How to Pay Off a 30-Year Mortgage in 25 Years-Parts I & II (and save over $100,000 in 10 months in interest payments)
10-24-16 How to Pay Off a Mortgage FASTER Part 1
Here is the true story of someone I know who reduced the mortgage term on her CA house from 30 years to 25 years within 10 months of purchasing it.
The buyer searched for a house for months. The market in the Bay Area was and still is a very strong seller market. A seller market is where the supply of homes for sale is less than the demand (the buyers). The sellers are in control of inventory, pricing, etc. A normal market condition is believed to be around 6 months worth of homes for sale.
The house was purchased late June (2015) with the following terms:
Loan Amount $362,000; Term 30 Years; Interest Rate 4.125%
Monthly Principal and Interest payment (P&I) $1,754.43 beginning Sept 1st. 2015
Because property taxes, property insurance, and to some extent Property Mortgage Insurance (PMI) are fixed elements, I won’t discuss them here now. Private Mortgage Insurance?is the amount of money a borrower is charged by the lender to protect the lender against default by the borrower.?
Paying $1,754.43/month for 360 months will amount to $631,595.53; of which $362,000 will be the principal and $269,595.53 in interest. Wow!
When it comes to interest payment, you want to be in the receiving end of it, and not in the giving end.
The buyer paid $2,000 “extra” toward the principal, i.e. in addition to the fixed monthly payment of $1,754.43 in Feb, 2016, and another $5,000 extra toward the principal in April, 2016.
That alone eliminated 13 months of her repayment term, totaling $22,807.59.
This means that she “will never, ever” have to pay $22,807.59 again. She “killed” 13 months of payments. Therefore, her total term of payment was?reduced from 360 months to 347 months.
Cashwise, by deducting the $7,000 extra payments made toward paying down the loan, she?saved $15,807.59 in interest ( $22,807.59 - $7,000 ).
Mortgage = Death Pledge = Mort + Gage
Mort = Death and Gage = Pledge
Is this a good deal? I don’t know! It all depends on what “your” definition of a good deal is. And what’s more important to you in dealing with your finances.
To this buyer, getting rid of the house loan is by far more important than any other life pleasures are. And $7,000 was what she could afford to pay and she was?very?happy.
Pay $7,000 now to save $15,807.59 over a period of just under 29 years. That’s $22,807.59 less the $7,000 extra payments, equaling to $15,807.59.
And we are talking about the obligation to pay off the most important and the most expensive line item in a person’s list of monthly recurring expenses: His/her House Debt.
In The United States of America, depending on where you live, housing cost comprises anything between 30% to 50% or MORE of your monthly living expenses.
This is how to calculate your mortgage to income ratio:
Take your mortgage payment and divide it by your take home pay. Your take home pay is your net salary. It’s what you receive in cash after all taxes and fees are taken from your income.
Multiply the result by 100. For example, if you pay $2,000 on your mortgage and your take home pay is $5,000, then your mortgage to income ratio is 40%. That’s 2,000 divided by $5,000. Is it good? Again, I don’t know.
What I know is this: It’s always a good thing to pay off one’s home loan ASAP for very important reasons, the most important of which is?to eliminate the risk of foreclosure?by the bank in case of nonpayment due to defaulting….
Here in CA, many are paying over 50% of their very hard earned money toward rent or mortgage! The so-called standard set by many lenders is 33% which is the "gross" income guideline and not the spendable cash yet.
Whether one has to consider paying off one’s home loan ASAP depends on many factors to be discussed in later posts.
I am sure, however, there are many who don’t agree. That’s fine. I love The Laws of The United States of America, among the many, The First Amendment.
Financial education is the most important duty of any person in life. Poverty and lack of financial literacy are among the worst to destroy the foundations of a nation. And financial literacy must begin in the family first.
Getting out of debt ASAP should be any rational and responsible citizen’s first step on the path to enjoy a stress free and happy life. Why?
