Mortgage Debt Elimination Secrets

Apr 2 09:40 2009 Tim Derey Print This Article


The mortgage debt elimination process that we're going to share with you will,Guest Posting without a doubt, put you on the right path towards eliminating your mortgage payment. Once you begin putting these strategies to use, you'll be much happier as you rid yourself of that burdensome debt.    

Adjustable Rate Mortgages - ARM's

If you get into an ARM, you're opening yourself up to higher monthly house payments since ARM interest rates are not fixed.

Basically, the interest rate you pay on ARM's resets at a "higher" rate in a short period of time (generally 1, 3 or 5 years). As a result, your monthly mortgage payments will skyrocket.

It's very sad to see so many people that are struggling with these increased payments after their ARM resets; many to the point of losing their homes.


Fixed Rate Mortgages

You'll find that a fixed rate mortgage is a better option then an ARM. In fact, you'll find the vast majority of mortgages out there are 30-year fixed rate mortgages.

The problem with the 30-year fixed is it will literally eat a hole in your pocketbook. This is because 30-year notes will cost you hundreds of thousands of dollars in interest payments. In fact, mortgage companies love 30-year mortgages because they make them rich.

Your monthly mortgage payments are based on an amortization schedule where your monthly payment is made up of both interest and principal. Since the principal portion of your monthly payment is what reduces your mortgage balance, the great majority of your payment is "not" paying down your mortgage debt because most of this payment is being allocated towards interest.


Prepayment Penalty Clause And Mortgage Debt Elimination

You'll want to make sure your existing mortgage does not have a prepayment penalty clause in it. A prepayment penalty is a fee assessed by the mortgage lender on the borrower who prepays all or part of the principal of the mortgage loan before it's due.

A great many conventional mortgage loans do not contain a prepayment clause. However, depending on the lender you're dealing with, some do. So, it's prudent to ensure that you don't have to deal with this clause in the event you want to accelerate your mortgage payments.

 
Extra Principal Payments

This mortgage debt elimination technique gives you the option to make extra principal payments towards your mortgage loan which will enable you to pay off your mortgage substantially faster. You also have the added benefit of saving several thousands of dollars in interest payments my using this method.

Starting at payment 1, you can pay off your mortgage in half the time by simply paying your regular mortgage payment plus "just" the principal amount of payment 2. By doing this you've basically made two payments and just avoided the payment 2 interest payment.

Another way to look at this is you've paid off the principal twice as fast. Because you are paying double the principal, you’re jumping down the amortization schedule two months at a time; or twice as fast.

For the second mortgage payment, you skip down to payment 3 where you'll pay your full monthly mortgage payment plus the extra principal from payment 4; and you continue on from there.   

What's nice about this mortgage debt elimination method is its flexibility. If you only have $25, $50, $100 for example to put toward extra principal payments, by all means you should do so. You'll still get your mortgage debt paid off faster and save thousands of dollars in interest payments.


Refinance To A Lower Rate

This is another excellent mortgage debt elimination strategy that can certainly benefit you. To figure out whether it's in your best interest to refinance, you need to calculate your break-even point.

The break-even point is the time it takes to make up in monthly savings (had you refinanced at a lower rate) what you paid in fees to do the refi. You can calculate your break even by simply dividing the mortgage fees by the monthly savings.

For instance, let's say you would save $100 a month by refinancing, and the refi closing costs would be $3,000. Your break-even point is 30 months from now: the $3,000 in fees divided by the $100 a month in savings.

Whether or not to refi comes down to how long you plan on living in the house you're considering doing the refi on. For example, if you expect to continue living in the house for more than two-and-a-half years, you'll save money in the long run by refinancing.

But, if you plan to sell the house before then, you're better off staying with the mortgage you have.
 

The 15-Year Fixed Loan

This is an excellent mortgage debt elimination strategy because with the 15-year fixed, the equity in your home is growing much faster than it would with a 30-year fixed. This is because the 15-year fixed puts the time value of money on your side.

In other words, you’re having your monthly mortgage payments weighted more towards principal, enabling you to pay yourself by quickly increasing your equity instead of overpaying interest to the mortgage company through a 30-year fixed.


Invest In An Index Mutual Fund

This is a fantastic mortgage debt elimination method; but it requires discipline on your part. Using this strategy, you would invest your extra mortgage principal payments into a no load index mutual fund.

This strategy depends on your time horizon because stock mutual funds are a longer-term investment strategy. But we've got to tell you that historical returns on these index funds have averaged 11%.

Compare the 11% to your mortgage interest rate, and you can see why this is a great strategy.


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About Article Author

Tim Derey
Tim Derey

Tim is the editor of http://www.frugal-save-wave.com where you’ll get the answers you need to live better on less through wise family money management.  These money saving strategies include tips on frugal living, budgeting money, eliminating debt and more.

Tim doesn’t just write about these strategies, he lives them.  Tim also has an MBA in finance as well as over 20 years of professional experience in personal finance.

For additional information to assist you with eliminating debt, see http://www.frugal-save-wave.com/paying-off-debt.html.
 


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