Pay Off Your Mortgage The Best Way Possible
Who likes a mortgage? A hundred years ago you bought a house in cash, and now you spent fifty years of your life in debt paying the darn thing off. If you want to get really depressed, take a look at how much of your annual payment actually goes towards the principal on your loan.
That's where mortgages kill you: the interest. Even a reasonably low interest rate means that over 75% of your annual payment goes towards interest. No wonder it takes so long to pay off a house.
That's why most people would argue that getting the lowest mortgage rates over the shortest time period is the best way to go. But while that seems to be -- and in fact is -- sound advice, there's a still quicker and more efficient way to pay off your mortgage.
The secret to mortgage payments
Whether you have a variable rate mortgage or a fixed rate, there is a way to make payments that goes contrary to popular advice.
First of all, you should of course find the lowest mortgage rates possible. A mortgage broker can help you. From there, most people will advise you to go with the shortest term possible -- say, 25 years, or 20 if you can afford it.
They will certainly not tell you to take the longest term possible -- 35 or even 40 years if you can get away with it.
Why on earth would you do such a thing? Traditional wisdom holds that the longer it takes to pay off your mortgage, the more you're going to pay in interest. Well yes, that's true -- but it also means lower monthly payments, and here's where the trick comes in.
First of all, decide what you can afford to pay each month on your mortgage. Let's say that works out to be $1,000. Now you look at your mortgage options and your broker suggests a 25 year term with payments of $1,000 a month, exactly what you can afford.
But... what if you could get a 35 year mortgage with payments of $750 a month, and you deliberately put the extra $250 into a special bank account. At the end of each year, you would be able to make a lump sum payment of $3,000 on your mortgage.
Most of your monthly mortgage payments goes towards interest. That $3,000 lump payment goes straight onto the principal. That means that the amount of your loan decreases significantly, which makes the interest payments less hefty (meaning that next year, a little more of your $750 goes towards the principal). Every year this improves until you pay off the mortgage far ahead of schedule and with less cost in interest.
Work it out for yourself if you don't believe it -- this is by far the most efficient (and quickest) way to pay off a mortgage.