Fighting over money and finances is the main cause of stress in a relationship.
1 in 3 Americans have saved $0 for retirement
https://www.gobankingrates.com/retirement/planning/1-3-americans-0-saved-retirement/
The typical American couple has saved just a few thousands of dollars for their retirement.
?How long does that last? I don’t need a calculator to know the answer…
There are statistics all over the web regarding the plight of Americans’ retirement fund deficiencies. But, what does one do about it?
I’ll continue this real world story in other blogs by going into more details as to what happened next.
Hint: Two weeks after making the extra $5,000 payment, the loan manager (Michael Koran with Primary Residential Mortgage Company in San Francisco) contacted her with a refinancing offer that she couldn’t refuse. It was “VERY” interesting I must say….
Lots of prayers and supplications had been made throughout months for the paying off of the loan.
Do you have the knowledge and the tools to pay off your debts FAST?
If not, would you like to learn more and have them?
What is “your” plan to get out of debt, save money, and invest in safer assets?
10-28-16 How to Pay Off a Mortgage FASTER Part 2
Continued from Part I…
About a month after making that second extra payment of $5,000 (late April, early May 2016), the lender contacted the borrower.?
It gave her 2 refinancing offers.?
What is refinancing?
Refinancing is a process that a borrower, due to a variety of reasons, will choose to “change” any of the following because it will benefit her more than keeping the current repayment plan.
Some of the reasons are:
1- A lower interest rate (the lower, the better)
2- A shorter payment term (the shorter, the better)
3- A lower monthly payment (the lower, the better)
4- Some or all of the above.
Why would a lender do that? Wouldn’t they want to get paid month after month for as long as possible, and for as much as possible?
The lenders do this because they don’t necessarily keep these loans on their books. Most lenders package the loans and sell them at a discount to interested investors who are willing to wait to receive their investment capital back at the desired interest rate or yield. Their capital is protected by the collateral; the collateral being the house(s) on which the borrower is making payments.?
Another reason is that, favorable market conditions provide a better deal for the borrower by refinancing, if they understand what they want from it AND if the offer is attractive enough.
I am intentionally going into details here to make a point that every borrower’s reasons and decisions are different from another's. One has to have both the knowledge and the right tools to make an informed decision as to why one should accept one offer over another.
Note: The principal balance of the mortgage at the time of refinancing was around $350,000. The principal balance is the balance due at the time of refinancing.
Your balance goes down as you pay down your debt with each monthly payment AND with each "additional payment" you make toward reducing Principal.
You reduce the TOTAL amount owed by reducing the Principal on which interest is charged.?
In this scenario, the balance due went down in two ways:
1- The elimination of 13 months of payments due to making two extra payments of $2,000 and $5,000.
2- The principal pay-down due to the normal amortization of the loan.?
The principal balance, after 10 months of paying $1,754.43 each and every month went down only by $5,500! That’s about $550 per month.
Wow, this means that only $5,500 of the total payments made ($17,544.30) was applied to the total debt payoff amount. That’s less than 1/3 of the payments made so far…($5,500 / $17,544.30 = 31.35%)
The 2 offers made by the lender:
The following 2 options are for 30 year fixed mortgages and the payments below do not include taxes and insurance.
Option 1
Interest Rate 3.75%
· $1,621/month (principal and interest)
· $120/month (PMI = Private Mortgage Insurance)
Option 2
Interest rate 4.125% (same rate you have now but no monthly PMI)
· $1,696/month
· $0 PMI
The following 2 options are for 25 year fixed mortgages and the payments below do not include taxes and insurance.
Option 1
Interest Rate 3.75%
· $1,799/month (principal and interest)
· $120/month (PMI)
Option 2
Interest Rate 4.125%
· $1,872/month
· $0 PMI (Private Mortgage Insurance)
How do you decide what to do when this is in front of you??
Well, the typical borrower, not knowing HOW and WHY any of these 2 offers will benefit him/her, will be very confused. But not our savvy home buyer.
