Pay Off Your Mortgage Early [Or SHOULD You?]

Pay Off Your Mortgage Early [Or SHOULD You?]

– Today's video is not
going to be a video talking about ways to save
money so you can come up with an extra thousand a month
to put towards your mortgage. There are a ton of videos
out there for that. Today I'm going to talk to you about creating an actual plan to pay off your mortgage early. A quick word of warning. This video might challenge
some of the ideas that you have already about
paying off your mortgage. I ask that you withhold
judgment and listen with an open mind until you hear me out.

Okay. I've been doing this for 17 years. I know a thing or two about mortgage debt. I know a thing or two
about financial literacy. I want to begin by
reminding everybody that if you're thinking about
paying off your mortgage early you should first pay
off any consumer debt. You don't want to worry about paying extra towards your mortgage if you still have credit
card, debts, car payments, or student loans. Since your home is an appreciating asset, carrying mortgage debt
is a little different than consumer debt or
depreciating debt like a car. You also want to make sure that you have adequate savings
and an adequate savings plan for things like an emergency fund, upcoming college education, retirement. Maybe you've got kids that
are going to get married at some point. Sometimes people get
so focused on the fact that their mortgage is a debt
that they want to pay it off when they don't adequately have a plan for some of these other things in life. And we'll talk a little bit more about that when I give you
my biggest tip on paying off your mortgage early.

Step one, make a clear plan. It might sound like a no-brainer but most people skip this
part and proceed blindly. And guess what? They make a lot of mistakes along the way. When making a plan to
repay your mortgage early you first want to familiarize yourself with the rules of the game. What does that mean? Call your mortgage company,
speak with your lender, find out and be sure what
the terms of your loan are. Specifically find out if your
loan has a prepayment penalty. They're not common but they do exist. This would be a fee for
paying your loan off early. Federal law prohibits prepayment penalties for many types of home
loans, like VA, FHA, USDA, which is also known as RD, as well as for mortgages
issued after 2014. These fees are limited to the
first three years of loan. And after that you're free to pay it off without full penalty. Again, it's not common,
but that does exist.

Make sure you know what
you're dealing with. The next thing you want
to ask your lender is whether or not they allow you
to make additional payments. If so, how often? Is there a particular way the payments need to be made to ensure that the payment goes to principal? Remember, it's in the lender's
interest that you do not pay off your loan early because the
more interest that they make over the life of the loan,
it's more money they make. This is why there are
sometimes restrictions on how and when you can
make additional payments. It seems shocking but supposedly
a mortgage company actually does not start making
money off your mortgage until you've had it at least five years.

They want you to keep it long-term because they wanna make
money on their money. They want to make money
on their investment. This information will and should also be in your loan documents. So you can find information there if you prefer not to call. Regardless of how you
get it understand please, what your lender will allow, what may cost you extra
when you're making that plan to pay off the mortgage early. All this information took a
long time to put together.

So I'd really appreciate if
you'd hit the like button and support the growth of my channel. Thank you for doing that. Next let's discuss how to make
a smart plan that will pay off your mortgage early and
save you money in the process. We'll start with one of
the more common ones. And this is known as the
bi-weekly payment method. Have you heard of this strategy before? For those who haven't, let
me quickly break it down. Most people pay their mortgage monthly and most people get paid every two weeks. If you take your monthly mortgage payment divide it in half and pay
that amount every two weeks, you end up making the equivalent
of 13 monthly payments a year instead of 12. That results in paying off your loan early and saving thousands
of dollars in interest. Let's look an example, and I'll drop a link in the description for an easy to use online calculator where you can enter your loan terms and find out how this
plan can work for you. Let's say you have a loan and
the loan amount is $250,000, a 20 year term, and a 3% interest rate.

