Your Home Should Be Where You Enjoy a Lifetime of Memories

Your mortgage shouldn’t be along for the ride

With House prices at historical highs, mortgage balances are growing with them.

When looking for a mortgage, the most common things people are provided are:

  • A good rate (which should be a given)
  • An affordable payment
  • A brief (very in most cases) explanation of terms, privileges, penalties (see my blog entry).
  • A handshake and a 25 or 30 year plan

The most overlooked and in my opinion the most important; is a customized strategy to be mortgage free faster.

Simple strategies with small changes to payments can have a massive impact.  We tend to take what we are offered when walking into the bank when it comes to amortization and payments.  30 years is the new 25 because the payment is lower.

The real cost is much higher

Image result for dollar sign

Let’s look at this example (*calculations using 5 year 2.59%):

25 Year Amortization 30 Year Amortization Difference
Mortgage Amount $500,000 $500,000
Monthly Payment $2,262.30 $1,995.45 -$266.85
Interest Paid Over 5 Years $59,692.37 $60,749.75 +$1,057.38
Balance After 5 Years $423,954.37 $441,022.75 -$17,068.38

This is a common scenario, most people can generally afford the higher payment. but, choose the lower because they don’t understand the true cost.

You will “save” $266 per month, but, owe $17,068 more at the end of 5 years.  Principal is your money.  Much the same as a monthly investment contribution. The faster you pay off your mortgage, the faster you can keep the mortgage payments in your pocket

The real secret to being mortgage free faster is creating a repayment plan that is both realistic and affordable.

 

Secret

Strategy Number 1 – Accelerate Your Payments

Monthly Payments

Bi-Weekly Accelerated Payment

Savings/Gain

Initial Amortization

25 Years

25 Years

 
Mortgage Amount

$500,000

$500,000

Payment

$2,262.30

$1,131.15

 
Balance End of 5 Years

$423,954.37

$411,632.87

+$12,321.50

Revised Amortization

25 Years

22 Years  3 Months

2 Years 9 months

This is a powerful and simple start to your plan.  By accelerating you payments bi-weekly you reduce the life of your mortgage by 2 years and 9 months!!

Strategy Number 2 – Accelerate Your Payments and Make an Annual Lump Sum

Bi-Weekly Accelerated Payment

Bi-Weekly Acc. & Annual Lump Sum $2,500

Bi-Weekly Acc. & Annual Lump Sum $5,000

Initial Amortization

25 Years

25 Years

25 Years

Mortgage Amount

$500,000

$500,000

$500,000

Payment

$1,131.15

$1,131.15

$1,131.15

Balance End of 5 Years

$411,632.87

$398,136.93

$565,522.06

Revised Amortization

22 Years 3 Months

20 Years 6 Months

18 Years 9 Months

Again, very powerful.  If you are able to put aside an extra $416 per month and apply it to your mortgage, you have reduced your mortgage by 4 years!

Strategy Number 3 – Accelerate Your Payments, Make an Annual Lump Sum and Increase Your Regular Payment Once Annually

Bi-Weekly Accelerated Payment

Bi-Weekly Acc. & Annual Lump Sum $2,500, Increase Regular Payment by 2% for the first 5 Years

Bi-Weekly Acc. & Annual Lump Sum $5,000,Increase Regular Payment by 2% for the first 5 Years

Initial Amortization

25 Years

25 Years

25 Years

Mortgage Amount

$500,000

$500,000

$500,000

Payment

$1,131.15

Increase Payment approx. $45 once per year

Increase Payment approx. $45 once per year

Balance End of 5 Years

$411,632.87

$388,641.40

$375,145.49

Revised Amortization

22 Years 3 Months

18 Years 5 Months 16 Years 11 Months

Now, this is significant!

This is just the beginning.  A well thought out and diligently executed strategy can and will reduce most people’s mortgages by up to 10 years faster.  Mortgages are big numbers and most of us tend to resign ourselves to what seems like a lifetime of mortgage payments.  In fact most people joke about it in passing.

If you consider how much money we pay towards our mortgage payments each year, the above scenario is $30,000 per year in regular payments on a 25 year mortgage.  Imagine if you got to keep that money in your pocket 10 years sooner!

Every extra dollar you pay to your mortgage is creating equity in your house, it’s not an expense, it’s an investment.  Interest is the expense.  You pay interest on what you owe.  You owe it to yourself to stop paying interest.

Not every strategy will work for every person, but, the key to this is to sit down with a professional, create a plan and execute the plan.