I’m sure you have heard this before, but – for most people, regardless of where you live, a home mortgage is usually the most significant financial burden you will deal with in life; sometimes multiple times in life. Yes, I know myself that university debts can be quite hefty, yet they usually come nowhere near that of a home mortgage. And yes, some of us may have serious medical debts that can rival those of a home mortgage. Still, a home mortgage is the traditional massive debt the majority of the world’s populations have in common. Even with the other cases, the debt management discussion in this article is relevant to managing any loans.
Pay-Off Early; Is That a Real Thing
First, ask yourself whether you want to pay off your mortgage before its maturity date. This included paying off any debt that has an interest rate tied to the payments and overall debt requirement. If the answer is yes, know that it can be done and it’s not a secret held back by the mortgage companies and banks. By paying just a little extra money on those monthly mortgage payments, you can whittle-down the back end of the loan. It doesn’t require a large amount of extra cash, only a consistent effort toward that early payoff goal.Credit: Pixabay 2014
A Large Investment
A home mortgage is usually the largest investment and monthly drain on your personal finances. Paying off your home mortgage early is within your grasp and doesn’t require wealth. With a bit of creative home budget management, self-discipline, and motivation you can be mortgage free in a shorter period of time than set in your loan contract. The average American pursuing a home loan usually applies for a thirty-year mortgage. It’s not the only option; however, it is the average or traditional situation. There are fifteen-year loans, though these are a lessor common type of mortgage. In any case, just a few extra dollars, or more when you can, will go a long way in reducing the duration of the loan, while increasing your home equity at the same time.
There are varying estimates as to the average mortgage in the United States over the past few years; however, they generally range from $150,000 to $200,000. For the purpose of this article we will use the lower amount of $150,000. As a side note, someone does not have to be poor or under financial distress to be concerned with personal financial planning or wealthy enough that budget planning is irrelevant. That is not the case. In fact retirement planning and debt management are important concerns for everyone desiring the attainable goal of early retirement and or a home mortgage free life. You don’t have to be a millionaire or billionaire.Credit: Pixabay public domain images
Pay Off in Half the Time
The main objective of the information in this article is to explain how it is possible to pay off a thirty-year mortgage in as little as fifteen-years or pay off a fifteen-year mortgage in as little as nine and a half years. These shorter duration mortgages will not change the point for this discussion, in fact it supports and presents even better opportunity for a fast pay off of a home loan. Unless you paid cash for your home, most home loans are generally thirty-year mortgages with either fixed or varying interest rates. For the purpose of this article we will stick to the typical thirty-year mortgage loan. It’s the nature of the mortgage beast that you give the bank a significant amount of your money over the extended period of the loan beyond the actual loan amount. All the while you are making payments against that original loan you are giving more money to the bank than the home is probably worth.
From the First Payment the Bank Benefits
Although when you start making your first payments on your mortgage and you begin accruing equity in your home, in the beginning, the largest portion of those payments goes towards the interest rate accrued on the debt. The bank starts out by using the bulk of your initial monthly payments towards the interest payments and a minimal amount towards the base loan amount. As time and payments progress over time, the division of the interest allocation against the base loan amount (principle amount) reverses resulting in the majority of the monthly payment going towards payment of the principle amount and a lessor amount towards the interest payments.
Let’s use for an example look at a $150,000 loan for thirty-years and 3.7% interest. Let us say that you do as many home owners do, simply pay the minimum monthly payment as indicated on the mortgage contract with your bank. Your monthly payments will be around $690.42 a month; roughly 67% goes towards the loan interest and only 33% goes towards the principle loan amount. Roughly, it is at payment 153 of a 360 month (30-year), that the monthly payment reaches that point of time where the payment is evenly split between the principle loan payment and the accrued loan interest amount. By the final payment, number 360, the principle amount is 99.4% and the final interest amount is .6%. This of course is still based on paying your home loan with minimum payments for the full duration of the 30-year loan. After the full amount of interest has been paid over the thirty-year period the paid interest equals $98,552.81. Now add the original loan of $150,000 and you have paid a total of $248.552.81 paid to the bank against the original loan as accrued over the full 30 year period. So ask yourself, considering this country’s up and down real estate market will your home be sellable in thirty years for a quarter of a million dollars.Credit: Pixabay public domain image
Remember, it’s not your responsibility to make sure the bank is profitable. Your job is to get out of debt as soon as possible while paying as little interest as possible (meaning giving the bank free money). Don’t worry; the bank will make money off of you even if you pay off the loan in less than half the time. The sooner the debt is off the table, the sooner that headache disappears and the sooner you can get on towards other important debts or spending desires.
Next: How to Manage and Pay of Your Mortgage Debt Part 2 of 2