3/26/2017

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Make Extra Payments On Your Mortgage

A home is a long term investment that can pay dividends in several ways.

There are differing opinions about paying off home loans. Some financial experts believe that equity buildup in a home should be borrowed and invested in the stock market for a better return on the money while others think that paying down a mortgage is a better way to go.

Either way, there are pros and cons about making extra payments on a mortgage but anyone who has a home that is completely paid off will tell you that it is one of the best things that can happen to you.

When you don't have a mortgage payment, it's like having a home to live in without having to pay a monthly note. All you have to pay is your property taxes and homeowner's insurance. This is a nice financial position to be in as you grow older.

Years ago, before refinancing to borrow the equity in homes became the thing to do, people bought homes so they could pay them off and have a place to live a little easier in their retirement years.

Then people started buying homes with hopes that the properties would go up in value so they could sell them and get enough money to use as a down payment on a bigger home in a better neighborhood or to use the money to invest in the stock market, business, or other investment opportunities.

Realizing that property values can drop more quickly than they appreciate, many people are now looking for ways to pay their homes off as early as possible. They are making extra monthly payments, paying additional payments at the end of the year, qualifying for 15 year loans instead of traditional 30 year mortgages, paying on the next month's principal with the current monthly payment, and making bi-weekly payments.

Before making a decision on the way you want to go about paying your mortgage off early, take a look at your options. Some ways are better than others but all are good ways to save more money.

(1) Bi-weekly mortgage payments:

  • The pros: There are 52 week in a year. If you divide the 52 week by 2, you will see that you will be making 26 payments which calculates into 13 monthly payments for the year instead of 12. By using this formula, you will pay off your mortgage between 6 to 8 years sooner than you would if you pay on a monthly basis.
  • The cons: The costs are high. Many mortgage companies that offer bi-weekly payments charge enrollment fees and monthly service charges.

(2) 15 year loans:

  • The pros: You save a lot of interest. Your mortgage will be paid off in 15 years thereby freeing up your money, after the mortgage is paid off, to make other investments such as buying other property or investing in the stock market. 15 year loans usually don't have a prepayment penalty or negative amortization.
  • The cons: Your payments will be higher. A 30 year loan is more affordable because the interest on the loan will be stretched out over a longer period of time, thus making your payments lower. If you refinance your 30 year mortgage, you will have to pay closing costs and other fees.

(3) Make extra payments:

  • The pros: You can make the extra payments as you see fit. You can make the extra payment in months that you get 3 paychecks instead of 2 or you can make the extra payment at the end of the year. You can also make an additional payment, as much as you can afford, every month. The goal is to increase the amount you are paying toward principal thereby paying down your mortgage faster.
  • The cons: Some people argue that instead of making additional payments on your mortgage to pay it off early, the money should be used to buy into other investment opportunities such as 401k plans, Roth IRA's, emergency funds, college funds, etc. Also, you have to make sure that the additional money you are sending along with your payments is applied to the principal balance of your loan correctly.

Regardless of the strategy you use, you can pay off your mortgage early. Not only will it keep money in your pockets over the long term, it will make you feel good when you make the last payment on your property. That's when you will see that making the extra payments was well worth it.

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