Paying your home off early - any good strategies?

[motion]

Originally Posted by Don Ro

From where/what?

Microlending.... Prosper/Lendingclub

[sc_rufctr]

IMHO... The "own home" thing we're sold from youngsters is the biggest scam ever. The banks here have always pushed it and have made huge profits because of it.
I don't begrudge them that but I've never played the game by their rules. I've never bought a house without at least a 35% deposit.
So often I've seen young people stuck in a mortgage and living hand to mouth. I could never live like that so I've always done more to earn than just a full time job.

It's simple... Pay extra money into your mortgage. Don't make it complicated.

If you don't have extra money then start earning more. As a suggestion, Get your taxi licence and start driving on weekends. You won't like it but believe me you will get used to it. (I've done this and still have my licence)
When I left the Army I worked as a nurse full-time in a busy hospital and when my roster allowed I did extra agency shifts. I got tired but in time I also got used to it.

Also... Examine your life and really look at what you're spending your money on. And be tight with YOUR money.
Check your outgoings regularly and think about ways of reducing it.

Do you have a credit card? More than one? Get rid of them and use a Visa debit card linked to your savings.

Do you save money? Most people I know don't

There are legitimate ways of increasing your wealth. Find out by talking to people that have what you want.
Don't talk to someone who's broke because they can't help you.
Do you know someone who is financially successful? We all do... Take the time and talk to them?

Ask yourself some questions... Why is it so important that you own your own home?
What's wrong with renting? Not much from my point of view. It's cheaper and less hassles without council rates/taxes.

[Rick Lee]

Originally Posted by sc_rufctr

IMHO... The "own home" thing we're sold from youngsters is the biggest scam ever. The banks here have always pushed it and have made huge profits because of it.

It's not for everyone. But until this real estate bust started around 2007, homeowners were doing way better than banks IF they sold at the right time. With my first house, I had roommates pay my mortgage for me. My share was rarely more than $100 per month and I walked away with about $150k tax-free capital gains after I sold it. Pretty sure I did a lot better than the bank. And I want the banks to do well too.

[wdfifteen]

Originally Posted by motion

I poked around my Wells Fargo online banking account and can see how I can setup extra payments to be credited to my mortgage every week, 2 weeks, monthly, etc.

Take a close look at this. BOA offered me one of these things. Turns out they weren't making any extra payment until the end of the year. For example, my regular mortgage payment was due on the 30th. They wanted to set it up so I made a payment on the 1st and the 15th. They would put the money in an account, and when the 30th rolled around, make my regular payment for me. At the end of the year there would be enough in the account to make the extra payment. Screw that.
If YOU make your regular mortgage payments and add whatever you can afford to the payment SPECIFIED TO BE APPLIED TO THE PRINCIPLE you will begin saving money on interest the first month you do it.

[Porsche-O-Phile]

Bingo.

There are a number of these "pay your mortgage off years earlier" services that offer similar programs - they all do approximately the same thing, add one extra payment per year out of a similar escrow account. You can ALWAYS do this yourself, and better and with more advantage to yourself exactly as stated.

I've run the numbers on at least five or six of these "offers" in the mail and always reach the same conclusion - they do nothing I can't (and don't) already do myself, better and more quickly with more benefit to me.

[HardDrive]

Motion, you have mentioned micro-lending a few times. Not to thread hijack, but have you had any negative experiences with it? Its the risk spread out across multiple lenders, or do you have a one to one relationship with the borrower?

[MysticLlama]

I just pay the mortgage with bill pay and it automatically credits the extra money as additional principal reduction. I just tossed in an extra $20 the first month, waited to see how it was credited and that was that.

No reason to make it more complicated than it needs to be.

I don't think he's looking for the "just throw more money at it" thing, but something more interesting from a tax/hedge/leverage perspective.

I'm following this thread because I'm kinda interested in that too, though my loan is only 5% and upside down. (Though no big deal since we didn't buy into the "starter home" mentality and have no intention of moving.)

[MysticLlama]

Originally Posted by HardDrive

Motion, you have mentioned micro-lending a few times. Not to thread hijack, but have you had any negative experiences with it? Its the risk spread out across multiple lenders, or do you have a one to one relationship with the borrower?

It's spread out over multiple lenders in chunks of $25. $25+ on Prosper, $25 increments (iirc) on Lending Club.

I'm just starting to play with it though, so I don't have any long term experience.

Supposedly the fully hedged point comes at ~400 loans for diversification purposes, and once at that point, all of the returns have been positive, though a few really unlucky people, or people with terrible loan criteria for investing are making 0-2%.

It's also kinda cool to have an investment that pays back principal + interest and at varying times for cash flow purposes vs. something like a CD.

[motion]

Originally Posted by MysticLlama

I don't think he's looking for the "just throw more money at it" thing, but something more interesting from a tax/hedge/leverage perspective.

Yep

[Por_sha911]

Originally Posted by MysticLlama

I don't think he's looking for the "just throw more money at it" thing, but something more interesting from a tax/hedge/leverage perspective.

I guess it depends on your definition of being "creative". If you want to pay off your mortgage early without paying more money you could look into computer hacking the bank or maybe camp out on Wall Street until they give in to your demands to pay off the mortgage for you...

