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In
the current economic downturn, many of us are looking
for ways to rid ourselves of some of our debt. One way
may be to pay off our mortgage sooner.
If you have a typical 15, 20 or 30-year
mortgage, it may be advantageous for you to set up a
bi-weekly payment plan or send in an extra monthly
payment each year. Prepaying on your mortgage can take
5-7 years off of the life of your loan.
Paying extra toward your mortgage will
help reduce the principal as well as reduce the interest
you are paying in the long run. There are two ways you
can make that extra payment.
If you are one of those people who need a
more structured plan, there are several “mortgage
savings plans” available. You divide your monthly
mortgage in half and send in a payment every two weeks.
By paying down your mortgage faster, you also have a
better chance of getting a home equity loan or line of
credit if you need it.
Let’s say you have a $150,000 home loan
on a 30-year fixed interest rate at 6%. Not only will
you pay the loan off 6 years faster, you’ll also save
about $37,000 in interest.
Some lenders offer this service to their
borrowers with a modest fee—others don’t. While you
should always check with your lender first, there are a
number of third parties offering these services. You
should work with a company known to be legitimate by
your lender. You are sending money to a “conduit” and
need to ensure they are a reputable company.
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One thing to keep in mind is that these
companies are in business to make money. They will
generally charge you around $500 to set up the payment
plan and then a $5 fee per month. They will make
interest on your money while they are holding it.
The mortgage savings
plan is not for everyone. If you are a young homeowner
and plan to stay in your house for 10 years or less, the
benefits of prepayment are inconsequential. You would
probably be better off to put the equivalent of an extra
mortgage payment per year in your 401K or stock options.
If you are a more disciplined consumer,
you can take your monthly mortgage payment and divide it
by 1/12 and send in that extra payment each month. Be
sure you designate on your payment coupon that you want
the extra payment to go toward your principal balance.
You’re still making the equivalent of an extra mortgage
payment each year, but without paying any fees to a
third party.
However, before you send in that extra payment, be sure
your lender doesn’t penalize you. Some lenders charge
penalties for prepayments, especially to those borrowers
with bad credit or subprime home loans. However, if you
have a conventional or government-backed loan,
prepayment penalties are extremely rare.
You might also consider using that extra payment to pay
down high credit card debt. Since the interest rate on
credit cards is much higher than on a home loan, it
might be more fiscally advantageous for you to pay those
balances down first.
CONSUMER TIPS is provided as a public
service by the Missouri Independent Bankers Association
AND
Community Bank of the Ozarks
P.O. Box 43
Sunrise Beach, MO 65079
(573) 374-5245
1-800-927-4314
www.cbobanker.com
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