Wednesday, June 20, 2012

Paying off my mortgage before my children go to college


When you started searching for the best mortgage rates to finance your current home, there’s a good chance that you were thinking of all the other financial obligations that you have to juggle -- including retirement saving and your children’s college educations. Luckily, you don’t have to stick to the expected payment date that the bank gives you. If you want to pay off your mortgage before your kids become scholars, here’s how you can do it.

Bi-weekly payments. Making payments every other week is a brilliant way to trick yourself into paying off your mortgage faster. This is because the years has 52 weeks, meaning that you’d be making 26 payments, each for half the amount of your monthly payment, each year. By the end of the year, you will have made 13 full payments on your mortgage instead of 12, and your pockets won’t feel the impact. Homeowners should tread lightly in this territory, however. It is much better to set the terms of your biweekly payment plan at the beginning of your mortgage so that you don’t have to pay hundreds of dollars in fees. Or simply set aside the money yourself and make it in one big payment each month so that you remain in control of your finances.

Up your monthly payments to put more toward interest. When you make your mortgage payments, you’re covering some of the cost of your home, but some of that payment goes toward interest, as well. A faster way to chip away at your home loan is to add a bit extra to your payments each month that should be applied only to the principal (you should specify this with a note or memo whenever you send your payment). For example, we bought our home for $200,000 and put a 20 percent down payment of $40,000 on it, meaning we had $160,000 left to pay. We covered that with a 30-year mortgage with an average rate of six percent, so our monthly payments were $960. But we calculated that if we were to round that payment to an even $1,000 each month, we knocked three entire years off of our mortgage.

Make as many extra payments as you can as early as you can. This is the golden rule when it comes to paying of your mortgage early. The biggest concern for homeowners is how to wrangle the interest on their home loans, which the majority of their first payments will go towards. If you use our logic, you can do it early on by making as many extra payments up front. Even if you can only afford to make an extra payment during tax time, like we did each year, you can knock years off of your mortgage term. By putting an extra payment of $1,000 (combined with the extra $40 we were paying each month), we paid our mortgage seven years earlier than we had originally planned.

Refinance to a lower interest rate. Whether you have an adjustable rate or a fixed rate, if you see interest rates in the market taking a downward turn, it may be time to move on it. We locked in our mortgage rate at six percent, so we had no need to worry, but this advice is crucial if you have a high fixed rate or an adjustable rate that can change at any time. If you current rate is a half a point to two points higher than what is currently being offered, and if you plan on staying in your home long enough to absorb the closing costs from refinancing and still save money on interest, talk to your loan provider to see if it’s possible for you to take advantage of a lower rate.
Remember to advise your loan officer ahead of time whenever you plan to make extra payments so that he or she will know exactly what to do with it. Because before you take control of your financial future, you have to take control of your home financing terms.

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