Little Known Secret: Eliminate Your Mortgage In 23 Years Or Less!
BATTLECALL GUEST EXPERT: Tom Levine, Loan
Resources
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.
Got an opinion? We want to hear from you. Post your thoughts or comments here in our Mortgage Warrior Forum. Come join the conversation and say hello...onward mortgage warrior!
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