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.
Method 1 (3 ways)
- 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!
- 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!
- 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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Advantages & Disadvantages
The advantage of Method 1 is that you can implement it 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.
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