This post continues my mortgage series. My previous post was about assessing housing needs in a realistic way and choosing a home that will result in lower costs going forward. Here, I’ll give some tips for paying off your mortgage sooner, so you can float peacefully along the Green Money Stream. In my next and final post of this series, I’ll look at how much you can save in interest payments by pre-paying your mortgage.
To get out from under your mortgage (and assuming you’ve already paid off any other higher interest rate debt, like credit cards), make sure you are making extra principle payments regularly. Here are some strategies:
- Whether you are purchasing or refinancing, consider taking out a 15 year mortgage. A good strategy is to wait until you have enough of a down payment so that the payment for a 15 year mortgage is affordable. If you approach the home buying process from the outset with the conviction that you will only take out a 15 year mortgage, you will be forced to look at more modestly priced and sized houses. As an added bonus, the interest rates for 15 year loans are usually less than a 30 year, often by a half a percent or more.
- Make extra payments on principal on a regular basis. Some people try to make an extra payment a year, but to achieve financial freedom you need to set your sights higher than this. Can you do $100, $150, or $200 extra per month?
- Set up the extra principal payments so they are deducted automatically from your bank account each month. This helps to prevent you from spending that money elsewhere, as it is already accounted for and hopefully forgotten.
- Instead of wasting your annual bonus or raise on even more lifestyle inflation, make it a habit to put that extra dough towards extra principal payments. (I mean, do you really need more dinners at PF Changs?) I increase my extra principal payment each year to coincide with my annual raise. I automatically put the additional take home pay towards the extra payment. This way I never miss it.
- If you get a tax refund each year, why not use this as an extra principal payment? Just think of it as a forced mortgage pre-payment plan from Uncle Sam.
Following some of these strategies will help set you on the path to owning your home outright. So, just how much money can you save in interest payments if you do follow these tips? How about tens of thousands of dollars. Want to see some specifics? Stay tuned. In my next post I’ll show some examples.
In the meantime, let me know what your strategy is for pre-paying your mortgage.
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