I can’t be the only person who has seen those ads around the Internet. Usually they’re referring to mortgages and as a result, they’re one of the most successful click-baits. Why? Because whether you own or rent, housing is usually your biggest expense. And if you made the mistake of buying too late in life, you might be one of those people who is worried about retiring or even dying with mortgage debt. This means that articles or services promising to teach you about how you can eliminate that debt as quickly as possible will get your attention. Unfortunately, many of these people are also trying to sell you something. Well, I’m not, and today, I decided that I was going to make sure you never have to click on those links again, by telling you these “simple tricks banks HATE!”
Before I start, let me highlight the importance of eliminating mortgage debt.
- Housing is not just a huge expense, it’s also a necessity. You’ll always need a place to live, and given the way rent and housing prices are, if you can have a roof over your head for only the cost something as relatively marginal as property taxes, you are doing better than most.
- You’re less likely to lose your house if your debt is paid off. Think about how many people lose their houses to banks because they couldn’t afford the mortgage, versus house many people lose their house to a tax lien.
- It’s one of the few things you can guarantee will pass on to your heirs. The building might fall apart, but barring an environmental crisis in your immediate area, the land will always be there. If you can help it, don’t pass on debt.
- Depending on houshing type, location and maintenance costs, it could become a good source of income. (More later on how I became an accidental landlord.)
With these reasons in mind, the point is to pay off your mortgage as quickly as you can. The following methods will help you achieve that goal. Some of these rely on good habits and discipline. Others rely on a windfall and some rely on your type of financing. You may even do a combination of them to see which one suits you best.
- Your terms are key. Do you have a 30-year mortgage or a 15-year mortgage? What’s your interest rate? If you have a 30-year mortgage, you will be in debt for twice as long and you will pay more in interest. You’ll also have a much lower monthly payment. What about your rate and down payment? If you have great credit (740+), steady employment and a low debt to income ratio, you’re almost guaranteed the best available rate. This means you’re paying as little as possible on your debt and may be able to own for as much or even less as you would rent (depending on your local housing market.) And of course, the more you put down, the less you have to borrow. So the key to borrowing cheaply for a shorter period, really starts before you get a loan. It’s about cleaning up your credit, saving as much as possible and choosing the mortgage that is right for you.
- But what if you already bought a house? Fret not. You can always refinance. Those who bought back in 2005-2006, were borrowing money at ridiculously high rates. Although I didn’t have any money to buy a house at that time, in 2007, I had a CD that was paying me 5%. If you know anything about banking, you can try to guess how much mortgages were. If not, you can look up historical mortgage rates and get confirmation right here. So what would a smart person have done in 2012 if they bought a house in 2006? Assuming they kept their credit clean and continued to qualify for great rates, they would have refinanced their mortgage to a 15-year mortgage at 2.5% and NOT TAKEN ANY EQUITY OUT. What would that achieve? It would have not only sliced their rate in half, but also their term. This would have probably kept their mortgage payment close to the same but they would be out of debt in before 2030, instead of after 2036. If you think about how much you pay towards your mortgage (or rent) every month I want you to multiply that by 72. This is all the extra money they could save, reinvest or use toward something else over the course of 6 years.
- At the same time, some people just wanted a break. Many of us really over extended ourselves when we bought homes before the bubble. This means we wanted relief from our high payments, not to keep them the same. Good news! You can also refinance to another 30-year mortgage. You do the same thing above: apply for a new rate, don’t borrow against your equity but keep your 30-year. You don’t get a 2.5% rate, but you might have been able to get 3.5%. Anyone looking at houses now might find it hard to believe, but these rates were definitely available as recently as 2012. I got my house in 2013 and I have 3.75% fixed. But ultimately, going from 5-6% to less than 4% reduces your monthly payment amount. The biggest benefit is that you can continue to pay the difference towar your principal balance IF you can afford it. But if a bi expense comes up and you need that money for something else, you can reallocate your finds accordingly. You are not bound to the bank to make the higher monthly payments on their schedule.
- But what if you already have a great rate and refinancing makes no sense? Well I have a “one simple trick” for your situation too. Before I go into it, let’s remember this basic principle of time: 12 months and 52 weeks in a year. Say your mortgage is $1,000 a month. You can pay $1,000 a month so $12,000 a year ($1,000 x 12 = $12,000). Or you can pay $500 every 2 weeks, so $13,000 a year (52/2 = 26 payments, $500 x 26 = $13,000). It’s like magic! So it’s like making one whole extra payment a year. You can also achieve this same result by making your payments as scheduled, but for the last payment of the year, making an extra payment and applying it to your principal. You can also take the extra payment and divide by 12, and add that number to your principal every month. (In our example this would be $1,000/12 = $84, monthly payment = 1,000 + 84 = $1,084). This can and should shave years off your mortgage. Will it be 6-7 years? Probably not. But if you can save 2-3 years or even 1, that’s 12-36 payments you don’t have to make. That’s money you don’t have to pay interest on. That’s 1-3 years of worry free living.
- What if you can afford extra payments on a regular basis? Take advantage of windfalls. This doesn’t require any math or the same discipline as making extra payments, and it doesn’t even rely on you having good credit. The point is to take any and all unexpected monies and put it towards your house. Gifts, inheritance, bonus, lotto winnings, tax returns, that $100 bill you found in the parking lot of the grocery store, etc. As long as you weren’t relying on it as s regular source of income, if it comes in, pay your debt.
Here you have it: my 5 “one simple trick” to pay off your mortgage faster. But remember, you must assess your own situation individually. If you get a condo, they may not have association dues or they may not include your homeowner’s insurance. Not everything works for everyone. So don’t come back here trying to sue me if you didn’t like your results lol. I am a big fan of the banking calculators. You can them on bankrate, zillow, etc. While they’re great at giving you a snapshot of your mortgage, be careful, because they don’t always included all your housing costs. You can even use them to test some of my theories.