[dmcummins]

If you can earn 10% easy, why would you worry about paying off @ 6.25%? You should borrow more.

[motion]

The 3.75% difference doesn't interest me too much. Its fairly trivial. I'd rather know that the 2nd home is paid off than be making a few extra bucks.

[dmcummins]

Originally Posted by motion

The 3.75% difference doesn't interest me too much. Its fairly trivial. I'd rather know that the 2nd home is paid off than be making a few extra bucks.

Then just pay it off and be done with it. I know it was it was difficult for me to write the big checks to pay mine off early. I was sending in 50k at a time, but it sure is nice now that I havn't had a payment in years. As I retired early it also means that I don't need to withdraw as much from my investments to get by.

You may believe that you can get 10% easily, but there is still some risk there or you wouldn't be getting that kind of rate. The 6.25% your paying is guaranteed, unless you plan on defaulting.

[Baz]

Sorry I don't have anything to contribute wrt creative financing - except to agree that paying extra on the principle is the way to go - especially early in the mortgage. I think the rule of thumb is a 30 year mortgage becomes a 20 year one by paying just an extra $100.00 a month. Your amortization calculator could tell you specifics.

Personally, I have been doing this since day 1 of my mortgage - which started out in '98 as a 30 year and will be paid off now in 2006. I've saved gobs of interest. I tried to add an extra $3-400.00 each month - whatever I thought I could afford....knowing it was going to give me the biggest bang for my buck in savings down the road.

Once I even laid down a whole $10K chunk just on the principle. Now that one felt very good!

My mortgage bank is Chase and it's very easy to make extra payments any month you want and of course never any strings attached. I can see the light at the end of the tunnel now and will be happy to get her paid off so I can control my own insurance options instead of having my arm twisted behind my back!

I'm self-employed too so can understand your thinking....

Good luck!

[motion]

So, I was thinking more about this...

Lets say you're making extra payments. Your payment coupon is going to stay the same, year after year (assuming your impounds don't increase). How are you saving money on the interest of the loan, if your payments are being applied to the 'back-end', when there are essentially little or none of your payment going to interest? IE, the interest is paid off mostly in the earlier portions of the length of the loan.

Only thing I can think of, is that your normal monthly payment is applied differently to the loan.... in other words, since you're also making extra payments, more of your normal monthly payment is being applied to your principle, and less to interest. Do I have that right?

[stomachmonkey]

Originally Posted by motion

So, I was thinking more about this...

Lets say you're making extra payments. Your payment coupon is going to stay the same, year after year (assuming your impounds don't increase). How are you saving money on the interest of the loan, if your payments are being applied to the 'back-end', when there are essentially little or none of your payment going to interest? IE, the interest is paid off mostly in the earlier portions of the length of the loan.

Only thing I can think of, is that your normal monthly payment is applied differently to the loan.... in other words, since you're also making extra payments, more of your normal monthly payment is being applied to your principle, and less to interest. Do I have that right?

Your interest is calculated against remaining principal.

The faster you bring down your principal the less interest you pay.

Especially important in the first few years where like 90% of your statement is going to interest.

[Porsche-O-Phile]

And one really big reason it's important to buy well below your means so you can overpay in those initial years...

This concept is lost on an awful lot of house buyers who just want their McMansion - so long as the monthly payment sounds good (never mind all the other, much more important factors that go into it...)

[MysticLlama]

Yes, the coupon stays the same, except on the long term interest only in which your required payment goes down.

When I send mine in, it breaks down for interest owed over the period since the last payment and takes that off the top. Then it takes out the current escrow amount, then the rest goes to principle reduction.

It shows princpal separate from additional principal reduction transactionally, which is where any overage past the coupon amount goes.

If I was to throw in $500 extra one month, I'd pay probably $1 less interest per month for the life of the loan, and the extra $1 would be paying down the principal faster over that period of time. $500 at the beginning could be worth an entire payment off the end.

The downside is that it doesn't free up any cash flow until a refi at some point. That's why I put a few bucks here and there other places vs. just on the mortgage. In an emergency I would need cash, not a paid down house, esp. early in the loan.

[VincentVega]

Right, no use having the house paid off and no money for food.

If it were me I would invest to get the ~10% and worry about the mortgage later, assuming the 10% is reliable. Even after paying taxes on the 10% and factoring in the deduction for the mortgage interest you are ahead.

[Baz]

Originally Posted by stomachmonkey

Your interest is calculated against remaining principal.

The faster you bring down your principal the less interest you pay.

Especially important in the first few years where like 90% of your statement is going to interest.

Yes SM has it dead on!

Especially the first several years of the mortgage....get that principle DOWN! Your interest is constantly figured against your principle. Your payment will stay the same each month no matter how much extra you pay on principle. But what starts off as a 30 year mortgage......automagically becomes a 15-20 year mortgage.

Your escrow payment will fluctuate some year to year depending on property taxes and homeowners insurance - if you have those included in your payment.

You can play with the numbers with an amortization schedule and actually see how much you save over the long haul when applying extra amounts to the principle...it's very motivating!