Let’s face it, we would all love to get out from under a house payment. If it is rent or a mortgage payment, one of my personal goals is to get out from under my mortgage before my eight-year-old son graduates from high school. I would love the freedom that the lack of a mortgage payment provides and for my home to become and asset and not a liability.
There are a couple of strategies that you can employ to accomplish this goal. To begin with, make sure your mortgage rate is at least as low as what you could refinance for. Like I suggested in a previous post regarding mortgage refinancing, find a rate and be happy with it. If that is your current rate, fantastic. If you could shave 1.0% or more off your rate, then you should explore a refinance. From there, there are three strategies that seem to get the most attention. I think the best way to look at each is for me to give you a summary of the three concepts and then discuss them in detail over the rest of the week. At the end of the week I will then discuss how to compare making extra payments on your loan to taking the same amount and investing. Then you can decide for yourself the best approach for you and your family.
Mortgage Acceleration Loans – This is a type of program that is currently popular in Australia and parts of Europe. While on paper it sounds like a decent idea, I am not sure how it would work if you were unemployed. Let me explain. The concept is you refinance your home using a home equity line of credit (HELOC). You deposit your paycheck into an identified bank account and then draw your monthly expenses including your mortgage payment from that account. All the money you have left over at the end of the month is then put towards the HELOC. If you don’t have additional funds available, this program would still make the payments for you. In my opinion, this program is only appropriate for those families that are savvy investors AND spend less than they make each month anyways. Mortgage acceleration is not for everyone. I will talk about the advantages and drawbacks later in the week.
Changing Your Payments to Bi-weekly Instead of Monthly – Most lenders allow you to make electronic payments on your mortgage. Most of us set those payments up to be made a day or two before the due date each month. To start this program, you would change your payment schedule to half of your monthly payment every two weeks. Making bi-weekly mortgage payments will help you make an extra payment each year, which should go against your principal. While the program sounds easy, your lender may charge an enrollment fee to allow you to apply the extra payment to principal. You need to make sure you communicate with your lender so they know what you are doing and why. Again, there are advantages and disadvantages to this strategy.
Paying Extra Each Month – This is the simplest strategy that I would suggest most people follow. We will use me as an example. We make electronic payments to our lender, Bank of America. We set a budget using the strategies that Robert Kiyosaki suggests in his book “Rich Dad Poor Dad“. We set a budget that included all debts and an aggressive savings strategy. We then took the leftover money and increased out monthly mortgage payment by that amount. As time went by and our income increased, we added that extra cash to our mortgage payment. The extra money is applied to our principal each month and the length of our mortgage is shortened. Just like the other two scenarios, there are advantages and disadvantages to this strategy.
I look forward to the discussion that these articles will spur and to see which strategy people are using.