The Ultimate Dream:
A Mortgage Free
Life
Experts say that for every
dollar you invest in home ownership,
you will earn, on average, three
tax-free dollars in the long run.
Sounds like a great investment,
but most of us still shake our heads
in disbelief when we get that mortgage statement showing how much we still
owe, even after all those years
of making payments.
Imagining life without a mortgage may seem like a pipe dream, but
to help you realize that it may
not be as out of reach as you might
first think, here we offer some
interesting information.
Say goodbye to your debt...in the
right order
Paying down your debt is one of
the wisest things you can do with
your money. Chances are, you have
several types of debt: perhaps a
mortgage, car
loan, and some credit
cards. Generally speaking, your
best move is to always pay down
the highest-interest debt first.
In nearly every case, your credit
cards will have the highest interest
rates and your mortgage the lowest.
Once you have this high-interest
debt paid off (yes, easier said
than done), you can then focus on
whittling away at that mortgage loan.
Mortgage interest
The rate may be low, but the amount
can be staggering. Consider a $200,000
mortgage, which is commonly amortized
over 25 years. Even though interest
rates are at their lowest in decades,
you are likely to ultimately pay
more than the full amount of the
principal in interest only over
that time! In other words, the $200,000
mortgage you took out to buy your
house for $250,000 could well cost
you over $500,000 once all that
mortgage interest is paid. If you
do the math and look at compounding,
you'll quickly see that the
earlier you can pay down your mortgage,
the better, since your interest
costs will be lower over time. In
fact, in a typical mortgage, during
the first five years that you are
making payments, most of those payments
are going straight to paying interest,
not the principal.
Yikes! Unless you can make some
extra payments or increase the amount
of each payment up to the point
where your principal payments are
at least as high as the interest,
you're going to be a slave to your
mortgage - and in reality,
most people are.
Extra payments add up
If you think you might be able to
make some extra payments at any
point during your mortgage term,
make sure that the mortgage you
get allows for this. Some mortgages
will not allow you to make extra
payments, and others will only allow
a certain percentage each year.
This is often called an annual prepayment
privilege, and often it is around
10% of the original principal per
year. This means that if you have
a mortgage for $250,000, you can
make $25,000 maximum in extra payments
each year.
Making extra payments can be really
tough - after all, you're
probably pretty maxed out with making
just the regular payment along with
all of your other bills each month.
It can be hard, too, to put money
towards something that isn't
tangible. However, extra payments
can do wonders for knocking down
your principal, ultimately shortening
the life of your mortgage and saving
you hundreds or even thousands of
dollars of interest.
Help! How can I make extra payments?
Sorry, but there's no magic
here. You simply have to try to
manage your money in such a way
that you can make an extra payment
every so often (or at planned times,
depending on how well you can be
disciplined). The massive consumption
of consumers today is rampant. Try
to cut out some of the excess and
use that money to apply towards
debt. Something as simple as cutting
out a $4 latte before work each
morning will free up an astounding
$1,000 each year. Another option:
if you get a tax refund, instead
of blowing it on a new stereo or
some other 'toy', why
not apply it (at least some of it)
to your mortgage?
Alternative mortgage strategies
If you just can't afford to
make additional payments during
the early years of your mortgage,
there are still other things you
can do to take out some of that
long-term interest sting.
Say, for example, that you are up
for a renewal on your mortgage and
manage to get a lower rate, which
means lower monthly payments. Instead
of dropping your payment, why not
keep it at the same amount as before?
Face it, you're accustomed
to paying that higher rate, so stick
with it and the extra money will
be equal to making some additional
payments so highly recommended above.
See, you've found a way to
do it!
In a related vein, why not increase
your mortgage payments in proportion
to any increase in your income?
Another way to chip a little harder
at your mortgage is to step up your
payment frequency. If you pay biweekly
instead of monthly, for example,
you will save a significant amount
of interest over the long term.
In summary, admittedly, none of
these tips are exciting. The bottom
line is, if you want to move towards
living a mortgage-free life, there
is no magic involved: you simply
have to exercise discipline. The
thousands of dollars in savings
to be had down the road can make
it all worthwhile in the end.
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