mortgage time in half right away but wouldn't you be happy with taking five years off your mortgage by making slight changes that you won't notice? This is exactly what I'm going to be explaining this week.
The below examples are based on a monthly mortgage amount of $1,000.
Sign up for accelerated bi-weekly payments
The first method is to use accelerated bi-weekly payments. Changing your monthly or bi-monthly payments to accelerated bi-weekly is the easiest and simplest way to save thousands of dollars a year. I'm sure a few of you are saying to yourselves what is the difference between bi-monthly and accelerated bi-weekly and it comes down to simple math.
Bi-monthly takes the $1,000 a month and divides it in half so when the year is past you have made 24 payments totaling $12,000. If you signed up for accelerated bi-weekly they calculate the payment schedule differently. They break your year up into weeks and divide the 52 weeks in two, which gives you 26 payments totaling $13,000 annually. With this method instead of paying twice a month every month, you pay every other week and over the course of a year you end up making two more payments that likely won't even be noticed.
Over a five-year term term you will have made 10 extra payments totaling $5,000 towards your mortgage.
Do not reduce your monthly payment amount over the life of the mortgage
The next approach that I advise a person is to stick with the high payment amount you have already been paying and don't reduce it when you refinance. When you first bought your home you set out a budget of what you could pay towards your mortgage every month. Usually your monthly payments go down every time you refinance as the mortgage principle amount and interest go down over the five-year term.
By leaving your payment amount unchanged over the life of the mortgage you will essentially be paying more than is required and paying it down quicker without altering your finances because you have not actually increased your monthly payments. You could take five years off of your mortgage, which saves you thousands of dollars in interest. Because you pay over $10,000 in interest for a five-year mortgage term, by not reducing your payment, you keep that in your pocket rather than putting in the lender's.
Additional payment options
Another way you can save money and help with the amount you refinance is to use the prepayment privileges your mortgage comes with. For example, my mortgage has four options for making extra payments up to a maximum of $75,000 a year. We will never max this out but we can use it to our advantage.
Most of the privileges are standard practice now so you will likely have options similar to the ones offered to us.
A common option is that lenders will allow you to pay an additional 15 percent of your monthly payment to the principle. So again with a $500 payment every two weeks you can pay $75 extra dollars with each payment. This little amount adds up to $1,950 a year and $9,750 over the fove year term with no penalty. This money goes directly to the principle amount so you are not paying off interest when you invest an additional $75 every two weeks.
Another prepayment option can be to double up your monthly payments that could bring your $13,000 a year payment up to $26,000. Now this may be a challenge for most home owners because who really has an extra $1,000 a month just floating around. I know we don't, but when we do have extra money we put it into a savings account for the other options that we do use.
A lump sum payment is another option. Lenders will allow you to pay a lump sum amount up to a maximum percentage of your mortgages every year. The normal range is 15 to 20 percent of the mortgage amount, which can be paid every year. People use this option often as you can make one lump sum at the end of the year every year and again this money goes straight to the principle so when you finish your five year term you will not pay any new interest on the amount you have paid off.
All of the options discussed above will not impact the mortgage terms or amount of interest you will pay within the five-year term you are currently locked into. The benefits are evident when it comes time to refinance. If you use these options you are likely going to knock years off of your mortgage and be mortgage free quicker. There are many ways that you can look at reducing the mortgage you carry. Some are so easy that it makes perfect sense to start using them today. Find out what options are available to you and start making changes so that you start helping yourself live mortgage free.
Stay tuned until next week when I go over misconceptions on how your credit works and how to bounce back if you have hit some rough times. If you have any questions or need help navigating your prepayment privileges email me mortgageminutepe@gmail.com.
