Save Money By Paying Off Mortgage Early

Paying off your mortgage might sound ambitious, especially if you have recently refinanced into a 30-year term. But it’s still smart for homeowners to give some serious thought as to how they’ll pay off their home loan.

An early mortgage payoff can net substantial interest savings compared to making scheduled payments for 15 or 30 years.

Paying more quickly reduces your housing cost, freeing up that money for other needs and wants, says Ronit Rogoszinski, a wealth adviser at Arch Financial Group in Garden City, N.Y. You’ll still be responsible for property taxes, homeowners insurance, and home maintenance and repairs, but your mortgage payment will disappear.

“Once that money can remain in your pocket, you control that money,” Rogoszinski says. “It’s yours. It’s not going to someone else.”

An argument can be made in favor of allocating more cash to investments instead of eliminating low-cost debt, says Alfred McIntosh, principal of McIntosh Capital Advisors, a financial planning and investment management firm in Los Angeles. But he says being mortgage-free can be “a very beautiful thing,” especially for homeowners near retirement age.

Here are six ways to get rid of your mortgage.

1. Pay More Each Month

The simplest way to pay off a mortgage is to add an extra amount, say $50 or $500, to each monthly payment, Rogoszinski says. You shouldn’t sacrifice necessities, such as sustenance or medical care, but putting a little more toward the mortgage can be a good financial habit.

“If you can manage your expenses in a way that an extra couple of dollars goes toward the mortgage, that’s freeing up money down the road sooner rather than later,” she says.

Some homeowners add enough to their payment each month to make one extra payment each year. McIntosh explains the math: Divide one payment by 12 or multiply one payment by 10 percent, and add that to the amount each month.

Make sure the extra money is applied to principal, not interest or your escrow account. Prepaying interest or padding your escrow won’t accelerate your loan payoff date.

2. Make Extra Payments

Making an extra payment in January, December or some other month is more challenging than paying a little extra each month, but the benefits are the same, Rogoszinski says.

“The faster you get rid of your debt, the more cash flow you have, the more things you can do,” she says. “I don’t think there is ever a wrong time to do that.”

One way to make that extra payment less painful is to make payments every two weeks instead of every month. The result is 26 half-payments instead of 12 full payments. McIntosh says biweekly payments can knock approximately six years off a 30-year term, as long as the extra amounts are applied to principal.

3. Pay a Lump Sum

A gift of money, an inheritance, a bonus or an income tax refund creates another chance to put extra money toward your mortgage. This strategy works best if you don’t have other, more costly debt, Rogoszinski explains. “You really want to pay off the most expensive debt you have as fast as possible,” she says.

Examples of higher-cost debt include most private student loans, auto loans, department store cards and revolving credit cards.

Another option is to deposit your windfall into a savings account and set up an automatic monthly payment from that account to your mortgage, Rogoszinski suggests. That way, you can have money in the bank and put money toward paying off your mortgage, too.

A more aggressive approach is to invest the lump sum for a return that’s higher than your mortgage rate, then use the principal, plus appreciation, dividends and interest to pay off the mortgage when you retire, McIntosh suggests.

Either way, the key is figuring out how to eliminate your mortgage because that “makes the difference” between who might end up with a comfortable retirement and who will not, he says.

4. Refinance To Speed Up Payoff

Refinancing can help you pay off your mortgage sooner, the idea being that a lower payment frees up money that can be applied to additional principal payments.

The challenge is being able to qualify for a new loan, says Justin Lopatin, vice president of residential banking at Baytree National Bank & Trust in Chicago.

The biggest hurdle, Lopatin says, is the effect of declining home values. A lower valuation can throw off your loan-to-value ratio, result in an appraisal that’s too low to support your loan amount or trigger a need for mortgage insurance, making your new payment more costly and refinancing less attractive.

You’ll also need an up-to-par credit score and two years’ worth of documented stable income, Lopatin says.

To maximize the benefit of refinancing, shorten the term of your loan. For example, if you’ve paid off 10 years of a 30-year term, refinance with a 15-year mortgage instead of a new 30-year loan.

5. Shrink Your House Cost

Selling your house might seem like a dramatic way to get rid of your mortgage, but it’s certainly effective, leaving you free to buy a more affordable home for cash or become a renter without any housing debt.

Whether downsizing makes sense is largely a matter of your needs and personal lifestyle, yet Rogoszinski suggests it’s “definitely something to consider.” However, don’t try to time the housing market by selling high and buying low. That’s a strategy more appropriate for professional real estate investors than homeowners.

6. Tap Retirement Savings

Homeowners who don’t have spare cash on hand might be tempted to tap a retirement account to pay off a mortgage. This idea has gained purchase in recent months, as legislation pending in Congress would waive the early withdrawal penalty if money removed from a retirement account were used to pay a home loan.

Still, Rogoszinski and McIntosh advise caution.

“My instinct is not to look at that very favorably, particularly because of how little retirement savings Americans have already,” McIntosh says.

One exception: If you’re in danger of foreclosure due to a temporary financial setback, a retirement account might be a resource of last resort.

Even then, McIntosh adds, “be very, very careful.”

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Courtesy: bankrate.com/finance/mortgages/save-money-by-paying-off-mortgage-early-2.aspx

Five Must-Knows About Mortgage Insurance

A specialized kind of insurance policy that has recently made its advent into the mortgage industry, mortgage insurance promises that your loan will be repaid when you are faced with disability or death.

As a borrower of a mortgage, you are given a tenure of about 12 months or higher depending on your situation. The lender has the liberty to seek protection for the capital that he loans out with the help of insurance instruments of this type.

Two types of this specialized insurance exist. And a number of popular banks and financial institutions provide this insurance. Now, let’s get straight into the details, so you’re well prepared to make your choice.

1. Private Mortgage Insurance

Private mortgage insurance products are provided by insurance companies, in order to be able to provide a certain degree of security to the lender when giving out large sums on credit. When an event of default occurs, the insurance will take care of a significant part of the capital that has been lent out. This type of insurance is provided by private insurance companies.

2. Mortgage Insurance Premium

Premium insurance for mortgages comprises products of mortgage life insurance that seek protection for the lender in the case of nonpayment because of genuine reasons such as unfortunate events. These are unique products because they are facilitated by government insurance bodies.

3. Fixed Mortgage Rate

A fixed mortgage rate is an insurance product that provides a fixed rate of interest during the entire term of the loan. Market conditions don’t affect the rates of mortgage in this service, and the product features a pre-fixed rate of interest. The rate of interest fixed beforehand ranges from 12.5% to 25% and is decided upon at the time of borrowing.

4. Flexible Mortgage Rate

A flexible mortgage service consists of an interest rate that differs in correspondence to the change in market movements. Also referred to as floating or adjusting rates, flexible mortgage rates involve a high risk factor.

5. Your Options for Mortgage Insurance

Housing finance companies that are the forerunners of the organized mortgage industry include LIC Housing Finance, ICICI Home Finance, and HDFC, among others. Being the biggest catalysts of mortgage insurance products in the country, these companies are known for providing the most well-known form of mortgage loans.

Also catching up with the industry are cooperative, national, foreign, and commercial banks, as well as other financial companies from the non-banking sector.

I’m an avid writer, whose focus is more towards highlighting civic issues our society faces on a daily basis. I provide tips on property investment, write on real estate market price trends in India, and provide an insight on the latest residential projects. For more property related queries, you can visit http://www.commonfloor.com

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