Updated: Jan 9, 2019
You’ve signed your life away. For the next 30 years 2 things are certain, taxes and your monthly mortgage payment.
But what if there was a different way? What if, by small changes, you could cut 8-10 years or more off your mortgage? Would you do it? What if, by small changes, you could save yourself $100,000 in INTEREST over the life of your mortgage?
Before we jump into the HOW - the mortgage murdering hacks - and these are good hacks - let’s talk about how mortgages are structured and why most people lose to their mortgage and get stuck in a perpetual interest spiral.
How Mortgages Work
The foundation of any loan is the payment schedule. In simple, black and white, the payment, or amortization, schedule tells you what this life loan sentence will look like. But if we know this, why is it that so many continually get stuck in an interest spiral?
The Amortization schedule for any loan lays out, not just the payment amount - but how much of each payment goes toward paying down the principal and how much satisfies the interest on the loan.
For a typical mortgage the amount going to principal and interest changes throughout the life of the loan, and at the front end the majority goes to INTEREST. This means, for the typical homeowner, only small amount of equity is built for the first several years of the life of the loan.
“Why is this a bad thing? After all, my mortgage is for 30 years, over time that ratio will flip and balance it all out, right?”
Technically, that’s correct. But there is one factor most people don’t consider. The typical mortgage is only kept for a fraction of the life of the loan. On average, an American will move every 7 years, and those who don’t move often refinance and start the mortgage process all over again!
Our life patterns trap us in an interest spiral! Paying 70%-80% of our monthly payment toward interest for years and years!
Today I want to lay out a better way. Actually, 6 better ways. I guarantee one of these 6 Hacks will work perfectly for your family and can take YEARS off your mortgage life!
*Keep reading after the final hack for a piece of bonus advice.
Bi-weekly Payment Plan - this is the most popular way to beat the amortization schedule. Here’s how it works.
Pay half your mortgage (monthly) payment every 2 weeks. So if your payment is $1,000/month you would schedule an automatic payment or manually make a payment every 2 weeks, NOT on a certain day of the month like the bank will have you scheduled. (Some months you will have 3 payments.)
End Result - you make 26 (Half) Payments instead of 12 (Full) Payments - this equals one extra payment per year
It will take - on average - 8 yrs off your mortgage
This works great for most people because people get paid every 2 weeks.
Matching Principal Payment Plan - this is less popular but one of the most effective ways to beat the amortization schedule!
Take the principal payment from your first statement and add that on top of your payment each month.
EX: A 30 year Mortgage for $350k at 4.25% = $1,722/month. The amount of the first payment going toward principal is $480 and interest is $1,242, so an extra, rounded-up, payment of $500 to match the $480 going to principal each month will pay off your mortgage 11 years early and save you $107k in interest over the life of the loan. WHOA!
Extra Payment Per Quarter - This takes some discipline to keep this up and manually make this large/extra payment.
Make and Extra FULL payment toward your principal balance each quarter. Again, this is less popular because many don’t want to budget for a large/extra payment so instead they will contribute smaller amounts each month consistently as in Hack 1. If this option works for you, here’s how it works.
EX: A 30 year loan for $220k at 4% = $1,050/month. Pay an extra $1,050 per quarter towards your principal and cut ALMOST 11 years off your mortgage!
If you are a young person/family considering purchasing your first home. Buy as much house as you can reasonably afford (this amount may be less than what you are “pre-approved” for through a lender). Don’t shy away from a 30 year mortgage, here’s why.
The majority of families make far less as they are young than when they are old. Plan to buy a home you can grow into so you can stay there longer and avoid being caught in the interest spiral. Additionally, if you decide somewhere down the road that you want to refinance to a 15 year loan, you will be able to do so with great ease.
If you are close to paying off your mortgage. Consider investing in additional/income properties before paying off your primary residence. Then hustle to pay off those properties while maintaining a minimum payment on your primary home. More on this in another post.
Now go murder your mortgage and beat that amortization schedule!
Part 2 coming soon!
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Ben is passionate about educating prospective home buyers and sellers in all areas of the real estate sales process. If you have a question - even if you aren’t planning to move any time soon - Ben is always available for a conversation! (517) 917-5550