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Pay Off Your Mortgage Early
It used to be that you worked hard, burned your mortgage and burned the papers in the front yard and partied. That doesnt happen too much these days.
Very few people stay in their home long enough today to pay off a 30-year mortgage. If you can pay it off early, it might be the best way to spend your money.
There is a security found in owning your own home. With every year that passes, we count how many years until the place is free and clear. You can make extra payments on your mortgage to pay it off quicker and save thousands of dollars in interest. For example, paying one extra payment a year on a $200,000 mortgage, you can save over $65,000.
Thats a lot of money that you could spend elsewhere.
There are a lot of arguments against paying off your mortgage early. Long-term mortgage rates are around 7% for most homeowners. If you deduct the interest paid from your taxes, the actual rate you are paying is closer to 5.1% if you are in the 27% bracket. Any investments that earn more than 5.1% are a better place for your money.
Many advisors recommend that you take care of three areas of investment before using your extra money to pay off your mortgage:
Retirement
You may need to focus your extra money towards your retirement before you pay off your home. Owning your own home wont mean a thing if you have to sell it to afford medication and food. Saving for retirement should especially be important if your mortgage is scheduled to be paid off before you retire anyway.
Insurance
If you have others dependant on you, good insurance coverage is necessary. Your familys needs should be addressed by you policy. Make sure that you have enough coverage to take care of your family. Disability insurance is expensive, but a good idea. If you are unable to work for a long period of time, it takes away a lot of your worries by providing an income.
Emergency fund
Having enough money in a savings account to cover three to six months worth of expenses, including your mortgage payment. This will help prepare you for any emergencies that might come your way. For example, if you break your arm and cannot work for two months, your loss of income will be covered by your emergency fund. On the smaller side, a broken dishwasher or vehicle wont stress you out as much if there is money designated for repairs.
And dont even think about paying off your mortgage if you have high-interest debt somewhere else. Always pay off your credit cards first. Extra money goes to the loans with the highest interest first as a general rule of thumb.
There are some homeowners who really benefit from paying off their mortgages early. If you have a small mortgage and dont deduct your mortgage interest, the actual cost of your mortgage is higher. Paying off your mortgage is a good idea.
If you are paying private mortgage insurance because you owe more than 80% of the homes value, you should pay it down as quickly as possible. Eliminating your PMI payments will reduce your monthly payments and gives you a faster return on your investment.
Many lenders will encourage the payment of a mortgage early. On my first home mortgage, our mortgage company offered a program that deducted the payments from our checking account twice a month. Each payment was half of the regular payment. Because there are 26 bi-weekly periods a year, you are making an extra payment during the year. If you are paid bi-weekly, the situation can really help you in your budgeting as well.
Programs such as these are convenient and free. Another way to do this is to take your monthly mortgage payment and divide it by twelve. Add that amount to each payment you make, and you will be making one extra payment each year. This will shave years off of your mortgage.
Make sure that the extra payment amounts are applied to the principal of your mortgage. Make sure that your agreement contains no prepayment penalties. Most wont.
I am proud of you if you are in a place where you can pay off your mortgage early. The idea of not having a mortgage payment is a wonderful one. Look at where you are, where you are going and how you will get there before you decide where your money will be going.
Finding a Mortgage
You may be bombarded with ads claiming the lowest rates. In fact, many say you can reduce your payments by hundreds of dollars by going with their program. If only it was that easy. Finding the right home loan or refinancing deal can involve a lot of work.
You have to shop around. Look at different mortgage lenders to find the best interest rates and terms. I suggest that you decide exactly what you are looking for before you start looking for lenders. Do you want a fixed rate mortgage or an adjustable mortgage. There is tons of information about mortgages available on the Web. Know how much you want to put down, how much you want to finance and how long you want to finance. Believe me; you dont have to worry about not finding a lender who has what you need -- it might take a little work, but it is possible. If you are prepared, have good credit and are financially in order, you will have no problem finding the perfect financing.
You dont even need to leave your house to start your search. The internet is an excellent place to start looking for mortgages. Not only will you find thousands of mortgage companies, you will also find lots of valuable information. Many sites will be familiar to you from television ads. Look for the lenders and banks you recognize. The largest companies offer good, sound information. They can also be trustworthy.
You should never give any personal information to anyone you arent sure of, whether by internet or telephone. It is best to handle all transactions by phone or in person. Have the lender call you.
You can also look for lender in the local newspaper. Just flip to the real estate section. Many lenders list their rates. But remember, this is a newspaper, so the rates may be anywhere from four to 10 days old. There may have been a shift in rates. When you call the mortgage company, dont mention the papers rate. Instead, you should ask for the lowest rate on the type of mortgage you are looking for.
