If you have a steady source of income, no more non mortgage debts, and even after spending your money the whole month, you have money left which could be used in other purposes, paying off your mortgage quicker must have definitely crossed your mind. Making a quicker payment will lift the burden of having a mortgage on your shoulders and it will also relieve you of the stress. This feeling is unmatched and gives one great psychological boost. Most people would rather buy a house in just one payment than having to go through a mortgage but since it is not possible, the option of paying off your mortgage as quick as possible seems lucrative and friendly.
Now that you know that one of your primary financial goals is to pay back your mortgage quicker and that you have enough funds to make the development, there are a few schemes which you can consider to accelerate mortgage payment. These are:
- Refinance from a 30 year plan to 15 year plan – this is the first approach which comes to the mind and it makes sense because you pay more every month and also experience an interest drop. However, on closer inspection, one realizes that the interest drop is not good enough and does not make refinancing very fruitful. Let us move on to the next point in this discussion.
- Sign up for a bi-weekly program at the bank – the bi weekly program at banks is a way which enables one to pay off their mortgage quicker but it will charge you an enrollment fee and also increase your work. You will also have to keep track of more things during the program which can turn some people off.
- Pay extra money each month – now, you might decide to pay a few extra hundreds every month to accelerate your mortgage each month but is that really enough? Or is there a better way so you can save money and pay off your mortgage quicker and much more easily.
There is a method which has been described in the book, Wealth Without Risk by Charles Givens, that guarantees that you can pay your mortgage off in half time without refinancing or making any type of extra principal payments. Is this magic? What is the catch here?
In this method, to explain concisely, you pay your regular mortgage amount in the first month and along with it, you also write a check for the principal only portion of the next month’s payment. This is also known as prepayment and you can use a prepayment calculator to get an exact figure which you need to pay the bank.
Now, this post will explain why this method is such an interesting and effective one. The principal only portion of any mortgage payment is a very small amount for almost all home owners. For instance, if your mortgage bill for a month is 1600 dollars, around 1100 dollars will be designated for interest, around 300 dollars for several taxes and your insurance, and the remaining 200 dollars will be for principal. Now, when you write a check to pay this month’s 1600 dollar and along with it you write a check of 200 dollars for next month’s principal, you effectively accomplish the same thing you would by writing a check of 1600 dollars the next month. Only, you would have done it at 12.5% of the actual price you would have paid otherwise. Impressive bargain, isn’t it?
Now, let us list the advantages and disadvantages of this approach so you can decide if the plan is really for you or not.
There are many advantages of using this method for paying off your mortgage quicker. These are:
- The principal amount will increase but gradually – it is a given that the principal amount will increase each time you write two checks for paying your mortgage off. However, the increase is going to be very gradual so you will have time to get used to it and grow into the scheme.
- You can opt out of the plan at any given time – at any time if you feel that the principal payments are a burden for you or feel that the money will be better invested in some other place, you can opt out of the plan very easily. Just stop making the second payment and that’s all you need to do.
- Every time you make two payments, you cut the time of your mortgage by half – since each month you are writing two checks, you are also cutting your mortgage time by half. This sounds like a good deal.
The con of this method would be that Charles Givens, in his book, suggests that this method is more suited for those who have high interest mortgages. So, those who have low interest mortgages don’t really have an ideal option, in his book. In fact, in Wealth without Risk, he clearly states that those who are paying low interest mortgages should not indulge in this type of scheme and use the money for other investments that yield better results. By high interest mortgage, Givens means a mortgage at an interest rate of 9% or higher. So, according to him and his theory, someone paying less than 9% interest is better off investing in other projects and diversifying their money.
So, can you still use this method if you are on a low interest? If you are really keen on paying your mortgage off quick and it is one of your major financial goals, you can definitely give it a try. You can also look into options of an annuity or a structured settlement to give you the cash you need to pay off your home early too so you have extra cash each month along with an asset you own in full.