Hopping Off The Debt Cycle!
Paying your mortgage payment on time every month is a great practice and your credit will reflect that good habit. However, this practice is not enough to get ahead. It's just enough to keep you chained to the high interest rate wheel of cyclic existence. Otherwise known as thirty year mortgage hell.
To understand what's happening, take a look at the interest you are paying your bank every month for the priviledge of maintaining that account balance. Most people don't realize that over the life of a thirty year mortgage they are paying for not one, but two homes... one for you and one for your bank! Have you taken a really close look at your amortization chart? You are paying mostly interest for the first number of years and BARELY touching the principal balance (loan amount). Once you realize that you can pay MORE every month than your statement says you owe, the penny drops! If you make it a practice to add an additional payment when you can, earlier in the loan term, you could save tens of thousands on the accrued interest over the life of the loan. Naturally your bank does not point this out because they want all that interest over the thirty or so years you have agreed to pay them.
You see, the simple fact of reducing the principal balance sooner, even by a small amount earlier in the loan term, will cut years off your mortgage. Any additional payments you make in a give month must go straight to reducing your principal owed. Simple and easy in theory. However most of us it hard to make additional payments. So time to look around. What other monthly accounts do you pay? Add up your car payments, department store, gas and credit cards you get each month. Are you paying the minimum or only partial payments? Which one have the highest interest rates? These kinds of revolving accounts are doing the most harm to your long term ability to pay off your mortgage sooner by soaking up your money otherwise available to pay off your mortgage. The more interest being eaten up by delaying the paying down of credit accounts is, literally, preventing you from getting off the debt merry go round.
There are several ways to accomplish owning your home free and clear sooner. First you can set up a 'biweekly' plan with your bank to automatically pay half of your monthly mortgage payment in two installments, every other week. That way you trick yourself into making an extra payment every year. That practice alone can cut about 8 years off a standard 30 year loan. You also get tax benefits. Lots of people do this now.
There is a much better faster way to accelerate your mortgage. When I first lived in Australia, I was surprised to meet so many young people who owned their homes outright. The system they used was in a little red book written by Harj Gill, a former banker. He explains how to set up a system (using the bank's own systems) to help you become more proactive and pay off your mortgage years sooner.
As an example, let's say you decide to pay an additional amount, say $50 more per payment period; or you apply a bonus or tax return straight to your mortgage rather than celebrate the windfall by spending it. The point is to pay more when you can with minimal impact on your lifestyle --until you get the point: $50 put toward your mortgage will save you many thousands in the long run and $50 spent on entertainment or frivilous things now will get you only those temporary pleasures. Which would you rather have: fun now or much more money (and no mortgage payment) and a more secure future later?
I highly recommend reading Harj's Gill 1997 book: How to Own Your Home Years Sooner.
EDIT: 11/25/09: I recently became an affiliate of Mr. Gill and offer this link to my affiliate discount for a one year online system and his book: http://www.speedequity.com/v2/pg=affiliates_web1a&referral_id=4921
Happy reading and reaping!
copyright © 2009 susan templeton loannetter
To understand what's happening, take a look at the interest you are paying your bank every month for the priviledge of maintaining that account balance. Most people don't realize that over the life of a thirty year mortgage they are paying for not one, but two homes... one for you and one for your bank! Have you taken a really close look at your amortization chart? You are paying mostly interest for the first number of years and BARELY touching the principal balance (loan amount). Once you realize that you can pay MORE every month than your statement says you owe, the penny drops! If you make it a practice to add an additional payment when you can, earlier in the loan term, you could save tens of thousands on the accrued interest over the life of the loan. Naturally your bank does not point this out because they want all that interest over the thirty or so years you have agreed to pay them.
You see, the simple fact of reducing the principal balance sooner, even by a small amount earlier in the loan term, will cut years off your mortgage. Any additional payments you make in a give month must go straight to reducing your principal owed. Simple and easy in theory. However most of us it hard to make additional payments. So time to look around. What other monthly accounts do you pay? Add up your car payments, department store, gas and credit cards you get each month. Are you paying the minimum or only partial payments? Which one have the highest interest rates? These kinds of revolving accounts are doing the most harm to your long term ability to pay off your mortgage sooner by soaking up your money otherwise available to pay off your mortgage. The more interest being eaten up by delaying the paying down of credit accounts is, literally, preventing you from getting off the debt merry go round.
There are several ways to accomplish owning your home free and clear sooner. First you can set up a 'biweekly' plan with your bank to automatically pay half of your monthly mortgage payment in two installments, every other week. That way you trick yourself into making an extra payment every year. That practice alone can cut about 8 years off a standard 30 year loan. You also get tax benefits. Lots of people do this now.
There is a much better faster way to accelerate your mortgage. When I first lived in Australia, I was surprised to meet so many young people who owned their homes outright. The system they used was in a little red book written by Harj Gill, a former banker. He explains how to set up a system (using the bank's own systems) to help you become more proactive and pay off your mortgage years sooner.
As an example, let's say you decide to pay an additional amount, say $50 more per payment period; or you apply a bonus or tax return straight to your mortgage rather than celebrate the windfall by spending it. The point is to pay more when you can with minimal impact on your lifestyle --until you get the point: $50 put toward your mortgage will save you many thousands in the long run and $50 spent on entertainment or frivilous things now will get you only those temporary pleasures. Which would you rather have: fun now or much more money (and no mortgage payment) and a more secure future later?
I highly recommend reading Harj's Gill 1997 book: How to Own Your Home Years Sooner.
EDIT: 11/25/09: I recently became an affiliate of Mr. Gill and offer this link to my affiliate discount for a one year online system and his book: http://www.speedequity.com/v2/pg=affiliates_web1a&referral_id=4921
Happy reading and reaping!
copyright © 2009 susan templeton loannetter
Comment
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Comment by Susan Templeton on November 25, 2009 at 9:22pm
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Tnanks for your perspective Keith. If we spend too much of our resources propping up financial organizations that do not support our local initiatives --what wil be left?
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Comment by Keith Foecke on September 15, 2009 at 8:53am
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It's not just about not paying more, it may be a matter of survival!! Especially if you lose your job and the bank forecloses your home. Many of us do not have adequate savings in case of an emergency. We live paycheck to paycheck essentially working as indentured servants to banks and utilities. Even if you do have some savings, you usually cannot get an apartment without a job. Homelessness is on the rise. You would be surprised at the recent increases in homelessness.
Being debt free (not just the mortgage, though that is the most important debt to pay off first), increased your security in the coming economic storm.
We should all be prepared for the worst: Peak oil, climate change, economic instability, food prices and scarcity, peak water.
Even if things don't get as bad as they could, being prepared for the worst won't hurt.
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