The normal payment and
remember, this is just principal and interest I'm talking
about, I'm not talking escrows. That's $1,386 a month. Divide that in half, pay
$693 every two weeks. Just following that plan alone you would pay off your
mortgage two years early and save $9,317 in interest. That's a lot of money. Is this biweekly method
what I would choose to pay off my mortgage early? Actually, probably not. But I want to give you all the
options I can think of here. It will definitely save you money over the life of your loan.

We just saw that. It will definitely shave off some time. We just saw that as well. And if you're someone
who wants to work this into their budgets, set
up automatic payments and then forget about it
so you know it's working saving you money in the background and it could be a good option for you. Before you do this make sure
this is what I always say, if you're going to switch to biweekly what I need you to do is
to please make a payment and then switch to biweekly. That way you're a payment ahead. This will keep from confusing
the lender and them thinking. You're sending a partial payment
because you're paid ahead. Alright, let's talk about
the next method for paying off your mortgage early,
which to me is a better option and that's making extra
payments towards your principal. So mortgages work on an
amortization schedule where your monthly payment
covers both interest charged and the principal balance or the amount you borrowed
that you're paying back.

When you first start paying on a mortgage most of the monthly payment goes toward interest and a
little toward principal. It's very interest heavy in the beginning. But over time as you pay, they switch. So at the end of the
mortgage most of the payment is principal and interest
is the smaller portion. This is because you're
paying interest based on the principal amount
that's outstanding each and every month. If you do the bi-weekly payment option we just discussed for each
extra payment you make the bank will put some of
that towards the principal. And some of that towards the interest. However if you continue to make your monthly mortgage payment as
agreed upon in your loan terms you can choose to make additional
payments that you specify to the bank, to your lender, that are going towards principal only.

Remember when we talked
about how you need to understand the terms of your loan, right? The rules of the game. Here's where that comes into play. Based on the agreement
you have with your lender find out if you can make these
additional payments monthly, quarterly, or yearly,
depending upon your goals, and your flexibility and
what you need to do when making that payment to
communicate that it is principal. It is not interest. It is not escrow. Let's talk about what a
difference this can make. You can find mortgage
calculators online that will show you how making extra
payments will save you money and reduce payment time. I'll put a link in the description below. Let's use the same terms above. Bi-weekly payments, $250,000 loan amount, 20 year term, 3% interest. Remember we talked about that. The payment for principal
and interest was $1,386. Now, instead of biweekly,
what if we say we pay an extra $200 every month exclusively to principal? $200.

By making that payment the loan
will be paid off in 16 years and nine months. That's three years and three months early. Remember, earlier, we were
knocking off two years. That saves you $14,558 in interest. That's a lot better than
a little over $9,000 wouldn't you say? Next, have you ever heard
of recasting your mortgage? Most people have heard of
refinancing, but not recasting. As you probably already
know, refinancing is done when you want to apply for a
new loan, start your term over. Maybe you're taking out equity. Maybe you're just doing a
rate and term refinance, but you're looking for a shorter term. You're looking for a better rate.

Avery

If you qualify for a
better monthly payment or a better mortgage rate, than refinancing could be a viable tool for paying off your mortgage early. There are fees associated with
this you want to consider. Often ranging between
two and 6% of your loan. While on the other hand
recasting your mortgage is when you pay a lump
sum toward the principal, then the loan is recalculated based on your current loan and loan terms. So your interest rate
in terms stay the same but the lower principal
means a lower monthly payment by recasting it, which
saves you interest paid over the life of the loan. There's usually a small
fee with this option. Sometimes not even a fee, but
it's significantly less in either instance than refinancing. And the process is much easier because you're not
applying for a new loan.

See, recasting is a great option if you come into a sum of
money like an inheritance, a signing bonus, a sale
of another property, maybe your tax refund every year. Now, not all lenders offered a recast. Most of them do, but not all. Notes that are backed by FHA and VA typically are not eligible for recasting. Now you might be thinking,
okay, recasting sounds great if I'm looking to save interest and reduce my monthly payments but how does that help
me pay off my loan early? That leads me to my biggest tip for paying off your mortgage early. Don't pay extra towards your mortgage.

