July 20th, 2015 5:10 PM by Landa Pennington
Equity is an asset and an appreciating home is an investment. While some people have resolved themselves that a mortgage payment is a normal part of life, others have set goals to get their home paid for as soon as possible. There are several strategies that will work but they all require persistent vigilance.
A shorter term mortgage such as 20, 15 or even 10 years will not only pay off sooner, it will generally have a lower interest rate. A recent comparison at Freddie Mac’s Primary Mortgage Market Survey showed a 30 year fixed-rate mortgage at 4.04% compared to a 15 year fixed-rate at 3.20%. The fees for the shorter term were even .1% less. The shorter term with the lower rate would have a higher payment but some people consider it forced savings.
Additional principal contributions to any length fixed-rate mortgage will save interest, build equity and shorten the term of the loan. Some homeowners may apply lump sums at various times during the year such as when bonuses are paid or a tax refund is received.
Other owners might increase their payment by $100, $200 or more each month. Setting the increased payment through electronic banking would insure that you consistently make the extra amount.
Bi-weekly payments make 26 half-payments in a year which equals 13 full-payments. Because of the frequency, it reduces the interest that is due. This might work well for borrowers who are paid every two weeks but could present cash flow problems for those who are paid on schedules that don’t coincide.
Making one extra payment a year will have almost the same effect as a bi-weekly payment. The 13th payment would be completely applied to principal.
Before embarking on one of these strategies, it would be wise to verify with your lender that it complies with their policies. Check out the Equity Accelerator to see how it could affect your loan.