You may not have thought of this, but ask a real estate agent. They are in the business of selling homes, and most homes are financed. They will know which local lenders offer good rates. In fact, many real estate agencies offer mortgage services. The agency may also be able to handle the title and escrow details, install the alarm systems and perform appraisals. Any good agent can give you three recommendations.
Simply take out your phone book and start calling the local lenders and banks. Ive done this several times. Ask for their rates and terms on the type of mortgage you are interested in. They will usually ask some questions about the type of home you want to purchase, how much you want to put down and other general questions. Be prepared and know what you want to ask them in advance.
You can also call your local housing authority. This is an excellent source for information. It may be that you could qualify for certain programs, such as those for first-time buyers. There are also programs that include down payment assistance and low-rate loans. If you qualify, you may be able to get a mortgage below the market interest rate.
Searching for the best rates and terms will take a little time, but it can save you tens of thousands in interest payments. Take a little time to make the best decision for your financial future.
Foreign Currency Mortgages - Take Advantage Of Some Of The Worlds Lowest Interest Rates
In the UK over 99% of borrowers raise the mortgage they need to buy their home in sterling and pay the prevailing UK interest rate. But there are alternatives.
Despite increases in 2005, the UKs domestic interest rates are low by its own historical standards. However, they remain significantly higher than in Eurozone, America, Switzerland and indeed, Japan. Therefore, currently you can take out a mortgage in Euros, $ dollars, Swiss Francs or Yen, convert the money youve borrowed into sterling, secure the debt against your house in the UK and end up paying a much lower rate of interest.
You may think that UK interest rates are low, but if you look at the 3 month money market interest rates youll see that they remain significantly higher than in other parts of the world:
? sterling 4.64%
$ US 4.48%
Eurozone 2.46%
Swiss Franc 1.03%
Yen Japanese 0.12%
(Source: Financial Times, 3 month Money market Rates, 9/12/05)
But you wont be able to take your mortgage out at these 3 month Money market rates. Youll have to pay a premium for borrowing in a foreign currency and the set up costs will be higher. Nevertheless, if interest rates were to remain as they are now, you could save a lot of money on your interest payments.
So why do 99% of UK domestic mortgage holders still choose a domestic UK mortgage? Most borrowers are unaware of foreign currency mortgages but thats not the main issue. The primary answer is that there are extra risks.
International interest rates are constantly changing and gap between sterling interest rates and the foreign currency rate youve borrowed in, could narrow. This would reduce the interest rate saving and, if that trend continued, could make your interest rate more expensive than a standard ?sterling mortgage.
But the biggest risk by far lies in fluctuations in currency exchange rates. If you borrow in say, Euros, you eventually have to repay the loan in Euros. That would be great if the Euro/Sterling exchange rate was fixed ? but they arent.
If the ? sterling strengthened against the Euro, when it came to repaying the mortgage you would need to convert less ? sterling into Euros than the ? sterling value of the money you received when you first took out the mortgage. That would be great, a lower interest rate and repay less than you borrowed.
But what happens if the value of sterling falls against the Euro as has happened in recent times?
You still have to repay the same number of Euros but youll have to convert more ? sterling to achieve that. In other words you end up paying back more capital than you borrowed.
So in many ways, a foreign currency mortgage becomes a bet that the ? sterling exchange rate will not fall against the currency youve borrowed in. In other words youve transformed your mortgage and what is probably your biggest liability, into a major currency speculation. And your homes secured against it! You may be lucky and save a lot of money - but its not for the faint at heart!
Another point you should be aware of is the minimum deposit youd need for a foreign currency mortgage. Most lenders ask for at least 20%. Thats a reflection of the increased risk.
Incidentally, you now have second option to consider. You can take a mortgage in ? sterling and have your interest rate linked to a foreign currency interest rate. Whilst you avoid the biggest risk ? the exchange rate risk, you are still taking gamble that the foreign currency interest rate plus the interest rate premium you pay, will remain lower than the equivalent UK interest rate. These foreign interest rate mortgages typically have a 5 year tie in clause. So, if you want to repay the mortgage early, youll have a hefty redemption penalty to meet - although the mortgage can usually be moved to another property. For some borrowers this represents an acceptable risk, especially if the mortgage is linked to the Swiss Franc or Yen where interest rates have been astonishingly low and stable over past years. For example, the Swiss interest rate has not moved above 1% in the last 4 years and in the Eurozone, the interest rate has not changed for 5 years.
Nevertheless, part of the standard wording for a regulated investment warning is appropriate here ?.. past performance should not be construed as a guarantee of future performance.
Still too risky for most borrowers!
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