Say what, I'm going to say it again. Don't pay extra towards your mortgage. You're probably thinking,
Stephanie, what did you just say? Did you forget this video's about paying off your mortgage early? Just hear me out. I promise this will
make sense in a minute. Let's imagine we have a homeowner. Let's call her Avery. She buys a house for $250,000,
3% interest for 20 years. Avery's smart, she's paid
off all her consumer debt. And she saved an emergency fund
for six months of expenses. And she's even started
saving for retirement. But after all of that she's
been putting all her extra money toward paying off her mortgage early, trying to become mortgage free. Let's say she's been doing this
by making an extra 500 bucks principal payments per month.

That's a lot of money. This plan would save her $28,711
in interest over the life of the loan and pay her mortgage
six and a half years early. That sounds a great right especially to the two comparisons
we spoke about earlier. Well, let's say 10 years in
Avery has a terrible accident. She's been paying extra
500 bucks remember a month. So her mortgage is down and
her balance is only 50 grand. That sounds great so far, right? But this terrible accident
caused her to lose her income, spend her six months of savings, and still have medical bills piling up.

If things are really dire and she finds herself unable
to make the mortgage payment her bank is actually incentivized
to pursue foreclosure because the high amount of equity which means they're going to sell the home and easily recoup their
full outstanding amount and then some. This is not a good spot to be in. We were talking about
a worst case scenario. We are talking about a
worst case scenario, right? But the point is that she's
been taking her extra money and giving it to the bank
to pay down that mortgage. Now, when something unforeseen happens she doesn't have money
when she needs it the most. It's all tied up in her home. As a lender I've seen this so many times. You have no idea. Now, again, you're probably thinking Steph I clicked this video for you to tell me how to
pay off my mortgage early.

Are you seriously trying
to talk me out of it? No, no, no, I'm not. I'm actually one of those
rare lenders remember, thrilled when their clients
pay off their mortgage early. I'm telling you this story because I want you to be smart about it. There's more than one way
to accomplish your goal. If your goal is to pay
off the mortgage early paying any extra money you
can seems like the smart move but you have other options. One option is to pay your
monthly mortgage payment as agreed by your loan terms, right? And take any extra money and invest it in a way that will grow.

Then you can use that investment to pay off your mortgage early. Let's say, instead of
making that $500 a month extra mortgage payment Avery put $500 into an S&P index fund. Granted the return of
these funds fluctuate but most investment resources will agree there's an average of a 10%
annual return over time. Talked about that in another video. This is a higher annual turn than the interest on our
mortgage, which is great.

Most importantly, along
the way she's investing growing the amount she can
use to pay her for mortgage. Also, if something were
to happen she has access to those funds and can use them as needed. By maintaining control of your money instead of giving it to the
bank you're lowering your risk if something were to happen. This also allows you to take
advantage of tax incentives for the interest rate on your mortgage as you work to pay it off. Now, remember how I talked
about recasting a mortgage and I told you it could be a tool for paying your mortgage off early. Let me tell you how. Recasting your mortgage can be a tool if you want to use a combined approach to paying off your mortgage early.

What this means is that you
can take your extra money each month, each quarter, each year, put it into an investment fund. But instead of waiting
till you have enough money to write the check and
pay the mortgage in full, pull out a chunk along the
way, pay toward the principal, ask for the recast. Recasting your loan will also
lower your monthly payment which can increase the
amount you're investing each month to work
towards that ultimate goal of paying your mortgage off early. On the other hand, if you're considering a
refinance as a possible avenue be sure to check out my
refinance tips for success where I explain the most
common mistakes people make when refinancing their home and get my best tips for
saving money in the process.

I will continue to release videos with mortgage advice each week. Be sure to subscribe to the channel and turn on notifications
to catch the next one. Click this link to watch the video and I will see you there..

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