How old do you want to be when you pay off your mortgage? For most people, their home is their biggest asset and one of their principal forms of savings. The traditional mortgage is based on a thirty year payoff, but there are ways to pay it off early, save on interest and build your equity faster.
The easiest way is through the type of mortgage you take on. Many people refinance from a 30 year mortgage into a 15 year loan. The interest rates on 15 year loans are slightly better, and though the payment is higher, it is not as much as you might think. For many people the extra payoffs are a good trade off for the increased equity build up. You do need to be careful with this, though. Locking into that higher payment reduces your flexibility, and if your income goes down over time, it may become a problem. I’ve had several clients who have refinanced from a 30 year down to a 15 year, but then after their personal situations changed the higher payments became a burden, and they went back to the longer loan.
There are more options than just a 15 or a 30 year loan. You can choose your amortization so that you can pick a 20 or a 25 year pay off, where the increase in payments is much lower than with a 15 year mortgage, but you are still building up more equity than you would with a 30 year fixed rate.
There are other ways you can pay your loan off faster on your own. One way is by just adding extra payments toward your principal. Doing it this way you are not locked into the larger payment of a fixed loan, but every dollar extra you pay reduces your mortgage balance and pays the mortgage down a little faster. Some people pay extra every month, but if you are short on cash, you aren’t obligated to the larger amount.
Another popular option is the Bi-Weekly mortgage. This is a service that is usually set up after closing. You pay a fee to set it up, and then the loan servicer automatically deducts one half of the mortgage payment from your checking account every 2 weeks. By paying every 2 weeks you are making 26 half payments per year. That means you are really paying an additional payment over the course of the year. By paying that one extra payment, a 30 year loan is cut down to about 23 years.
Pete Thompson is a long time resident of the Chicago area, and has been a mortgage loan officer specializing in helping first-time home buyers since 1992. Go to http://www.ptmortgage.com for a Free copy of The Real World Home Buyer’s Guide – How to save thousands when buying a home and getting a mortgage.
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