Looking at her monthly budget, and desiring to pay off her home loan FASTER, while considering choosing the less costly option during the process, and by using a fairly sophisticated excel worksheet for analysis, she chose option 2 under the 25 year fixed mortgage plan.?
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Option 2 (25-year Term)
Interest Rate 4.125%
· $1,872/month
· $0 PMI (Private Mortgage Insurance)
Going with this option:
She will never have to pay the PMI (private mortgage insurance). On the surface, it looks like the lender paid it for her, which it did! That's not, however, what really happened. The lender "charged" her higher than the then interest rate compared to "other" lenders out there (i.e. what she could have got from other lenders if she had used them and paid thousands in closing costs), basically in exchange for "NO" closing costs.
The details can't be explained here. Again, our borrower was happy to pay a little more in interest, compared to other lenders, in exchange for not even paying the appraisal fee at closing, and get a lower monthly payment too! I think that's good enough.
Private Mortgage Insurance is the amount of money a borrower is charged by the lender to protect the lender against default by the borrower. It’s charged to the borrower if she puts down less than 20% of the property value. If she were to pay that fee (that amounted to about $170/month), she would have to continue making payments until the mortgage amount reached 78% of the property’s appraised value. Then, she can ask the lender to cancel PMI payment and by law she won’t be charged that fee again.?
The main reason is that the lender will have "sufficient" equity in the property (about 20%) for its interest in the property to be protected should the payments stop. The lender can then foreclose and get the property back.
According to the calculations we made, with most of the payments going to interest rather than reducing the principal in the early years, it would take almost 10 years for that to happen!
That is, it will have taken about 10 years before the equity buildup according to the lender's criteria (ignoring the appreciation, etc.) will reach to the level that the borrower will be exempt from having to pay PMI.
The borrower didn't want to wait that long. And "this" was another reason to choose this option.
Lender PMI cancellation rules can best be described here:
https://homebuyers.mgic.com/resources/15-21071_cancelling_MI_consumers-GENERIC.pdf
Our borrower DID not wish to make that monthly PMI payment. Period. That was an extra $170/month coming out of her pocket month in and month out for a good number of years. To HER, the slight increase in her monthly payment was well worth it.
The net effect, however, was a little less than the total monthly payment (principal, interest, and the old PMI payment of about $170/month).
To HER, getting rid of the mortgage FASTER was more important than anything else.?
Notice that Option 2 under the 30 year mortgage had a lower monthly payment with no PMI. So, why didn’t she choose this option? Again, to her, having a lower repayment term (25 years) was a better decision than paying lower monthly payment for another 30 years.?
Amazing, isn’t it?
By the way, another option offered was to get $10,000 cash at closing.?
Why didn’t she go with that? Here, she didn’t need the cash. Unfortunately, however, due to a combination of financial need, financial illiteracy, and lack of discipline among the uninformed, that’s the option the majority goes with. Taking cash out at closing and start over another vicious cycle of 30 year debt…
If at all possible, DO NOT use your equity as an ATM cash machine.
But the most beautiful part of this example was the DRASTIC reduction in her total repayment term. It went from 30 years to 25 years!?All in 10 months or so.
Please, refer to both images in both posts to see it visually. Before and After.
In a nutshell, by making two extra payments, and for a little extra per month (going from $1,754.43 to $1,872 with no PMI for the life of the loan), within 10 short months, she eliminated over 5 years of $1,754.43 per month. That’s a saving of over $105,265.?
One can calculate the Internal Rate of Return (IRR) given the new monthly payment for 25 years to see if this were a good choice after all. I won't do that here now. Remember, it's all about the borrower and her desired outcome. On top of this, the borrower didn’t pay “ANY FEES” whatsoever to do the refinancing. She was even reimbursed for the appraisal report fee of $450. There aren't many lenders who provide this kind of service.
THAT’S POWER, MY FRIENDS. THAT’S POWER.
