The bubble burst. The folly of interest only, negative amortization, and option arm mortgages have been exposed. Americans are fleeing from short term questions--"What's my monthly payment?"--to long term questions--"How can I pay my mortgage off faster?" It's easier than you think.
How Can I Pay Off My Mortgage Faster?
The word mortgage comes from the French. It means until death. In feudal times peasants were not allowed to move freely or own land. Once peasants were given legal rights, French landlords, no longer allowed to bind peasants to the land, became bankers, giving peasants land in return for monthly payments, payments intended to last until death. Things have progressed since feudal times. Homeowners now are only enslaved for 30 years.
I'm not sure when 30 yr. mortgages became the norm. Someone thought that 15 years of enslavement was not enough. Lenders are now pushing 40 and 50 year mortgages. The recent housing boom and subsequent bust was fueled by lifelong interest only and negative amortization loans, loans in which the balance went up monthly. It's time to take a stand.
"But How can I pay off my mortgage faster?" one might ask.
Knowing how to pay off your mortgage early is simple. Doing it? Easier than you think.
How to Pay Off Your Mortgage Early: Budgeting
King Naaman in the Old Testament was a leper. He consulted with Elisha the prophet who responded by telling the king he could be healed by bathing seven times in the River Jordan. The king initially refused to obey, considering the method too simple to be effective. A wise counselor convinced him otherwise; Naaman did as he was told and was healed.
Consumers yearning to be debt free are much like King Naaman: looking for complex solutions for their problems while disdaining the actual remedy. I'm not suggesting you bathe seven times in the river. I'm just advising you to budget better.
How Can I Pay Off My Mortgage Faster? Basic Concepts
A 30 year mortgage, if paid monthly, is about 60% paid off in 24 years. If the borrower makes one extra monthly payment per year on a 30 year mortgage, the entire mortgage is paid off in 24 years. That's six years of vacations, helping your children with college, or bolstering your retirement accounts.
To understand this, let's look at how your mortgage payment is determined. We'll use a $200,000 mortgage at 6.0% for our example.
- The monthly payment would be $1199.10.
- The interest payment is $200,000 * .06 = $12,000/ 12 months = $1000
- The principal payment would be $199. That's right. After one month you will have paid $1199.10 and your balance will have gone down $199.
- A lower principal balance = a lower amount of interest. Each month the amount of interest paid goes down and the amount of principal paid goes up.
- Anything extra
But who has an extra $1200 to make that extra payment? You do.