Pay Off Your Mortgage Faster,
By Borrowing More!
It seems the impossible dream for many, to actually ever pay off
a mortgage. Thirty years is a long time! Some, of course, opt
for a shorter 15 year term. It certainly seems more achievable.
But then, you'll have to lay out a lot more on a monthly basis
to make this happen, and not all can do that. So, what are your
other options?
One option everyone's heard about is the biweekly method. This
is a plan under which your mortgage payment is split in half and
sent it in every two weeks as opposed to once monthly. (A $700
payment becomes $350 every two weeks) Essentially using this
method you make twenty-six half-mortgage payments, or a total of
thirteen full-mortgage payments, in a calendar year, and it
typically will reduce a 30 year mortgage to around 22 - 25
years. This program can cost up to $300 to set up and usually
has an additional monthly fee, but for many is worth it because
of the automation of the process. As an example, a $100,000
mortgage amortized over 30 years at 5.75% under a biweekly
program would be reduced to right around 25 years, saving around
$22,000 in interest.
An alternative to the biweekly program described above would be
to take things into your own hands and simply increase your
mortgage payment each month (by an amount you're comfortable
with) and indicate that the extra money be applied towards
prepayment of your principal. Using the same mortgage scenario
above, if you sent an extra $100 each month with your payment,
you'd pay the mortgage off in 21 years. It gets the job done 4
years ahead of the biweekly program and your interest savings
are in excess of $36,000. You would also save the set-up and
monthly fees associated with the biweekly plan.
Still another method of accomplishing an accelerated mortgage
payoff is take the tax refund you receive each year and pay that
lump sum as a prepayment towards your mortgage. Your results
under this method would vary. If you send in one extra mortgage
payment a year - or 13 payments - you'd accomplish the same
results as the bi-weekly plan. Send in more or less and you get
the picture.
Any of these methods alone can help you to payoff your mortgage
sooner than expected. Combine any or all of them together in
some fashion, and well, you can get the job done even faster and
save yourself quite a bit in interest. But are these really the
best methods?
Well, there is another method typically overlooked, often
recommended by financial planners, and one that I like a lot. It
has the potential to not only accelerate the payoff of your
mortgage, but to increase the funds available to you in
retirement. It involves repositioning the equity in your home.
Let's say you own a home worth $150,000 and you owe $100,000 on
your mortgage. You've got $50,000 in equity. But it's dormant
money. It's no different than if you buried $50,000 in your back
yard. Those dollars are losing the opportunity to earn a rate of
return. What if, instead, you borrowed against your equity using
your tax-deductible mortgage, and placed those funds in a
liquid, safe, tax-deferred investment? You can start to see how
you may come out ahead. Even if your rate of return on the
invested money was the same, or slightly less, than the rate
paid on the borrowed funds, you still come out ahead.
Let me try to illustrate this for you by using the same example
of a home worth $150,000 today on which you owe $100,000. Let's
start by making some basic assumptions: we'll say you're home
will appreciate a minimum of 3% a year, you intend to take cash
out every 5 years to add to your investment fund, you will
borrow up to 80% of the value of your home each time, and you
are going to use a 5/1 adjustable rate mortgage to keep your
rate down. Additionally, you will reposition your borrowed funds
in a safe, liquid, tax-deferred investment vehicle that will
earn an average 6% rate of return. Here we go...
Again, starting with a home worth $150,000 on which you owe
$100,000 and borrowing 80% of its value, you take out a mortgage
for $120,000 providing you $20,000 cash out to start your
investment fund. The initial rate on your mortgage is 4.875% on
a 5/1 adjustable program.
At the end of 5 years the balance on your mortgage will be
$110,185.07 and you'd have $26,977 in your investment fund. Your
home has appreciated to a value of $173,891. Again, you
refinance 80% of the value of your home and take out a new
mortgage for $139,000 at 5.875% on another 5/1 ARM. You get
$26,000 additional cash out and add it to your investment fund
for a new fund value of $52,977.
At the end of 10 years the balance on your mortgage is $129,333
and you have $71,458.03 in your investment fund. Your home has
appreciated to a value of $201,587. You refinance 80% of the
value of your home and take out a new mortgage for $161,000 at
6.875% on another 5/1 ARM. You get $29,000 additional cash out
and add it to your investment fund for a new fund value of
$100,458.
At the end of 15 years the balance on your mortgage is $151,537
and you have $135,502 in your investment fund. Your home has
appreciated to a value of $233,695.
At this point, without refinancing your mortgage and without
taking additional cash out or adding any additional money to
your investment fund, at 16.5 years your mortgage balance would
be $147,745.32 and you'd have $148,230.47 in your investment
fund. You now have enough money to completely wipe out your
mortgage liability. And you've beat the other mortgage
acceleration methods we discussed earlier. All by using the
dormant equity sitting in your home.
Now what if you borrowed 90 or 100% of your homes value and
started with much more in your investment fund? Or what if
instead of making biweekly payments to your mortgage, you made
them to your investment fund? You can see where we could go with
this.
Curious how equity repositioning may work for you? Well, don't
wait. A Mortgage Planner at Pittsburgh Home Loans can create a
customized report detailing your specific scenario today!
Pittsburgh Home Loans is a Mortgage Planning Agency also known
as Mortgage911 specializing
in the creation of mortgage strategies to increase their clients
overall wealth. Michael Ferrazza can be reached directly at 412-253-0641.
To view Facts about Mortgage911 -- [Click Here]
