How to Own A Home Free and Clear Faster
Ways to Pay Off A Mortgage Sooner and With Less Interest Paid
There is a stack of document copies that a borrower is given after any mortgage closing. Therein will be a form with the heading Truth In Lending (TIL). That document displays the amount of total payments that will be paid by the end of the loan. With a 30 year mortgage, it amounts to three times more than what was borrowed! The length of time it takes to pay off a mortgage is known as the term of the loan.
If Buying or Refinancing Soon
For anyone considering a home purchase or refinance, there is the possibiltiy of a 15 year mortgage. Even though the loan gets paid off in half the time, the monthly payment increases considerably less than 50% more! A TIL or Truth In Lending statement can be prepared by a loan officer or mortgage broker for each term length, 30 years and 15 years. The difference in interest paid will be surprising!
Of course, with those increased payments, the debt to income ratio could then disqualify that loan amount. Maybe considering a lesser amount would be prudent. But even if remaining qualified with the higher payments, there are other personal life style factors to consider.
The Bi-Monthly Plan
The bi-monthly is a system that has the home owner pay one-half the monthly principle and interest twice each month. Because different amounts of days are in different months, with this system 13 months of principle and interest gets paid every 12 months. Depending on the interest rate, this can reduce the mortgage term by one-third. With lower rates however, the term's reduction is not as dramatic.
There are a few lenders that will accommodate a borrower with this plan. Usually they charge a small monthly fee in addition to a setup fee. And there are third party companies that will do the same for slightly larger fees. There are drawbacks to this setup.
The Down Side of Using A Bi-Monthly Plan
Those fees tend to subtract from the overall interest savings over the loan's term. And there is no personal payment control over this arrangement. The setup is for automatic withdrawals from one's personal bank account every two weeks. If an auto payment isn't available, there is a five day window to make it good. So if household income or financial priorities change for awhile, this arrangement remains in place regardless of personal needs or difficulties.
Accelerating Without a Downside
The same term and interest payment deduction or better as a bi-monthly can be achieved by adding a small separate payment along with each regular payment. It should be a separate check in order for to maintain a record of extra payments. Canceled checks are indisputable records in the mortgage industry. Before embarking on this voluntary plan, It is wise to let the loan servicer know about it.
To achieve the same results as a bi-monthly plan, take one twelfth of the monthly principle and interest payment only. On the memo of that check, put payment toward principle. Larger amounts would accelerate the mortgage payoff faster. This can be done voluntarily while retaining the normal monthly payment schedule. Regular monthly mortgage payments have a “grace period” of 15 days.
This window can be useful if there are personal financial issues. One retains control and can decide not to make extra payments or make larger extra payments at any time. And there are no extra fees. It is important at the beginning of each year to go over the mortgage payment records from the lender to make sure that there are no discrepancies.
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