The day you move into your new house is always a happy one. Everything is great and you now have your own abode. The feeling just couldn't be better. Then, an inevitable thought crosses your mind. You have 30 years left to pay on your mortgage. Wow! Thirty long years of making monthly payments, now there's a reality check!
No one likes to be saddled with a long-term debt such as a 30-year mortgage. Because of this many ways have been thought up where people can pay off their mortgages well ahead of schedule.
These methods sometimes promise you'll be paid off in 7 years, some 10 years, 15 years and some incredibly promise you will pay off your mortgage 26 years ahead of schedule. I'm sorry, but now I must hit you with sobering thought number 2: there are only two ways to pay off your mortgage early!
By the end of this article you will find out what these two ways are, but first let's talk about some of the not so real ways.
Accelerator mortgage
With an accelerator mortgage, you pay every cent you make into a mortgage account and at the end of the month your mortgage payment is taken out of the account. Proponents of the accelerator mortgage say it works because this account you pay into pays interest and that compounding interest negates the interest you are paying on the mortgage.
However, when the agent sets up your accelerator account, he/she asks you how much you want to leave in your savings each month to be paid toward the mortgage. You will even be egged on. They will ask, "$250, $500, $1,000?" $1,000! Heck, if you paid that much toward your mortgage each month, you would pay off any mortgage way ahead of schedule!
If you were to say, "well, nothing. I don't have anything left after groceries and other expenses." They won't want to give you the mortgage because the compounding interest in this mortgage account means very, very little. The heart of the accelerator plan is you pay extra principal in the way of savings left in your account each month.
Biweekly, Bimonthly and Weekly Plans
With the biweekly plan you are led to believe making two payments a month, which together equal the same amount you have been, paying monthly, will take 7 years off the time it takes to pay off the mortgage.
In reality, with a biweekly plan you make 26 half payments or 13 monthly payments each year instead of 12 so, of course, you will pay off your mortgage a lot sooner. The backbone of this plan is you are led to believe you will not be paying more money each month, but the fact there is more than 4 weeks in a month is the real reason it works. Oh, and by the way, for getting fooled like this you get the pleasure of paying about $1,000 upfront in fees to convert to the biweekly plan!
There is no such thing as a bimonthly plan. It is just a Biweekly plan improperly titled. Weekly plans are the same as biweekly plans cut up into smaller payments, but the same arithmetic applies.
The only two ways
The conclusion is there are only two ways to pay off a mortgage ahead of time. One is to pay more principal each month. For instance, the payment on a 30-year mortgage for $200,000 at 6.25% is $1,231. However, if you pay an extra $270 each month, you will pay off the mortgage in full, 11 years ahead of schedule and you will save over $100,000!
The only other option you may be able to get that will help you pay your mortgage earlier is to get a lower interest rate and continue to make the same monthly payment. In the example above, if you were able to refinance at 5.50% but you continued to pay $1,231 monthly, you would have that mortgage paid in full in 25 years, instead of 30 years.
Still, paying $1,231 monthly is the same as making additional payments toward principal because the scheduled monthly payment for $200,000 at 5.50% is $1,135. So, here is the final conclusion; you can try to fool math, but it is just as futile as trying to fool Mother Nature. You can't do it! To get your mortgage paid ahead of time, you have to make principal payments ahead of time one way or another. That is all there is to it! If you own a home right now that you pay a mortgage on, you likely do not have enough money in the bank to pay off that mortgage. But what if you did? If you had the money to pay off the mortgage and thus free up that money each month, would you do so? Many people that cannot afford to do it say yes. It would feel so good to be able to write that check that will ultimately make you an official homeowner Рfree and clear, no payment books, no bank to answer to. But if you look at the top 5% of the wealthiest people in America, most of them hold a mortgage yet have the money to pay that mortgage in full.
This is because of a process called the "accumulation of wealth". This is an indication of prosperity in our society, if you can accumulate wealth in your life. Have you ever noticed that when people do something that is going to save them money, they never really get rich? Take this for example: People want to save the interest on their mortgage so they go extra lengths to pay off the mortgage early and get out from under that 6% interest rate that they have been paying. Once they get the mortgage paid, they start saving for retirement. This process could take 15-20 years, but they saved money by not paying that 6% for the entire 30 years.
Now, look at that 6% that we discussed from the mortgage interest rate. This is a fairly average rate for the last 8-10 years in America. Since 1926 the stock market has averaged a return of 10% per year. When you do the math, the person that works hard to pay off their mortgage 10-15 years early is losing out on 4% interest on their money. Giving money back to the bank at 6% keeps you from investing money and essentially the bank giving you money at 10%.
Many young couples struggle to pay off their mortgages early so that they are mortgage free when their kids go off to college. This way, they can borrow against the house to pay for the college tuition. If you stop and think about it, that makes little sense. If you continue to make your normal mortgage and take the rest and invest in something that will likely offer you 10% returns, you will end up not having to borrow any money to pay for the tuition. You will just have to cash in some of your investments, and your home will be paid for in another 5-10 years instead of the refinanced 15-30.
When you purchase a home, there is a great chance that it will increase in value over the next 30 years. This is true whether or not there is a mortgage on a home. When it comes time to sell your home, no buyer is going to care what your outstanding mortgage balance is, nor is the IRS when they go to calculate your capital gains. Simply put, mortgages do not affect home value, and using your money to pay it off early is not always the best choice for saving money. When you first consider the thought, paying off the mortgage may seem like the most logical thing to do, but carefully consider your options with a certified financial planner before delving in too deep.
Real Estate Mortgage Terms
Whether your are obtaining a mortgage for your first home, or your tenth in a series of real estate investments, the type of mortgage you choose will have a lasting impact. The consistency of your payments, the amount of interest you pay, and the amount of money you put down will all affect your decision. Here?s a quick glossary of the terms you need to know.
