Sexy, Smart Mortgage Advice

Bet you never thought the words "smart", "sexy" and "mortgages" would ever be used in the same article, but in my blog I am going for it :-).

Every day I converse with people regarding their mortgages and whenever I bring up the subject of extra payments most people's eyes glaze over.

As a Mortgage Professional I see how people "manage" their $$ and it is not always a pretty picture.  So many people have been there...credit cards are building up because they are paid at their minimum and then a new car is bought...YIKES!  Not the best way to get ahead.

Smart, sexy money advice to you is live within your means and try to pay off your larger debt purchases (like a mortgage) faster!  

"How" you may ask?

It is easier than you think, but it does take some work.  Nothing good comes for free.

Start with an accurate household budget. Mint is a great way to start a budget with help and be realistic and include such things as "entertainment" and "coffee/snacks", etc.

Now, look at where you could possibly save $$ by cutting back.  Do you really need a designer coffee everyday...could you instead just buy a regular brew or better yet, make it at home?  

With this new "found money" you can apply it to your mortgage in a way that will save you hundreds, if not thousands of $$ over the length of your term. 

Also, consider another income source that you may have but not factored in, such as your yearly bonus or tax return $$ as a way to come up with the extra payment.  It is well worth it as shown below...

Here is an example based on a mortgage amount of $300,000 & a monthly mortgage payment $1,426.56* (*based on a 5 year fixed mortgage rate of 4.00% & a 30 year amortization).

• Total interest paid in 5 years = $56,791.31
• Total principal paid in 5 years = $28,802.29
• Balance at maturity of mortgage rate = $271,197.71

Here is the switch, for starters, consider taking a bi-weekly payment instead of a monthly payment.  It is slightly more $$ commitment to be paid, but once you get used to the payment it is easy.  Now the money savings starts...


Comparing the above mortgage amount of $300,000 & an accelerated bi-weekly mortgage payment of $713.28* - which would have you automatically make 2 extra payments/year...BONUS! (*based on a 5 year fixed mortgage rate of 4.00% & a 30 year amortization)

• Total interest paid in 5 years = $55,958.05 (difference of $833.26)
  
• Total principal paid in 5 years = $36,768.35 (difference of $7,966.06)
  
• Balance at maturity of mortgage rate - $263,231.65 (difference of $7,966.06)
• Reducing your mortgage amortization to 25 years and 9 months from 30 years!
  

Where the numbers really get interesting is when you add an extra payment of $100/month or $1,200/year, every year, to your regular payment.  The savings is not immediate but in the long term scheme of things it is HUGE. 

Over the 30 year amortization of the mortgage with just making those $1,200/year payments in the first 5 years, you would save an additional $7,164.30 in interest AND would reduce your mortgage to 20 years and 4 months!  Pretty interesting stuff.   

This is how people pay off their mortgage faster and save $$ in the process.  


The only down side (if you even want to call it that) is that during the original 5 year mortgage term, the extra payments cannot be used as a "emergency" payment if needed.  That extra payment money is applied directly to your principal and the benefit comes after the first 5 year term is up.  This is when the bank calculates your new mortgage payment (with new interest rate) for the new term, on the lower principal mortgage amount.  This lower mortgage $$ needed will keep your new payment down because as rates rise (which we all know they will) things should still be affordable for you to make ends meet.  

Food for thought and certainly smart money management!

Remember, as old Ben Franklin says..."If you want to know the value of money, try to borrow some".



Liz