Use Your House To Pay For Your House
Few people have heard of the technique of using your home to pay for your home. It requires self-control and a change in habits, but doesn’t everything in life that’s truly worthwhile? So put your mortgage on a diet and quit paying extreme interest rates to your bank by paying off your mortgage early, then using your “former house payment” for other investments.
First, so you’ll know what we’re talking about, let’s review the common early payoff techniques. The oldest one around is to just add a little extra when you write your check, either every month or whenever you have it. Even a one-time $5 additional payment to principal could save you $50 in interest over the life of the loan.
Some people make a regular habit, even using automatic withdrawals from their checking accounts, to add $100 or more (or less) per month to their home’s principal only. It is very important to specify to your lender that you are not “paying ahead” on next month’s bill, but do, in fact, want the entire additional amount applied to “principal only.”
Bi-monthly mortgages became popular in recent years, but not as popular as they could have become. You see, many lenders agreed to accept half of the monthly payment at the first of the month and the other half mid-way through the month. The problem was, they were saving up the first payment and applying them both at once. So not only was a buyer not paying fast, it could be the buyer was actually paying more slowly.
In a “true bimonthly,” half of the payment is applied as principal and interest twice a month. It’s still a little confusing though, because of the ambiguity of the modifier “bi.” “Bi” can mean twice in one period or every two periods. So a bimonthly payment could, conceivably, be paid twice in one month or every two months. You see the problem—big difference!
A bimonthly program requires discipline and yet saves, over the life of the loan, the approximate equivalent of only one month’s payment.
The better solution is “biweekly.” Perhaps that’s because a week is not easily divided into two parts (weekdays and weekends don’t count as half weeks!). Biweekly somehow always means every two weeks. The upshot of this approach is that it’s very easy for people who are paid every two weeks to use this technique, and it tallies up to an extra full payment per year.
Confused? While there are 12 months in a year, and they are generally thought of being comprised of four weeks, there are actually 4.2 weeks per month. In other words, there are four-13-week quarters in a year. Fifty-two weeks divided by two is 26; thus, 26 payments are made in a biweekly plan, as opposed to 24 in a bimonthly plan.
A biweekly payment schedule, depending upon your specific numbers, could cut five years or more off the total amount you would otherwise pay on a straight, fixed loan.
All of these methods can be arranged, rearranged or combined to maximize paying principal as soon as possible and interest as late as possible.
One methodology few people know, even amongst bankers and mortgage brokers, is that of using the equity in your house to pay off your house. And the best part about it is, if you live in a country where the interest on home loans is exempt from federal tax, you can use whole, 100% tax-free dollars for paying not only interest, but also principal, on your home!
It’s simple, though we don’t recommend trying it without purchasing a manual or drawing out a carefully crafted plan. One misstep, and you could find yourself worse off that you were before. But essentially, it works like this: you extract equity from your home and pay it onto the principle[al of your house. That reduces your remaining interest payments by tens or even hundreds of thousands of dollars (depending upon the specifics of your home price and loan).
Yes, you also then pay back the line of credit against your equity, but it should be significantly less than mortgage interest. Mortgage interest is computed daily, and compounded besides! Plus, it’s paid a month late. They call that “in arrears”—the opposite of in advance. Equity loans or lines of credit have different calculation and payment requirements and usually amount to much less.
Don’t try this at home without learning how to do it, but I betcha it’s a method you don’t hear much about!