The dream of owning a home can seem for many, becoming more and more allusive these days. Although everyone would like to have a home that is paid for free and clear, mots of us will have to assume that we will be paying a mortgage for the next 25, 30 and now even as long as 40 years into the future.
Everyone is constrained to a certain degree by their own budget. But, there are ways to pay off your mortgage more quickly and save money in the process.
Almost all mortgages have built into the terms, a payment accelleration clause. This allows borrowers to pay more than the minimum monthly payment: Read on...
If you simply remit to the lender more than the minimum scheduled payment each month, the benefits are huge! Each extra amount over and above the scheduled payment is automatically applied to the principal balance. This increases the equity in your home each and every month. In addition, you will be saving on interest charges.
Check this scenario:
If you are an average family earning $50,000 income annually, let's assume that you are saving at the same rate as most Americans... just under 4% annually according to government statistics. This equates to $2000 savings every year, or $167 monthly for future needs.
Savings rates at the time of this writing are approximately 1%. Being that the rate of interest is so low, why not take $100 of that 4167 and pay down the mortgage on your home ahead of time? Look at the following calculations:
If you take out a mortgage of $200,000 at a fixed rate of 6%, the note calls for monthly payment of $1210.56 for a 30 year term.
If you paid that extra $100 per month towards the amortizing balance on your mortgage, you would add an extra $1200 to the equity in your home annually.
Staying with this scenario, the total amount paid to buy that home over the life of the 30 year loan term would be an alarming $435,798.89. When you simply add that $100 extra payment every month, you would save $46,360.13 in interest charges alone over the life of the mortgage. In addition, how much sooner would you own your home free and clear?
Remember the minimum payment of $1210.56? With this simple plan, you would make 38 less of those payments and be cutting the term of your loan by 3 years and 2 months!! That is not all:
In short, what this strategy does is shift your money from passbook savings only ($2000 per year) to paying $1200 on your mortgage and still saving $800 in cash for passbook or money market savings.
So to sum up all the benefits using this simple investment and mortgage strategy, you save over $46360 in interest on your loan, and you accumulated more than $21,923 in cash savings accounts (with interest @ 1%). This totals $68,283 in accumulated savings in just over 26 years (based upon the original 30 year loan term).
If you had put the entire $167 per month into a savings account, they would have only accumulated $54, 646.35 over the same period of time. That is a $13,637.63 gain and you paid off the mortgage 3 years and 2 months early.
So, the key is consistency. The benefits can be even greater if you can apply even just a few dollars more.
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