Mortgage/Lending

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One of the most useful and effective techniques of financial planning involves the acceleration of the payment of one’s outstanding mortgage balance. This decreases the amount of interest expense an individual pays and thereby enables one to own their home sooner. When you own your home, there are no more required mortgage payments. The house is yours.

There are several different ways to accelerate one’s mortgage: The first method entails making an additional contribution directly to your mortgage company, which is described below. The second method entails securing an insurance policy, which is described after method 1.

Method 1 (3 ways)

1. You could make one extra payment each year. For example, you could earmark your tax refund or holiday bonuses towards paying down the mortgage. However, many people with good intentions have a difficult time doing this simply because there always seems to be something more important to spend the money on. If you decide to go this route, keep in mind that the earlier you make your extra payments, the more you will save in interest!
2. Pay extra each month. This method can certainly be easier to budget. Each month when you pay your mortgage, add an extra principal payment equal to 8½ % of your total mortgage payment. At the end of the year, you will have basically made an extra month’s payment directly against the principal!
3. Enter into a bi-weekly mortgage payment plan. This method is the easiest to budget for! Instead of making 12 monthly payments, you will make a half payment every two weeks. For example, if you normally paid $1,000 per month, you would instead pay $500 every two weeks. Since you will be paying every two weeks, you will actually make 26 half payments. Making 26 half payments is the same as making 13 full payments, which is the same as making one extra full payment each year! Another strength is that this method is automatic. Bi-weekly programs run on their own once you set them up so you won’t be tempted to spend the money on something else. All you have to do is establish the plan! This method is especially attractive if you are on a bi-weekly payroll schedule with your employer.

This entire process can be put on “auto-pilot” by using a Paytrust bill management system. You can instruct your Paytrust bill management system to cut two checks per month to your mortgage company. It will do it automatically for you. This system also does a lot more than this for you, saving you time and money.

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Method 2 (Utilizes life insurance)

You can secure a life insurance policy and take advantage of the tax-deferred growth of the policy’s cash values. Instead of (or in addition to) making an additional contribution to your mortgage company which lowers the amount of the principal you owe (which seemingly is the goal), by contributing funds into a life insurance policy, your tax deduction may be greater for your mortgage payment since the interest portion of your payment is typically tax-deductible. Therefore, you are maximizing on the current tax deduction while allocating funds into a growth-oriented environment. This is particularly applicable if variable universal life insurance is used. Variable life insurance enables the policyholder to allocate cash values into a number of sub accounts, which perform very much like mutual funds. Although there is no guarantee of the performance of the funds, these policies have generally, historically outperformed fixed income and “guaranteed” policies, over longer periods of time- usually 10 years or more. In these vehicles, policyholders have the potential for more significant growth, which facilitates accumulating wealth. When the cash values in the policy grow to a substantial amount, the policyholder may then withdraw or borrow funds or cash in the policy to pay off the mortgage outright. Assuming the policyholder believes that the equity markets will outperform fixed income over the long haul, he/she would be able to enjoy the maximum tax deduction during his/her mortgage paying years and if the performance of the policy is favorable enough, pay off the mortgage the soonest versus the other alternatives.

Insurance is complex- especially insurance that involves securities. It behooves the layman to consult with an expert before implementing any of these techniques or products. It doesn’t cost anything to sit down with an insurance professional and the adviser can best help you determine if mortgage acceleration and/or insurance (and what kind) is right for you.

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Advantages & Disadvantages

The advantages of Method 1 instead of Method 2 are that you can implement Method 1 even if you are older in age or in poor health.

There are, however, some disadvantages to Method 1, which you should be aware of:

If you have an emergency or opportunity, you cannot recover the extra funds paid to the mortgage company without selling your home or taking a second mortgage on your home. Basically, once you have made the extra payments to the mortgage company, it will not be easy to access the extra payments if you need to.

Once the extra payments are applied to the principal, they cannot be applied to current mortgage payments if you suffer a financial setback. You cannot, for example, pay extra for three months and then skip a month if money gets tight.

The funds needed to complete your mortgage acceleration plan may not be available if you die or become disabled prior to paying off your mortgage. Your family will be on their own to finish paying off the mortgage despite your efforts to pay it off early.

Making additional payments directly to the Mortgage Company or bank can minimize your current tax deduction because it reduces the amount of principal you owe. While this is the ultimate goal, generally speaking, only the interest portion of your mortgage payment is tax deductible. When you pay down the principal you owe, you cannot deduct as much of your monthly payments.

Click here to have a 1 Financial Marketplace Associate mortgage specialist contact you.

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