I’m not a mortgage broker or a financial advisor–I’m just a neighbor.
I have actually spoken with three people this week who asked me how they could get out of debt. I’m always too happy to give my opinion.
I know a guy. My “adviser” suggested to me that refinancing my mortgage when I am already paying more than the minimum amount is like hitting myself on the thumb with a hammer and then hitting myself on the other thumb to lessen the hurt on the first thumb. I’d just have two thumbs in a great deal of pain. Here’s what I was told–paraphrased.
If you refinance at a lower rate to obtain a lower payment, that is good if your budget is choked–keeping in mind that you are paying for that with additional fees and expenses that could be as much as thousands of dollars–even if those fees are rolled into the new loan, you’re still paying more money than you were originally paying. The only thing you currently get is a lower payment with good intention of later paying more to pay the loan off early. Some people will do this multiple times throughout the loan thinking they are saving money but not really. If you are consistently paying additional amounts over your principle every two weeks or monthly, you are in fact saving money over the long term and you will pay the mortgage off earlier than the total time of the loan.
Now, let’s say we have a mortgage for $100,000–our interest rate can be whatever but let’s say around 4%–divide that by 30 then by 12 and our principle payment would be about $278 per month for 30 years (this is my example, I can make it whatever amount I want). If only it were that simple. In reality, with interest compounded in ways that we don’t really understand, mortgage insurance, homeowners insurance and taxes, our actual payment will be between say, $650 and $850 (remember, only $278 of that is principle).
Here’s the part that’s easier said than done but is do-able, pay more than required minimum and our overall interest will decrease.
The extra money paid is not really extra because we are paying it on the principle but we save on the interest charged on whatever principle is the balance each month. Our payment will stay the same unless taxes or insurance increase (which will most likely happen because of increased valuation of our property) but the principle will decrease at a faster rate therefore, allowing for interest amount charged at the same rate to be less each month, quarter, year. Keep in mind, if we only pay $5 or $10 dollars each month, it will go down but won’t save us a great deal of time over 30 years because it will take 2 or more years to make one single extra principle payment resulting in 12 years to accumulate one additional payment–we might pay the loan off one or two years early.
If our principle is $278 a month, then we are paying $3,324 per year in principle. So, if we pay say an extra $100 per month on the principle (example) then we are making an additional 4.33 payments per year–it will take 2.77 to 3 years of that to equal one year off our loan–in addition to the normal payoff amounts of just making regular minimum payments, first 3 years results in 28 years to payoff, 2nd 3 years = 27 years to pay off, etc. So, in the long run, we could pay off the loan in 20 years instead of 30 by paying a little extra each month (or even $50 every two weeks).
How to have an extra $100 a month to pay your mortgage off early: A medium latte at the local coffee shop cost about $3.65 + tax and tip (additional syrups extra) so about $4.00 or more per drink–if they have the type of milk you want or need because you’re lactose intolerant. Sorry… If you have one a day during the work week that is $20 per week. And, if you indulge on the weekend–you get it. If you’re not going to make your coffees at home like I do with my mini espresso maker, try getting a small drink instead and save yourself a little money overall; find other areas in your life where you can cut back.
Some Things I do: If I go to the fast food places near my work I spend about $35 to $40 per week on lunches. However, I actually spend about $20 per week going to the local Neighborhood store and purchasing groceries and preparing at work or home for my lunches–sometimes I take left overs. I save about $80 per month on lunches with an occasional outing to a fast food or nearby restaurant. So, I do not frequent coffee places and I bring my own lunch saving me about $150 a month. That’s $1,800 per year I can put toward the principle on my mortgage which is 6.5 payments and is a year off my loan every 2 years, now paying off the loan in less than 20 years–about 15 years.
Other ways to save money to pay down your loan: Got credit cards? No matter what the interest rate, pay the minimum on the rest of the bills but pay the smallest balance off first, as quickly as possible, by paying more than the minimum—I paid the minimum + the finance amount until I was able to pay additional amounts. As soon as you fully pay that one, put all of that amount + the minimum payment (more if you can budget it) on the next smallest card or bill–do that until all your bills are paid. It follows the same as the mortgage early payoff plan, you are paying principle off sooner and therefore, paying less interest. If you do that part first, you will have the money to pay on your mortgage. You may say that you can’t afford to do that, actually, you can’t afford not to but start as soon as you can.
Now, let’s say that we save $2,500 dollars (in payments) a year by paying our cards and bills off early. That is $208 per month we can put on the mortgage instead of partying or splurging on stuff we don’t actually need. That is only, get this, $69 less than our principle payment of $278 per month (in our example). Use your imagination to find extra monies to make a double principle payment each month and be debt free much sooner.
A few ideas: Save change—it adds up; go through the garage and sell items that are no longer used; clean out and sell items in storage unit (close storage unit to reduce additional bills); clean out the closets and sell old, useful items that you don’t want to donate; if you’re younger and fit, rent yourself out when you’re not volunteering your time…there are plenty of things that can be done in your neighborhood or town to acquire more money—take on clients to tutor or train in one of your talents, hobbies or knowledge areas (tutor English, math, computer usage, how ’bout teaching people how to build a solar battery bank back up system for personal use) also, handyman (person), also, pet or house sitting, for example. Oh, spend less, that’s a big one to help save money. If you don’t need it, check your desires.
With all our other bills paid off first then the mortgage, we can provide our family a better lifestyle through attending events, or pay for college, a vacation home, a travel trailer, a newer car–all bought and paid for with cash (that we have saved by no longer paying a mortgage or high bills) or with large down payment to avoid extended payoff periods–pay it off in a year or 2 instead of 5 to 7 years. I was able to do extra remodeling after the tree fell on the house and the insurance company paid a little less than the upgrades we wanted. Here’s another idea, with our, yes our, saved money we can now do the things we’ve been saying we’d do if we had more money: help others who are less fortunate than ourselves. You know you’ve said it.
Be good to one another and be thankful in all things. We don’t always know what we’re missing when we didn’t get what we wanted because God knew it was bad for us and it didn’t fit His plan for us.
Happy Thanksgiving to you all.
- I do not endorse bankrate.com. However, I do use their calculators to help keep me on track.
- For expert advise, please see your locally trusted financial institution, financial advisor and mortgage specialists
1 Peter 4:7-11
7The end of the world is coming soon. Therefore, be earnest and disciplined in your prayers. 8Most important of all, continue to show deep love for each other, for love covers a multitude of sins. 9Cheerfully share your home with those who need a meal or a place to stay.
10God has given each of you a gift from his great variety of spiritual gifts. Use them well to serve one another. 11Do you have the gift of speaking? Then speak as though God himself were speaking through you. Do you have the gift of helping others? Do it with all the strength and energy that God supplies. Then everything you do will bring glory to God through Jesus Christ. All glory and power to him forever and ever! Amen.