Mortgage Debt Elimination

Smart Ways To Save Money

These are home payment relief tips that will enable you to reduce your note burden.

This is very important since, as part of your debt reduction analysis, knowing how to reduce this debt is key to keeping more cash.

I don't know about you, but having that house bill staring you in the face each month is no picnic. The good news, once you begin putting these mortgage debt elimination strategies to use, you'll be much happier as you rid yourself of that burdensome obligation.

Debt Mortgage Relief

Adjustable Rate Mortgages - ARM's

You're basically dealing with the uncertainty of not knowing what your house payment will be on a periodic basis; which is risky and difficult to budget for.

Basically, the interest rate you pay on ARM's resets at a "higher" rate in a short period of time (generally 1,3 or 5 years). As a result, your monthly payments will skyrocket.

In some cases, people opt for an ARM due to weak mortgage debt to income ratios. Sometimes ARM's are attractive for their lower initial payments.

Whatever the reason, it's very sad to see so many people that are struggling with these increased payments after their ARM resets; many to the point of losing their homes.

Fixed Rate Mortgages

Basically, your mortgage debt is calculated on an amortization schedule, which includes principal and interest. For example, here's an example of a $250,000 mortgage loan amortization schedule.

In this example, your monthly mortgage payment is approximately $1,420 dollars a month. Had you taken out this loan, you'll notice on payment 1 that only $274 of your $1,420 mortgage payment is going towards paying down your loan balance (principal); whereas $1,146 of your $1,420 is going into the banks pocket as interest.

As you look further down the amortization schedule, you can see that although, a very small amount of additional money goes towards your principal, the money you pay towards interest remains immensely high. In fact, if you scroll down to the total column, which indicates your total payments after making 30 years of payments, you'll be absolutely astounded.

Notice that you ended up paying the mortgage company $511,000 for a $250,000 loan you took out. This is because you paid $261,000 in interest payments over the life of the loan. This is more than the loan itself. No wonder mortgage lenders jump up and down on these 30 year fixed mortgages.

Prepayment Penalty Clause And Mortgage Debt Elimination

A great many conventional mortgage loans do not contain a prepayment clause. However, depending on the lender you're dealing with, some do.

Generally, you'll see prepayment clauses pop up with loans to people with tarnished credit or with borrowers with good credit who opted to take the prepayment penalty clause to secure a lower interest rate on their mortgage.

The prepayment penalty will vary by contract, but generally it comes out to about six months worth of interest on the outstanding loan balance. If you're looking to escape the prepayment penalty clause, then you should discuss it with a real estate attorney.

Reduce Mortgage Debt

Plan To Reduce Mortgage Debt

Then we started looking at our loan balance each month and found we were barely making a dent in paying it down. We figured there had to be a better way to pay down this debt, so we made it our mission to find out how.

Ok, onto the good stuff! Assuming you're not dealing with a prepayment clause, below are our mortgage debt elimination strategies.

• Make Extra Principal Payments
• Refinance To A Lower Rate

• The 15-Year Fixed Loan
• Invest In An Index Mutual Fund

Mortgage Debt Elimination - Extra Principal Payments

Looking again at the $250,000 mortgage loan amortization schedule, you can see for example starting at payment 1, you can pay off your mortgage in half the time by simply paying your regular mortgage payment plus the principal amount of payment 2 ($274.89). By doing this you've basically made two payments and just avoided the $1,144.58 in interest for payment 2.

Another way to look at this is you've paid off the principal twice as fast. Because you are paying double the principal, you’re jumping down the amortization schedule two months at a time; or twice as fast.

For the second mortgage payment, you skip down to payment 3 where you'll pay your monthly payment of $1,419.47 plus the extra principal of $277.42, paying off payment 4; and you continue on from there.

What's nice about this mortgage debt elimination method is its flexibility. If you only have $25, $50, $100 for example to put toward extra principal payments, by all means you should do so. You'll still get your mortgage debt paid off faster and save thousands of dollars in interest payments.

To illustrate, take a look at what effect applying an extra $100 a month towards principal has using this extra mortgage payment calculator. Staying in line with our amortization schedule, in the “enter loan information field”, type in 250000, 5.5, 360, 12. Then, under the “enter extra payments field”, type in the first row 100,1, 360.

After clicking on the "display extra payment benefits" button, you'll notice, that the extra $100 a month makes a huge difference. Had you not applied the $100, the mortgage would have taken 30 years to pay off and you would have forked over $261,010 in interest payments.

By putting just an extra $100 a month towards principal, you've paid off your loan 4.5 years earlier and saved $45,000 in interest payments.

One more important point; please make sure you indicate to your mortgage company that the $100 is for "extra principal payment". Depending on your lender, there may be a place on your mortgage coupon to indicate this.

If not, we would suggest that you write two separate checks; one for your regular mortgage payment and one for the extra principal payment indicating "apply to principal only - loan #".

You'll also want to check your mortgage balance periodically to ensure your mortgage lender has properly applied the extra principal you paid towards your loan. To do this, click on the "display loan schedule" button on the extra mortgage payment calculator and compare the balance figure from the mortgage calculator to the principal balance on your monthly mortgage statement.

Debt Reduction Analysis - Refinance To A Lower Rate

The break-even point is the time it takes to make up in monthly savings (had you refinanced at a lower rate) what you paid in fees to do the refi. You can calculate your break even by simply dividing the mortgage fees by the monthly savings.

For instance, let's say you would save $100 a month by refinancing, and the refi closing costs would be $3,000. Your break-even point is 30 months from now: the $3,000 in fees divided by the $100 a month in savings.

Whether or not to refi comes down to how long you plan on living in the house you're considering doing the refi on. For example, if you expect to continue living in the house for more than two-and-a-half years, you'll save money in the long run by refinancing.

But, if you plan to sell the house before then, you're better off staying with the mortgage you have.

You'll find an excellent site to begin shopping for refi's at bankrate.com. Using this mortgage debt elimination strategy combined with the "making extra principal payments" strategy will definitely save you a great deal of money and enable you to pay off your mortgage loan faster.

Paying Off Mortgage Debt

Reduce Mortgage Debt Using The 15-Year Fixed Loan

This is an excellent mortgage debt elimination strategy because with the 15-year fixed, the equity in your home is growing much faster than it would with a 30-year fixed. This is because the 15-year fixed puts the time value of money on your side.

In other words, your having your monthly mortgage payments weighted more towards principal, enabling you to pay yourself by quickly increasing your equity instead of overpaying interest to the mortgage company through a 30-year fixed.

If you're in a situation, where the monthly payment on the 15-year will be too high, then you can go with the 30-year fixed using the "making extra principal payments" strategy and still achieve the mortgage debt elimination benefits.

Invest In An Index Mutual Fund

Compare the 11% to your mortgage interest rate, and you can see that this is a great strategy should you take the following steps:

1. Set up an index mutual fund just for your extra principal payments
2. Send the extra principal amount you would normally pay towards your mortgage to this fund on the 1st of each month.
3. Allow dividends and capital gains to be reinvested in the mutual fund
4. Don't pull any money out of the investment until you're at the point where your investment can pay off your remaining mortgage balance or you are selling your home.

Mortgage Debt Elimination Summary

You can do it too - Crush That Debt!!