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For me, it was an easy feat; there was no magic pill or secret formula. However, I am the exception and not the rule, because I worked in real estate for many years. I watched in disbelief as client after client (against my advice) stretched their finances to the brink with each loan, each time making the minimum down payment and opting for the maximum financing term. If that sounds like you, let me share six tips designed to help you pay off your mortgage - fast. How fast, however, is up to your checkbook balance and your budget.
Pay early, pay often.
Mortgage payments are interest-heavy during the first five to seven years. The more you pay toward your principal during this time, the faster you gain ground on your principal. This is an particularly bright idea for those of you who didn't make a large down payment. Prepaying your principal builds equity faster, and that is always a smart move. In fact, if more people had built equity during the real estate boom instead of taking out costly mortgages with little to no down, the bubble burst might not have been so overwhelming to the economy.
Make an additional (lump-sum) payment in December, and as often as you can.
By making an extra full principal payment in December, or by applying tax refunds or other financial windfalls and bonuses to your principal, you are saving money on interest and paying down your balance faster. It isn't rocket science; the more money you squirrel away and put toward your mortgage each year, the faster you pay it off.
A little more, goes a long way.
Even after paying more during the first few years of your mortgage, and even after making your annual lump sum payment(s), you might be able to do more. I always told my clients to get a copy of their amortization schedule (which is included in your closing paperwork) to see how much you will actually pay on a home over the duration of your loan. All too often, it's twice the size of your loan amount --and that can be an alarming number. By making bi-weekly payments instead of a monthly payment and adding on a little extra, you can reduce your 30-year mortgage to a 21-year mortgage, saving tens of thousands of dollars in the process. If you can't find your amortization schedule, check out Bankrate's mortgage calculator -it does all of the scary math for you.
Beware bi-weekly promises.
I can't count on two hands and two feet how many times a client asked me if a bi-weekly plan was a good idea. The answer is, "yes and no." When you sign up (often for a hefty fee) for a bi-weekly plan, you are making 26 half-payments as opposed to 12 full payments (giving you an extra full payment each year, like I mentioned in tip number two). Yes, the plan helps you pay down your mortgage faster, but you are throwing money away if you pay a lender or service to make the payments on your behalf. Either sign up for a free service, use your bill pay service or allocate the payments yourself with a good, old-fashioned check. Even with the rising cost of postage, 45 cents for a stamp is nothing compared to the $300 to $500 signup fee that mortgage companies charge when you opt in to the bi-weekly plan and less than the "service fee" many companies hide in your payment.
One would think that a bank would apply payments properly -- after all, they are a bank. However, this is not always the case. Whenever you make additional payments, follow up and make sure that your payments are allocated appropriately. When it comes to most mortgage companies, paying online lets you specify how the additional money is distributed between your principal, interest and escrow accounts. However, if you don't follow up, you could be losing money misappropriated elsewhere, leaving all the good you have done, undone.
Keep up with new products.
I have seen many a homeowner feel comfortable and complacent with their mortgage --this is always a bad move. Keep your ear to the ground and stay on the lookout for interest lowering refinancing offers, and then do the math to find out if a refinance is right for you. However, even if you refinance to a lower payment, don't let that payment seduce you into complacency. Keep making the same higher payment and watch your balance shrink, even faster.
It Might Not Always Be the Best Idea.
For many homeowners, paying down a mortgage is a terrific idea, but it's not a perfect fit for everyone. When I have a homeowner who has a low (under 5 percent) interest rate who could be squirreling money away into an investment that yields 10 - 12 percent annually (opposed to the 1 to 3 percent gain on a home) I would tell them to invest and pay off the mortgage later, in a lump sum. Don't get so caught up in the idea of paying off a mortgage early that you lose sight of better, more profitable investments.
The best advice I could give on an early mortgage payoff is to take out a smaller loan over 15-years (not 30) and pay off that loan in 10. After that, sell the house for 100 percent profit and wind up with a sizable down payment on a nicer, newer home. If you do this just once, you can literally buy two to three times the house that you would have qualified for on your first purchase, simply by delaying instant gratification for a few years. It's a better investment and it's smarter money. That's the bottom line.