It's getting harder and harder to realise the dream of owning a home. Even though everyone would like to own their home outright, many people are forced to take out mortgages that will be paid off 25 or 30 years from now.
Everyone has a budget that limits them in some way. There is, however, a way to pay off your mortgage faster and save money at the same time.
A clause called "Accelerated Payment" is built into almost all mortgages. This gives the borrower the option of paying more than the minimum monthly mortgage payment.
To do this, you just send the lender more than the usual monthly mortgage payment. This is good because every extra dollar paid toward the mortgage will bring down the total amount owed on the mortgage. This makes your home's value grow faster over time. Also, you will spend less on interest if you pay down your balance.
Here's a good example based on what a typical family might do.
Let's say you have an average family of four and make $50,000 a year. We'll assume that you save at the same rate as most Americans and that you do so every year. Our government says that this rate of savings is about 4% of your income every year. This would mean that you put $2,000 in the bank every year to use in the future. This amounts to about $167 a month.
Right now, your passbook savings are probably giving you an annual percentage rate (APR) of less than 1%.
Why not take $100 of the money you were going to save and use it to pay down your mortgage early? The following example shows why you should do this.
If you get a $200,000 mortgage with a fixed rate of 6% and agree to pay it back in monthly instalments over 30 years, your monthly mortgage payment would be $1,210.56.
If you paid an extra $100 per month toward your mortgage, you would add $1,200 to the value of your home every year.
In this case, you would pay a total of $435,798.89 for your home over the course of the loan. Adding $100 to your monthly mortgage payment would save you $46,360.13 in interest over the life of the loan. You could also pay off your mortgage more quickly.
You'd be able to cut 38 monthly payments off of your mortgage payment. Using this method, the mortgage would be paid off 3 years and 2 months earlier.
In short, this strategy moves your money from savings in a passbook ($2,000 per year) to paying your mortgage ($1,200) and saving $800 in your bank account directly each year.
To sum up the benefits of this method, the borrower in the above example saved $46,360.13 in interest on their loan and saved $21,923.85 in their passbook ($67.00 per month x 1% APR x 322 months). Over 26 years and 10 months, this adds up to $68,283.98 in savings (This is the actual time it would take to pay off the original 30 year mortgage).
If the family had saved all of their money ($167 per month), they would have had $54,646.35 after the same amount of time.
So this family would have saved even more money if they had used this faster payment method. And they would have paid off their mortgage three years and two months early.
This method can be used whenever the mortgage has a clause called "Accelerated Payment Clause." It will work best if you keep paying the same amount every month on your mortgage. Any change in how much you pay on your mortgage each month will change how much you actually save.
Ask your banker if Accelerated Payments are an option for your mortgage. Then you can use this plan to pay off your mortgage faster and save a lot of money.
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