Monday, March 14, 2011
Don't treat your mortgage like rent!
For many first-time buyers it is easy to get into a new home and a mortgage and continue to treat the same way you did when you were renting. You can make a significant impact on how quickly you payoff your mortgage by just paying a little attention to it.
While renting you get into the habit of paying your regular monthly rent bill month in and month out. With your mortgage it is important to remember that you have the opportunity to pay extra whenever you can. Yes, I know paying extra never sounds like a great idea. Trust me, in the instance it is a fantastic idea!
By making additional regular payments you can significantly shorten the time it takes to pay off your mortgage and therefore save yourself thousands of dollars. Lets consider a real life example of a first-time buyer with an aggressive mortgage paydown strategy. Lets call them Jane and Joe. Jane and Joe realized that their mortgage was potentially going to be the biggest purchase they ever made (Yes, more expensive than their house if they took a full 35 years to pay it off). They asked their mortgage broker about some strategies to reduce their mortgage faster.
Their mortgage broker recomended bi-weekly accelerated payments to start, that is they took the regular monthly payment (amortized over 25 years) divided that by two and made that payment every two weeks. As any of you who get paid every two weeks knows, that means that there are two months out of the year where they were making 3 payments. The net effect of this was to reduce their amortization to about 21 and a half years.
Joe really liked the idea of getting rid of their mortgage faster and once he got into the house and established their budget he started looking for other ways to accelerate the mortgage paydown. The couple had a water cooler that they had brought from their apartment that cost them $26/month, they also had those 'free' (for the first 3 months) movie channels that actually cost them almost $40/mo. Joe quickly removed both of these expenses and called his bank to increase his bi-weekly payment by $50 (now they were down to about 18.x years).
The couple took their tax refunds over the next 3 years and applied them to the mortgage each year (down to under 14 years now). They had originally taken a 3 year term at 7.15% in 2000 and when it came up for renewal they were fortunate enough to obtain an interest rate of 4.49% for a new five year term. They kept their payments the same as the previous term so now they were paying off a substantial portion of principal each month. This combined with the application of more tax refunds left them in a spot where today (2011) they are now mortgage free!
Now you may not want to be quite as aggressive as Joe and Jane, but the point is that with a little bit of effort and focus you can make a substantial impact on the amount of interest you pay over the life of the mortgage without significantly affecting your lifestyle.
-Axiom Mortgage Partners