How To Save Thousands By Paying Off Your Mortgage Earlly
Save Thousands With New Way To Pay Off Your Mortgage!
You Can’t WIN! At least by doing it the conventional way!
FACT: Unlike about any other debt or “loan”, the typical mortgage (probably yours) is front ended load to apply most of your payment to the interest for at least 1/3rd of the loan life. On a typical 30 year mortgage, 90% or so of your payments go to interest for the first 7 years!
FACT: The “6%” or quoted mortgage interest rate only becomes effective at that rate after you complete the full contracted (15 or 30 year) period!
FACT: On your 30 year conventional mortgage, not even half of your payment goes to reduce principal until after the 7th year!
FACT: Over 70% of Americans move or refinance before the end of a seven year occupancy and paying.
FACT: On that move or refinance; most Americans take some equity out and start their clock all over again!
FACT: If you had money available to make extra principal payments, you could accelerate the time where your money starts to go toward principal and you could effectively knock years of “the back end” of the mortgage.
FACT: IF you had the money, you could accelerate the mortgage pay down and save substantially.
FACT: Most Americans DON’T have the extra money to make substantial additional payments.
FACT: Under The Standard System You Can’t Win
How then do you accelerate the payoff of your mortgage?
Under the standard system, we said you can make additional payments to principal.. but most people don’t have enough to do that on a regular basis. You can refinance possibly to a lower interest rate, but when you examine this option, you’ll often find that the costs associated with refinancing won’t be recovered for 3, 4, or even 5 years. And lastly, you could go to a bi weekly payment plan which is essence is a forced way to make one extra payment a year, and on average will accelerate the pay down of a 30 year mortgage by seven years.
Even with that, it’s not a win-win situation because you make two payments a month on average, but the bank sits on your first payment until the end of the 28th day, using your money, but not paying you any interest on it and ONLY crediting you with the payment at the end of the month.
Is there an answer to the problem? Surprisingly, there is! But it takes a little knowledge (or the use of a tool that has “knowledge” built into it and can do some complex calculations.
Why complex calculations? Because we’re going to follow some advice that’s been around for a very long time in successful financial transactions! What is the secret?
USE OTHER PEOPLE’S MONEY!.
In this case, the “other people” is the bank!
You see, that very same bank has a tool….. well, maybe your exact bank doesn’t have one… but if not, this tool is available to most people at SOME bank, and it’s an open ended loan account, generally referred to as a Home Equity Line of Credit.
You need to do some independent reading because the suggested length of an article like this does not allow for a full discussion of that financial instrument, but suffice it to say, in this type of a loan interest is treated much differently. Your interest is calculated only on the average daily balance, and that balance can be changed nearly daily. In other words, if you make a payment to your principal on the 5th, you get credit for the payment on the 5th.. not at the end of the month.
We want to keep the balance on this account as low as possible, and we can do that by putting money into it that is otherwise sitting around in zero or very low interest bearing accounts. But we need to know when to put money in and take it out.
Your HELOC will act like a conventional checking and banking account in nearly all respects, except it can never have a POSITIVE balance in it. If you have obtained a credit line of $10,000 you can withdraw up to $10,000 from it, but you never can put money in that would make it “store” money.
So let’s say you tap this account to make a substantial principal only payment on your primary mortgage. You’ve used “other peoples” money. For example purposes, you made a payment of 5000. Now you also have some household living expenses that equal 4000 and you wrote this out of the HELOC. Now you are “in hoc” to your heloc by 9000. You and your significant other (if you have one) or you alone… it doesn’t matter… have a monthly income (at least this month) of $6000. So you put your paycheck into your HELOC, and at the end of the month, you really only have a balance of $3000.. and that’s what you pay interest on. But you’ve killed the interest on your first of $5000. Because the first is front end loaded, depending on the year, that was really having an effective interest rate maybe of 50%.
Next month you wrote out your living expenses of $4000 from the HELOC, and as you had a negative balance in it of 3000, you owe your HELOC $y 7000. Payday again! Same $$6000, so you put it in. Balance becomes just $$1000.
Month 3… same schedule for the old budget. Monthly expenses were the same $4000, and add that to the bal of $1000 you owed starting.. so you have a 5000 balance you owe the bank. Payday coming up and you know the vital fact we just stated: You can’t have a positive balance in your HELOC! If you tried to put that full $6000 paycheck in, it would not take it.
So at some time before payday, you need to transfer some funds out of the HELOC to pay down some more principal.
Ah Ha.. the magic questions: When, and how much.
Take a guess and pay too much from your HELOC and your “spread” of interest advantage disappears. Why not make a massive payment of $8000.. after all , you have a credit line of $10,000. And when to make it.
The answer is that if you pay too much relative to your repayment schedule, the interest of that HELOC will cancel any advantages. Ditto on the timing.
While your regular mortgage payment has to be made by a certain date, or you get late charges, remember that you are NOT credited with payments until the end of the amortized schedule.. usually monthly. So you don’t want to put money in too soon and let the bank sit on it until they decide to credit you!
IF you had the time and patience, you could figure this all out to the penny and to the date and hour.
The facts of life are that most of us don’t have these skills or the discipline, so we need some one, or some things, to give us that guidance.
This is just math, not magic. Applied “numbers crunching” and what does that better than a computer!
The GOOD NEWS: There are commercial software programs in the market today that will do this for you. Some are better than others, but we suggest you become familiar with what is available and begin to use it as soon as possible.
Will this work for everyone? No. The software will, but you need an open ended loan account, and the most common IS your Alternate Home Equity Line of Credit. Looks like a second mortgage, but is not in that it is truly open ended. By definition, to get one, you must have SOME equity in your home, or a home if not your principal residence. You need to have an income where your income exceeds your monthly expenses. Doesn’t nave to be by much.. as little as $$50,000 qualifies most people. And you should have a respectable credit score or rating.
In late fall of 2007 we all read about the mess the mortgage lenders are in, and in an effort to cleans themselves up, they have tightened loan standards. Even if you meet the existing criteria above, you own bank may not offer this tool to you. so shop around.
You may be able to substitute a personal line of credit. Again, shop around.
As to the commercial software.. ask if it is dynamic. Does it adjust for your changing expenses and possibly income if you are self employed or paid on commission, so that each day and month, your calculations are adjusted to optimize your prompts for payment. Is it totally confidential and NOT move your money, but gives you full and complete control. If you change residences, can you transfer the account to a new home or mortgage? How about tech support.. is it available e 24/7? For your lifetime? From someone in the USA that you can understand? Is there a written guarantee of satisfaction? Will it reside on YOUR PC or on a mainframe? How often is it backed up? Do you have 24/7 access? Will it provide ancillary financial advice on decisions such as true costs of major purchases?
This is only an entry level article, but it demonstrates a proven concept, in use for many years in places like Australia and the Far east; It demonstrates how you can take advantage of the spreads between when interest is applied and calculated and when principal is applied, and how with the right tools and calculations, you can truly use other peoples money to accelerate your mortgage.
Typical results cut 1/3 to 1/2 off a standard mortgage.. and you don’t have to refinance or make any alterations.
We wish you well and much financial success.
Joe Leech makes it easy to follow the instructions in the article through resources available at his site at [http://www.mortgage-b-gone.com] or through his ebook