We, upon contacting the lender and out of my curiosity, later learned that the lender’s offer was based on two things:
(1) The market’s reduced interest rate AND (2) her extra payments toward principal.?
According to the lender, if she hadn’t made those extra payments, it would have been less likely that she would have been ever contacted by the lender nor could have benefited so much by refinancing. All in 10 months.
The original lender charged her only $1,650 TOTAL closing costs for the original loan AND zero dollars for refinancing afterwards, included the $170/month PMI, and no appraisal fee! Do you know how to compare that with all the various offers by other lenders (higher/lower interest rates, origination fees,etc.)?
If you want low closing costs with STELLAR customer service, call Michael Koran "NOW"!...wow, what a plug I just gave for him!
HE AND HIS COMPANY DESERVE IT. Period!
Thank you Michael Koran for your help and the offer. Besides being an experienced loan officer, you are also a wonderful human being.
or click below:
No one can see the future. But, one can make informed decisions with the right knowledge and tools today.
Our borrower plans to make extra payments on an annual basis.
With the prospect of zero to negative interest rates on the horizon, I won’t be surprised if the lender will contact her again with a similar offer in a year or two. It may not be as profitable, but we will see.
Update 2018: It's apparent that new political and economic decisions DO affect market rates. With the rest of the world at negative rates, many thought that the USA will follow. But, the USA is proving to be the leader AGAIN.
So, I predict interest rates to go up. How far, and how long? I don't know. That's the whole point of taking charge of one's finances and NOT leave it to market conditions and policy decision makers.
Having a free and clear home in retirement will eliminate between 30% to over 50% of your fixed monthly expenses. If that’s not peace of mind (at least partially), I don’t know what is. And if you learn how to tap into that equity, you can leverage it safely to earn you substantial income over the years.
That's something that our borrower IS currently doing utilizing another vehicle that I will address in the future. She is borrowing 5% interest from a "guaranteed" wealth generating asset that's used as a "collateral", and investing it at 14% in mortgage notes.
Keeping it simple here, if she can reinvest the proceeds (i.e. the interest plus the principal year after year) on an annual basis; based on Rule of 72, her money will double every 8 years. The vehicle used is private lending and investing in mortgage notes.
Calculation:
14% minus 5% = 9% ANNUAL return. Take 72 divided by 9 percent, you will arrive at 8 years (just about). OR, if you divide 72 by 8 years, you will arrive at 9% interest rate.
If she starts with $50,000 original capital; at a rate of 9% compounded annually; in 24 years, that $50,000 will have grown to $395,554.16, all with no additional contributions !? By compounded annually, I mean, the interest is "added" to each year's balance and "that" figure grows compoundedly year after year.
If the money doubles one more cycle (i.e. another 8 years to N=32), the $395,554.16 will grow to $788,166.44. The key is for the invested money to grow "uninterruptedly".
How is that for a change in investing mindset?
Note: There is a fatal flaw in the above analysis. Did you see that?
Hint: It has to do with the money borrowed at 5% simple interest and investing it at 14% compounded each year. The calculation of the 9% compounded growth of $50,000 for 24 years to arrive at $395,554.16 is correct. But, given that the borrower owes the lender only 5% simple interest on the money,...., and growing the money at the compounded rate of 14%, the total dollars accumulated in the end are A LOT more than $395,554.16.
I will address that in another post. It will require a video, spreadsheet, and a more detailed explanation.
Continuing on....
Through much research and study (read: thousands of hours), and painstaking evaluation of various options, I know of and have access to the kind of wealth building the above model provides (compounding of principal and interest).
I also know of a company that "allows" to add the interest compounded "back" to the previous balance (principal plus interest) each and every year so that the compounding will continue for years and years. So, it isn't just a fantasy math to make people feel good. I don't know of any of the existing traditional investments that can do this.
And no, it's not stocks, ETFs, bonds, derivatives, options, gold, etc.
