By John W. Lee
There thousands of books and articles written about how to be financially successful. Some of these books are written for rich people that already have money, and some of them are written to folks that need to feel good about themselves and what they are doing. Many books and articles are written by financial planners and self-help gurus that have lost touch with the average person. I am writing this article from the perspective of a bankruptcy attorney.
Part One: Pay Off Your Mortgage
This may seem like an obvious solution, and one may think; “If I could do that, then I would not have a problem.” Many people pay off their mortgages early, but it does not just happen, it takes planning and an understanding of how interest payments work.
When you purchase a home with a mortgage, you are required to pay interest. Even if you have a low interest rate, the amount of interest you pay could be two or three times the actual purchase price of the home. You could pay back, over thirty years, three times what your home is actually worth. Interest is compounded daily, that means every day the balance on your mortgage is going up.
There are several ways to pay off your mortgage quickly.
The easiest way to do it is to break your mortgage payment into two payments; and pay half in the middle of the month and half at the end of the month before it is due. By doing this you will actually be paying and extra payment and a half per year, this will pay off your house seven years early.
If you want to pay off your mortgage even more quickly, then add a few dollars to your payment each month. If you can’t add a few dollars to your payment each month, then put your tax return towards the principle balance each year. Making an extra mortgage payment per year, can reduce your mortgage by tens of thousands of dollars, and save years of payments. When you first start power paying your mortgage, you saving over twice what you are actually paying the mortgage company because not only are you reducing your principle by the extra payment, but you are eliminating future interest payments. Where else can you get almost a three to one return on your investment?
In many cases, depending on your interest rate, when you put an extra $200.00 on your mortgage per month, you could have the total payments made to the mortgage company reduced by over $90,000.00 and pay off your house five years early. Because of this, I would recommend beginning power paying your mortgage at the same time, or before, any of the other tips in this article.
Another thing to be careful of is refinancing and loan modifications. A loan modification or refinance may be very helpful in some limited circumstances; however, there are a few things you must be aware of. In the case of a refinance, normally the bank charges you several thousand dollars in fees or points for the privilege of refinancing your house. Typically, it takes five to seven years of the lower payment to make up for the extra fees the bank rolled into the loan. I would not recommend anyone to refinance their house unless they are absolutely certain that they will stay in the house for enough years to justify the additional cost of the refinance. Typically, loan modifications are given by banks to borrowers that exhibit some type of financial hardship. A very high percentage of those that apply for loan modifications do not qualify. In many cases, by the time the borrower has been turned down for the loan modification, they are too far behind in their payments to catch up. Many of the folks that are turned down for loan modifications have no other choice but bankruptcy to save their home.
By making a few minor adjustments to the way you make your monthly mortgage payment, you can pay off your mortgage 10-15 years early. Granted, this is a long term plan, but you will thank yourself when you pay off your mortgage a decade before all of your friends.
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