Accelerating Your Mortgage Payoff = Debt Free Euphoria

Being debt free can be a euphoric feeling that brings on a freer, less complicated lifestyle. Being debt free can be very difficult to achieve completely, especially in this credit heavy world we live in. You want it? You got it-just sign here. Look around your home at all the things you have purchased over the past three years. Flat panel TV, new smart phone, lots of shoes (lots), shiny car and a few sunny weekends in Bermuda. Wow, I bet you really did not need all that stuff and probably now think of some (most) of it as cluttering up your home. Now, look at your home……
 
Part of being debt free is owing zero on your home. A lot of people never think they will be able to and should pay off their mortgage early, but they can. 

There are two schools of thought on having no mortgage:
A. Some people believe that you need to have some debt, have some leverage on the equity of your home and need an income tax write-off from somewhere. 
B. Other people believe that it is best to have the lowest possible overhead for your day-to-day living. This means that if you lost your job tomorrow, you would be able to manage living with very little overhead. Hopefully there is a 6-12 month cushion in the bank account to do this. I am of the second school of living completely debt free including your home.  
 
I am not saying you should buy a house for cash or play the horses and pay it off with the winnings. I am saying that you should include your home in your total assets and include the mortgage in your total liability and payment in your monthly expenses. Paying off a mortgage can be achieved in the same vain as paying off your credit card debt. Just pay a little more each month.
 
From your first monthly payment due on your mortgage, you can begin accelerating the mortgage payoff. By simply making the equivalent of one extra payment of principle and interest each year, you can knock a 30 year mortgage down to 24 years and four months.  This is the same as reducing the interest paid over the 30 year period by a 1/3. Saving a third of your total interest is the same as lowering your effective interest rate by 2%!!  So, by paying a little extra each month, you knock off so much interest it might not even pay to refinance.  (For those math majors and picky-Annies out there, these numbers are approximated.)
 
There are a few ways you can do this:

1.  Divide the monthly principle and interest payment by 12 and add this to each monthly payment 
2. Make a full principle and interest payment once each year the same time (birthday, July 4th, etc) 
3. Make 26 half payments every two weeks
   

Any of these methods will achieve the same result; make one extra payment a year and knock almost 6 years off the loan. I do not recommend signing up for the bi-weekly or bi-monthly or mortgage accelerating programs offered by your lender or third party servicers. There is usually a fee for this, you lose control of the payments if you need to change something and you can do it yourself just as easily.  Part of being debt free is created your own model and having complete control over it!
 
Here is an example:
 
Anne has a 30 year fixed mortgage for $300,000. The interest rate is 6%. If she pays it off per the terms of the loan, she will have a monthly payment of $1,798 and will pay $347,515.44 total interest over the entire life of the loan!  If she simply pays $1,800 dollars extra each year (using any of the 3 methods above) she will pay the loan off in 24 ½ years, with a total lifetime interest of $273,870.

Anne will save a whopping $73,644 on interest. By simply finding an additional $1,800 a year; she can save 40 x that in interest. I say, that is a lot of shoes!!  Why would someone not want to do that?
 
So, you see how easy it can be to have your mortgage into the big picture and include it in your plan of being debt free. This is great when you go to sell the home, lose part of your household income or want to retire early. It might not be good for people who are definitely selling their home within 5 years, never plan on moving or just don’t care about mortgage debt. I always suggest calling the lender and asking them the best way to calculate the accelerated payments and how should you make them. Again, shy away from their offer to put you in a bi-weekly service plan. You can follow the reduction of principle on-line with the lender and trust me this feels good!

This is a guest post from Dale Robyn Siegel; a licensed attorney in New York and owner of Circle Mortgage Group, a boutique mortgage broker in White Plains, New York. She is an adjunct professor at Baruch College as well as NYU Schack Institute of Real Estate. Dale has been speaking to the public and teaching real estate professionals about mortgage finance for the past ten years. You can learn more about The New Rules for Mortgages at http://www.thenewrulesformortgages.com, and you can purchase a copy here: http://www.amazon.com/Rules-Mortgages-Dale-Robyn-Siegel/dp/1592579485 To learn more about this virtual book tour, please visit http://virtualblogtour.blogspot.com/2009/09/new-rules-for-mortgages-by-dale-robyn.html