One of the obvious benefits of homeownership has always been the sense of knowing that one day, your mortgage payments would stop, and you wouldn’t need to pay any form of “rent” for your home. When we first enter a mortgage agreement with the purchase of our homes, we tend to lean on maximum amortization periods such as 30 years. The amortization period is the amount of time it would take to completely pay off your loan. Since each mortgage payment services an interest and principal component, the amortization period (i.e., 30 years) helps calculate what your monthly repayment would be to service both elements of your payment. Like many, you’ll find that at the beginning, most of your mortgage payment goes to service your interest and as time goes on, each subsequent payment reflects a greater principal contribution, while at the same time, less of your payment goes towards your interest. Thus, if you stick to the schedule, eventually you’ll have your home paid off completely and get to the “finish line” of your home ownership marathon…
But what if you wanted to “speed things up?” What if you could pay your home off in 25 years or 20 years by making certain financial decisions along the way? Wouldn’t that be great? Fortunately, there are strategies that you can take as a homeowner to help take a metaphorical shortcut to reach your destinations:
Increase your monthly payments – If you increase your mortgage payment by even a small sum of payments, you can realize significant differences over the total span of the mortgage life cycle. For example, if you had a 500k mortgage with a payment of $2800/m and decided to increase each payment by $100, you would end up shaving 2 years off your original 30-year time span to pay off your home. This is because each additional payment you make goes directly to service/payoff the principal. If you step back and look at your additional contribution of $100 each month, this only represents a ~3.5% increase of your original $2800/m mortgage payment…
Accelerated bi-weekly payments – If you change your payment cycle to accelerated bi-weekly, you will naturally end up making 1 extra mortgage payment each year. If you’re like most people, you might naturally think that there are approx. 4 weeks in every month and therefore 2 ‘biweeks’. You also know that there are 12 months in a year, so it might lead you to believe that there are 24 ‘biweeks’. This, however, is incorrect since the full year has 26 ‘biweeks’. This means that if you take half your monthly mortgage payment but make those payments over 26 weeks (instead of the presumed 24), you will end up making an extra “months’ worth” of mortgage payments. This strategy could end up shaving 5 whole years off your 30-year mortgage in the same 500k example used above…
Annual Lump Sum payments – if you don’t want to commit to a regular increase in your mortgage payment or the accelerated bi-weekly strategy above, then you could always take the “lump sum” approach. You simply go about your days, weeks, and months making your regular mortgage payments while saving up whatever you can comfortably manage. At the end of the year, you simply look at your savings and assess what you can afford to dump into your mortgage. This approach allows you to be flexible with your savings and doesn’t financially commit you to save a firm amount of money or even apply all of your savings to your mortgage. This method can help you reduce the amount of time it takes you to pay off your mortgage, but how much time you save will depend on how much and how often you make those lump sum payments. One great strategy we encourage you to consider is that if you are fortunate to receive a tax refund every year, perhaps just use those funds to pay it toward your mortgage. The reason this strategy can be useful is that a tax refund is usually money that you have been doing fine without, and if you simply move it into your mortgage, it’s money you won’t miss (that’s the idea anyways).
There are other indirect strategies you could always consider, and each solution may work differently for different households but if you are interested in taking some shortcuts to the finish line, there is always a way to deploy a strategy that works best for you. The main takeaway here is that small, incremental choices today, can snowball into major impacts in the later years…. Call us today to discuss some options that might benefit you. – 905-455-5005