Fixed vs. Variable Mortgage Loans
The standard 30 year fixed real estate mortgage isn?t so standard anymore. It?s still extremely popular because you can lock in a one-time interest rate that will stay consistent over the life of your mortgage. But this doesn?t work for everyone, which is why the other real estate mortgage options have evolved.
The variable mortgage, also called an adjustable rate mortgage (ARM), or floating mortgage, is often attractive because the payments and interest rates can be significantly lower. The problem is that the interest rate will fluctuate along with the prime lending rate. This means your mortgage payment could increase at any time. This is a good option only if you know you can handle the jump in payment without consequence.
Interest Only Mortgage Loans
If you have ever looked at the amount of interest and principle paid on an actual real estate mortgage payment, then you know why interest only loans are so popular. Someone who pays $1,250 monthly, at a 5.875% interest rate, is actually making a payment of about $670 to interest, $400 to escrow, with only $180 going towards paying off the principle of the loan. By paying off the interest in the early years of the loan, your monthly payment will be significantly lower. A traditional mortgage would require that additional payment to principle each month.
While your payments with an interest only real estate mortgage loan are guaranteed to jump once the interest is paid off, this can work towards your advantage in some situations. For instance, a young person just starting out in a career may expect to be making more money by the time the monthly real estate payment increases. Also, the flexibility can allow you to borrow more money, or create more cash flow in your real estate investment, in those early years.
On the down side, you don?t accrue any real estate equity when you?re not paying off the principle amount owed. Also, the unpredictability of the real estate market makes this a riskier loan. Most financial advisors also counsel against taking out an interest only loan if you can?t afford the house without it.
Negative Amortization
A negative amortization loan is most often used in areas where real estate costs are very high, with the goal of helping people who could not otherwise afford to buy into the area. Basically, the real estate lender agrees that the mortgage holder will pay less than the amount of interest due each month for a short, usually 5 year, period of time. The owed amount is tacked on to the remaining real estate loan at the end of that period. Also known as a deferred interest or Graduated Payment Mortgage (GPM), this is considered risky since the ?jump? at the end of the lower payment period will be significant.
Balloon Mortgages
Balloon Mortgages have inspired come controversy in the real estate industry, because some shady real estate professionals have advised them inappropriately. With a balloon mortgage, you pay a fixed rate for a specified period of time (5/7/10 years) and then pay off the remaining principle in a lump sum when that time is up.
Balloon mortgages are attractive because the interest rates are usually lower. One way to use a balloon mortgage for your real estate purchase is to take advantage of the lower interest rate, and then attempt to refinance at a low fixed rate at the end of the term. This is especially appealing when interest rates are high. Just remember, have a plan, and a back up plan, for paying off the final amount if you are thinking about a balloon mortgage. The best advice is probably to talk to someone you trust who has a good real estate background, and who can assess your specific situation. Every real estate transaction is different, and so are your mortgage needs
Referrals are what make and break many mortgage lenders. Referrals are incoming calls that are referred to you from an outside source. That source might be a newspaper, a friend, a former client, or even the internet. In the end, though, mortgage originators know that incoming calls are always better than outgoing calls. So by understanding what types of referrals you can take advantage of, you will be better able to pursue them the right way.
Your Family and Your Friends
They may not count for a lot of your business, but a mortgage professional should be able to count those closest to him or her. When someone 's immediate social clan is in the market for a mortgage, you would likely be the first one they call. Certainly you do not have to worry too much about competition, but you do have wade through the referrals you get that are not qualified to pursue a mortgage.
With a family or friend referral you get a little bit of everything from your mom 's divorced friends to your buddy 's old college roommate. The referrals may or may not even qualify for the mortgages. However, in the mortgage business it is all about numbers so you take them anyway.
Referrals from the Internet
There are also referrals coming from the internet. Mortgage customers find online help and that is where your form shows up. When they fill out the form with their information, the form is fed to you so that you can then take that and turn it into your lead.
These referrals are great, because you are getting the prequalification information up front. Before you even make a phone call you will likely have knowledge of whether or not the referral is worth your pursuit. With internet referrals you can even go all the way to targeting certain sizes and types of mortgage. In a way, the internet referral is the most reliable if not the most common to come across your desk. Sometimes, your referrals may come from traditional advertising. For instance, many mortgage professionals give those applying for a mortgage after seeing their ad some sort of incentive. The incentive may be an award, money, a coupon, or something else that could push someone over the edge in terms of applying for a new mortgage.
Real Estate Mortgage Referrals
Then there are the referrals you get through real estate agents. These are the referrals that come from realtors who help people buy new homes. They usually know that the people are interested and by the time they get to you it is just about getting them qualified. These are great referrals because they are fairly well qualified and you do not usually have a lot of competition for the loan.
These types of referrals are exactly why it is important to find ways to partner up with real estate agents. There are many ways to do this, most of them wrong, and a number of advantages to it if done correctly. Besides allowing you free access to a number of leads, it also allows you access to the best customers in the mortgage industry: renters who are looking to buy for the first time.
When you are in the mortgage business, turning renters into buyers is the easiest way to make money. When you partner up with the right real estate agent, you will get all of the renters turned buyers you can handle, which can make you thousands every month. The key is simply to find a program that will help you do just that. When you find such a program, your real estate mortgage referrals can go up significantly which makes your income go up.
Referrals are what can launch you from a pedestrian mortgage professional to someone who is breaking the bank and making noise in the industry. That is why it is important to cultivate all the right mortgage referrals so that you can produce the best and brightest business possible. It does not matter as much what type of referrals you get, but that they are your best leads: although, a partnership with the right realtor can have you both taking care of all those first time buyers who are ready to buy a mortgage from you.