It all starts from “today”, not tomorrow.?Make a commitment to get your financial house in order today. Don't let math scare you. There are calculators and spreadsheets EVERYWHERE these days. Ask me your questions. I will help you.
What is it that you want to know more about? I will post a link to a website that the public can communicate with me soon. In the meantime, message me; connect with me or with any knowledgeable person you think that can help you. They are EVERYWHERE!
Update: The link to connect with me:
ou don't need AT ALL to go to university for this. Take heart! Unsurprisingly to me, many who have, don't understand these financial concepts.
Due to my extensive research on the subject matter, it's unlikely that I won't be able to answer your questions. If I can't find an answer, I will help direct you to the right resource(s).
What’s “YOUR” plan for your retirement??Do you know your number?
Get educated on financial matters "heavily" and consistently using the internet.
Reduce and/or eliminate watching T.V altogether. Don't wait until going through hard times and worse, bankruptcy, and/or serious illness to decide to cut off the cable first, sell that extra car next, not eating out afterward, cut the mobile phone next,etc. I hate poverty. YOU SHOULD TOO!
Get on a budget TODAY and save your hard earned money. If you don't have the right analysis tools, or don't know what to do exactly, contact me, and I will provide them to you.
You don't have to invest your money if there are no investments whose risks you aren't comfortable with and/or you don't understand. You must understand exactly what you are investing in, everything about it. In the meantime, save your cash! It will come handy. The return on your idle cash is the loss that you "won't" incur by deploying it in "unwise" investments. Think about that!
There are different opinions on how much money should be spent monthly on various life's needs and wants. Google "what percentage of money to spend on living expenses" or similar phrases.
Whatever you come up with, you need to set aside at least 10%-15% of your net income (after all expenses on an annual basis) for savings toward future investments.
If you are short, you need to continue to cut costs AND find a way (or two!) to make more money (online, 2nd job, selling someone else's product or service as an affiliate,etc.). READ, READ, READ! I will roll out my own favorite affiliate program(s) in the future for all to benefit. In the meantime, get educated on "Affiliate Marketing." That's something you can do with your own time, money, and effort. No resume!
Note: This story is continued. The borrower "refinanced" the mortgage again, this time with another company, in September of 2017! A different lender with a different servicing company.
Her current term is 25 years (same repayment period) at 3.5% interest rate (down from 4.125%), and a monthly payment of $1,707 (down from $1,872), and,of course, no PMI ! She paid about $1,000 in title fees. Negligible.
By the way, another advantage of NOT having to pay PMI is that she will only have to remit principal and interest (P&I) to the lender. Before, the lender required 3 additional payments along with P&I each and every month. These 3 (kept in an escrow account at the time) were:
1-PMI
2-Property Taxes (escrowed)
3-Home Insurance (escrowed)
Again, with the elimination of PMI, she will only have to send one payment equivalent to what she owes on the loan only (principal and interest). The other two payments (property taxes and home insurance) are paid separately, in due time.
Also, in order to remain on the same repayment plan schedule as before, after the first refinance, she pays an additional $60/month or so toward principal.
Details in other posts.
30-Year Fixed Rate Mortgage Average in the United States?was 3.78% on September 14, 2017, since our borrower's home purchase in June, 2015.
The refinancing window for many closed after that. Our borrower breathed a sigh of relief. "So glad I did it", she says.
Resources:
Kevin O'Leary: This is the age when you should have your mortgage paid off
I get very angry when I read about and see these real stories. Please, seek financial help and don't be another victim. Life happens. Be prepared for the unexpected. No one will come to rescue you, but yourself.
This information is intended for entertainment and educational purposes only. The author shares his own personal experiences and research on related subject matters of his interest. It is NOT an invitation for investment; neither is it guaranteed to be accurate. The reader must consult with his own financial and legal counsel on all related financial and non-financial matters.?
If you found this article useful, please, forward it to others. They will thank you for it!
Author: Zaya Gilana, BA in Accounting and Finance with Honors
Copyright 2017