August 18th, 2017 4:49 AM by Jackie A. Graves, President
For most of us, there's an implicit understanding that buying a
home will nearly drain your bank accounts. You'll shell out for the down
payment, the home inspection, and—just when you think you're done—the closing
you're forking over a ton of cash upfront, but once you're past that,
you're golden, right? You are—until you remember that you have to actually make payments on
that mortgage you got. And the interest. For the next 30 years. And
30 years of paying 4% interest on your $200,000 mortgage can seem like
indentured servitude—especially when you consider that those interest payments
add up to tens of thousands of dollars over the life of your loan.
what if you could pay off your mortgage in less time—and whittle
down that crazy interest you’re forking over each month? Apparently, it
can be done—and you don't have to go broke in the process. Here are four
expert-approved tips to get you started and on your way to putting money
back in your wallet.
a bonus coming up? Did you get a windfall from a beloved grandparent? If you make
one full payment at the end of the year and apply it to your mortgage
principal, you could knock off a few years from your loan, says Elise
Leve, senior loan officer with Citizens Bank in New York City.
easy to pay off a mortgage earlier now because most lenders don’t have
prepayment penalties,” Leve says. “Making just one extra payment a year on a
30-year loan shaves about four years off your loan.”
You can opt to make the extra payment at the end of the year, or
any time you get a lump sum of money, Leve says. Just make sure to indicate it
should be applied to your principal.
making smaller, more manageable payments is more in line with your comfort
level and budget, you can do that, too. For example, let’s say you have a
$200,000 mortgage with a fixed interest rate of 4% for a 30-year term. The
total amount you’d pay for that 30-year loan in interest alone is $143,739. Ouch.
say you made an extra $100 payment toward your principal each month over the
lifetime of your mortgage. You’d shave five years off your loan and pay
nearly $27,000 less in interest. That’s huge!
with extra annual payments, make sure you earmark these additional monthly
payments specifically for your principal. Otherwise, the extra money will get
absorbed into the following month’s mortgage payment, says Ethan
Vickery, a real estate agent with TripleMint in New York City.
to make sure your lender applies those extra principal payments correctly;
otherwise, you won’t get the benefit you’re looking for,” Vickery says.
in mind this strategy is not the same as setting up biweekly payments,
splitting up your monthly payment into two smaller ones. While biweekly
payments will help
you reach your goal faster, you're locked in—miss a payment, and you'll be hit
with fees and/or hefty penalties.
most cases, experts suggest simply making an extra payment when you can—whether
that's once a year or every other month—instead of committing to a
you bought your house when interest rates were higher, refinancing from a
30-year mortgage to, say, a 15- or 10-year loan will save you a huge chunk of
change on interest, says Tim Beyers, a mortgage
analyst with American Financing in Aurora, CO.
be forewarned: Although shorter-term loans tend to have much lower interest
rates, you generally need to have at least 20% equity, based on your
home’s current market value. Otherwise, you’ll be stuck with private mortgage
insurance, Beyers says.
thing to keep in mind: With a shorter-term loan, monthly mortgage payments will
go up considerably, and you’ll have to pay closing costs to refinance your
loan, too. Ask your lender to crunch the numbers to determine when you’ll break
even on those costs, especially if you don’t plan to stay in your home for the
long term, Beyers says. In that case, refinancing is probably not the best move.
A note about FHA loans: Refinancing
a loan backed by the Federal Housing Administration, or FHA,
has the added perk of eliminating mortgage insurance premiums. The annual premium can range from 0.45% to 1.05% of
the original loan amount (depending on the length and size of the loan). And,
generally, FHA borrowers are stuck with those premiums for the life of the
loan, Leve says.
from an FHA to a conventional loan as soon as you possibly can once you meet
loan-to-value requirements [for refinancing] will save you a significant amount
of money,” Leve says.
don’t have to refinance in order to pay off your loan early at the same rate.
With an amortization schedule, you can skip the fees and closing costs
of a refinance and figure out the monthly payment you’d need to pay off your
loan within your desired time frame.
amortization schedule is a more aggressive (and structured) tactic than simply
tossing a little extra cash at your mortgage principal each month. If done
right (with your mortgage lender's help), an amortization schedule will mimic
the effect of refinancing from a longer-term loan to a shorter-term period,
minus the fees and paperwork. Keep in mind that it won’t change your regular
monthly payments or cut down your interest right away, but it will lessen your
repayment time (perhaps by as much as 10 or 15 years!) which, in turn, saves
you heaps on interest.
method will take a lot of discipline and consistency on your part in order to
work. Ask your lender to help you crunch numbers and figure out a precise
target payment amount.
debt-free is undoubtedly appealing. Being able to achieve it largely depends on your financial goals and income. Here are some
questions to ask yourself:
you answered yes to all of these questions, you’re in a great position to focus
on knocking down mortgage debt. If not, talk to a financial adviser for some
direction, Beyers says.
examine what you’re trying to achieve,” Beyers says. “Sure, you’ll take 10 or
15 years off your loan by refinancing. But if you’re diverting that money away
on a monthly basis from your child’s education or other financial obligations,
is that what you want?”
By Deborah Kearns - To view the
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