How to pay down your mortgage
Learn how to tackle the mortgage beast with these 'best practices.'
The clear advantages of paying off your mortgage as quickly as possible have changed quite a bit in the past few years. The rules have changed with the advent of historically low interest rates and the urgency to pay off your mortgage has somewhat diminished as interest rates have plummeted to these historical lows. It is not the black-and-white decision it once was when interest rates hovered between 6 percent and 9 percent, and even the 11 percent to 13 percent we saw a couple of decades ago.
I am a big proponent of paying down that ugly mortgage beast as soon as is practical. However, each individual's circumstances are different, and you need to evaluate your financial circumstances first. There is a pecking order of financial priorities you need to address.
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In order of importance here are the places you need to put your financial attention first:
- Take the cards off the table: Pay off credit cards with any high interest rates — especially today, as there is now a huge discrepancy between credit cards interest rates of 13 percent to 23 percent and a 4 percent mortgage interest rate.
- In case of emergency: You need to build an emergency fund. I recommend one year of living expenses. Yes, today's job market is improving; however, if you suddenly find yourself facing a layoff, you need to be prepared to sustain one year of living expenses.
- Build up for retirement: Are you able to make the maximum yearly contributions to your retirement accounts? 401(k), IRA or an equivalent? Ask you accountant what the maximum allowable is for you and go for it.
- Get the kids to school: Ah yes, the kids, their schools and their college funds. Depending on how many children you have, how old they are and what type of college enrollment expectation they have, you need to be making adequate contributions to those 529 plans or other college savings accounts.
- You may live a long time: My mom is 97 years old, and my aunt just turned 100. So I am keenly aware that my money could run out before my health runs down. Another priority investment you need to be making each year is toward long-term health-care insurance. It is not as costly when you start it in your 30s or 40s. But if you didn't get around to it till your 50s it will take a hit out of you budget each month.
Once you have paid out and paid off all of the above, you are ready to begin to slay the mortgage dragon with the remaining funds you have available.
Next consideration is age. You should make efforts to pay off that mortgage by the time you plan to retire. There is something freeing about the release of that last mortgage payment when you switch to a fixed income. Plus, chances are you will not need the mortgage interest deduction.
One important note that many people don't realize is that when you are into years 20 through 30 of your mortgage payment, you are paying little actual interest compared to what you paid in the early years. The banks have cunningly structured mortgages so that they get a large portion of their money early on via interest sooner than later over the 30 years.
But how fast and how much should I pay down?
Make that decision by counting backwards. If you want to retire and be mortgage free by age 65, then calculate how much extra you will have to pay monthly or yearly to pay it off by that date. There are numerous calculators online that will help you do this.
For example: You bought your home at age 45 with a 30-year loan at 5 percent. You are now 55 years old, and you still owe $300,000 but plan to retire at 65. You are going to need to up your current payment of approximately $1,650 a month to approximately $2,650 a month till age 65. Not only will you get your mortgage paid off 10 years sooner, but you also will have saved almost $78,000 in interest.
What are the best methods to pay down your mortgage?
- Pay an extra bump: On Jan. 1 or Dec. 31, write an extra mortgage payment check to the bank. Send it in as additional principal, and the bank will credit your account. After a few of these payments, you will really begin to see the portion of your monthly mortgage payment that is interest begin to shrink and the portion of your payment that goes to principle begin to grow.
- Go monthly: Add an extra one-twelfth of your mortgage payment to each monthly payment. Or if you can afford it, add even more extra every month.
- Back-time it: Decide what year you want your mortgage paid off. Then determine, via a mortgage calculator, the extra amount of principle you to kick in monthly.
- Stash the cash: Before you go out and treat yourself to that new suit or to the spa retreat weekend, deliver your tax refund or your annual bonus directly to your mortgage principal.
- Don't pay the bank even more: Banks love to send out that notice telling you how much money you will save by allowing them to make twice monthly payments for half your mortgage amount rather than the one monthly payment. They will graciously offer to do this for you with a onetime set up fee and then a small monthly processing fee. Do you think the banks offer this because they love you? Nope, it's because they make money on this. Pay extra on your own, via any of the methods described above. The bank is getting enough of your money already.
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I had a 15 year mortgage and used the amortization from the bank against them. in the first half of the note it is all most all interest and little principal BY LAW you must pay a p&I each month-so make 1 interest payment and add up as many P as you can. you will note you can make easily a year(12) worth of payment the first month and hear the best part YOU DON'T MAKE PAYMENT ON THE INTEREST(12)-make the payments to the .01 on payment #13 you do this again-just be sure the banks put in in the front of the note. Banks loose you win-
I had a bank tried to put he P back of the note- took them to court and won- this work real good up to the middle of the note at witch it get harder- bottom line I paid my home off in under 8 years-this works on car payment also
Bank the money you would have paid extra with and YOU keep the interest. And YOU have the money in case you have a life changing event. YOU will never get a HELOC to get money back if you need it due to job loss etc. without it costing YOU.
Paying your mortgage early means nothing until make the LAST payment...
how about..how to afford obamacare? and what todo if you actually have to use it...and then find out what's wrong with you isn't covered...after you pay $500 a month and then have to pay $6000 before you find out whats wrong isn't covered...while saving $24000 so in case you have a life changing event you can still send the $500 so you don't goto jail because you don't have obamacare...and people bitch because some people go on welfare...who's the dummy...
If one can refinance at a lower interest rate say like from 7% down to 3% and one originally had a 30 year note and been paying say 15 years. Take the new loan out again for 30 years. The monthly payments will be almost half of what they were with the original loan. When things get hard again the smaller monthly payment will be easier to make and one can always pay down the principal as fast as your finances will allow. This is like rent control.
Remember the financial planners and banks want as much money as they can squeeze out of you. They would like nothing better than to take your home, collect from the mortgage insurance you have been paying for them sell the home again or put it into a hedge fund that will fix it up and rent it out to some one else and leave you on the curb.
I have found that the easiest & simplest way to pay down your mortgages is to add whatever amount is comfortable to you on the monthly payment, mark it "towards principle". With this method your mortgage
will get paid off yr's. early & save you mucho interest. Simple & effective . H>Flax
I recently paid off my Wells Fargo Mortgage early, but I wanted to share what a pain they made it for me. I went to the Wells Fargo branch bank near me to get the payoff amount, then I got the cashier's check for the exact amount, which was deposited with the teller as if it was a normal transaction at the teller.
A few days later, I checked my account - it said I still owed about $144, so I figured the original payoff amount was slightly in error, no big deal. But the next day, it said the payment was reversed, and I still owed WFMC for the original amount.
I went back to the local branch, and they put on the phone with someone from WFMC. Instead of admitting to their mistake, she told me I should I should have never deposited the payoff amount at a branch bank.
That is ridiculous, Wells Fargo Bank and WFMC are connected, and they all have computers!
And to add to this, she said it would take 5 business days to correct.
I doubt that I would ever recommend WFMC to anybody. It would have been easier to just pay the amount off online by transferring funds form my Wells Fargo bank account to WFMC in 2 or 3 passes.
Nothing here that is a secret, no ground breaking information, earn more pay more.