A Few Curve Balls Towards Making Mortgage Payments
No one in the right frame of mind will need extra motivation to make their mortgages a top priority among their liabilities. In fact, meeting these obligations could be a key reason why more and more people are seeking ways to earn extra money in their free time.
If you are to default on your car loan, some people might turn up at your house someday to tow your vehicle away. You probably don’t want that piece of scrap metal sitting in your garage anymore anyway.
But can you even contemplate having debt collectors chasing you to make your mortgage payments? And then have men in suits from the lender pestering you that your home might be taken away if you don’t wise up and be a good boy?
I shudder to imagine that, even if it’s just fantasy. That’s not what I want to put my family through. So I would try to pay off the house as soon as I can. Or at least try to make them less taxing on my blood pressure. Here’s some ideas that could help you do the same.
Private mortgage insurance (PMI)
The first thing you should do is to get PMI off your back. Private mortgage insurance is a lender’s requirement when you take up a home loan that exceeds 80% of the property value.
Real estate purchases with less than 20% down payment is risky business. At least to the banks. And that extra risk is mitigated by requiring the borrower to buy PMI. This makes lenders comfortable enough to write a bigger check for you.
Once you hit the 20% mark, PMI is no longer a strict requirement. The tricky part is that PMI is often packaged into your mortgage when you first signed up for it.
Lenders can partner with insurers to sell it via their own sales staff. So it’s an extra source of income for the lender. Meaning you cannot really expect a courtesy call from the bank that you now have over 20% equity and can cancel your PMI now. Their bottom line is at stake here.
It will then be your own responsibility to monitor when you hit that magical mark so as to cancel PMI legitimately.
An easy way to check whether you are still paying for it is by looking at your loan statement. If you see it, make an effort to cancel it as soon as you can. This can save you thousands of dollars.
The question many homeowners might ask is whether the 20% equity is based on the value of the house at the point of purchase or at this very moment. This depends on the policies of the lender you are with. However, if you know exactly where the 20% point is, you can actually make extra payments to your mortgage to reach that mark, then cancel PMI and forever be at peace.
To prepay early or not?
Despite conventional wisdom reminding us that we should pay off our debts as soon as humanly possible, there are some pretty good arguments against this from an investment point of view.
- If your mortgage is costing you 5% interest and your $50,000 time deposit is sitting in the bank at 1%, you are effectively losing money on your money! In this sense, you can immediately multiply the returns on your $50,000 by using it to prepay your mortgage. The saving you make obviously looks more attractive than the measly 1% a time deposit provides.
- When you reduce your outstanding loan by making a lump sum prepayment, your monthly installments are going to go down too. This has an immediate impact on your monthly cash flow as there is much less mortgage commitment towards your household expenditure. This is an easy way to feel richer than you really are.
- You can finally say that you really own your home without any tinge of irony in your words. Once you fully pay off the loan, no one will ever bother you again about repayments. It’s a huge load off your chest if your housing loan is something at the back of your mind every time you indulge yourself with lavish spending.
Why not prepay
- Even if you increase the equity in the house, it is just a paper value. You won’t be able to get your hands on that cash unless you refinance the house or sell it to the next owner. Even then, there is no guarantee that a bank will agree to refinance or a prospect will buy. In this aspect, you could be looking at the prospect of becoming “house rich, cash poor”.
- The mortgage and interest you accepted with the lender is definite. When you put inflation into the picture, your monthly payments look cheaper and cheaper the longer you stretch the loan. In 20 years, $1,000 will look far cheaper than what it’s worth now.
- If your mortgage interest rate is at 5% and you have an investment opportunity to give your 9%, you would be a fool not to use your extra funds for that investment. Prepayment is a huge opportunity cost if you are someone who is savvy with investments.
- Some people just like the feeling that they are using money which they don’t have. The feeling that the bank will treat them nicely if they ever want to see that money again. And the bank can do nothing about it as long as they continue to make the minimum payments.
Simple prepayment strategies
If you have decided that prepaying your mortgage is the way to go, then your next step is to work out the strategies you can use to do that. Yes, it is like a chess match.
Extra monthly payments
The easiest gradual repayment strategy is to make small incremental extra payments towards your loan each month. This will not be too taxing on your personal lifestyle while you save on interest little by little. You can then monitor the effects of your decreasing cash flow.
Annual lump sum redemptions
Instead of making a recurring extra payment monthly, you can accumulate all your excess funds yearly. Then dump them into your loan account like a real boss. The great part is that while you are accumulating that cash, you can use it like a petty cash box for yourself.
By converting a monthly repayment to a weekly one, you actually end up making more payments a year than if you are to do it monthly. Going weekly means that a supposedly $36,000 annual accumulated monthly mortgage payment will become $39,000. This is a bigger repayment which will save on interest rates, especially in the long term.
This is not a sleight of hand. It has something to do with months not having the same number of days. If you are a math fanatic, you can work out how this magic comes about.
What would I do?
I’m still really an old-fashion guy making ends meet. The home loan is the biggest financial commitment most adults every get into. It’s a huge burden in my mind even though I have no problems keeping up with it. However, it is a cloud I want to blow away from above my head as soon as possible.