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“I’m in debt. I am a true American.” -Balki Bartokomous
It’s true. Just about every person in American (and much of the world) is in debt.
We are so used to it that we even consider ourselves to be debt-free when we still have a mortgage.
You know how it goes…
“Yeah, I’m debt-free…well, except for my house.”
If you have a mortgage you are not debt-free.
But you can be…
There is a lot to know before you start paying off your home early…
Second, you need to understand why it isn’t dumb to pay off your mortgage early.
Now, if you’re still reading, you’re in the right spot…
This is an ongoing series on paying off your mortgage early.
A mortgage is generally the biggest debt you have, so it’s not quite as simple as paying off everything else.
In this series, I will explain multiple ways to lose the mortgage early.
You can even apply many of them simultaneously.
First, let’s discuss the different types of mortgages…
Types of Mortgages
There are many types of mortgages, but really, only a few apply to the savvy home-buyer.
Fixed-rate mortgages have a fixed interest rate for the entire life of the loan. This means that you will pay the same interest rate until it is paid off (or until you refinance). Fixed-rate mortgages are predictable since the interest rate remains the same. The standard loan is 30 years (in America), but it’s also fairly standard to see a 10, 15 or 20 year fixed-rate mortgage. The shorter, the better. Under no circumstance should you ever take out a fixed-rate loan for over 30 years. If you need a 40 year loan, you can’t afford that house!
Adjustable-Rate Mortgages (ARMs)
Adjustable-rate mortgages (ARMs) have an adjustable interest rate. Usually the rate is fixed for a certain amount of time, but after that time it fluctuates with the market rates. ARMs are unpredictable since interest rates fluctuate. They can go lower, but they can also go much higher. This makes an ARM much more risky than a fixed-rate mortgage. To keep it simple, I would just say: don’t do it!
Other Mortgage Types
Other mortgage types include interest-only mortgages, interest-only ARMs, balloon mortgages and other types of “creative financing”. There are also several variations of ARMs. These types of loans are very risky and should never be used by the average home buyer. In my opinion, they should never be used, period.
A fixed-rate mortgage is the safest and most predictable type of mortgage. Unless you are experienced with creative financing, stick with a fixed-rate. I recommend refinancing if you have anything but a fixed-rate.
It All Comes Down to One Thing
No matter which type of loan you may have, there is one very important thing for you to know right now when you are attempting to pay off any mortgage early.
It’s all about making extra principle payments.
I have probably heard 100 different ways to pay off a mortgage early and every single one of them equated to paying extra principle payments in one way or another, but that doesn’t mean that they aren’t all effective.
There are different reasons for the different strategies.
These strategies are not magic, but they work. And they set you up to be able to make extra principle payments, even if you don’t think you can afford to.
Everyone likes to talk about pre-payment penalties.
I have actually heard this as an excuse for not paying off a mortgage early.
Many loans don’t even have them. You need to contact your mortgage company if you are unsure and figure out if your loan has pre-payment penalties.
Even if you do have pre-payment penalties that doesn’t mean you shouldn’t pay off your mortgage early.
Yes, the bank would love for you to make payments for the entire length of the mortgage, 15, 20 or 30 years. That’s why pre-payment penalties exist, but don’t let them scare you!
These penalties generally only apply to the extra principle payments you make, not to your regular payments. Even if you have a penalty, you will almost always benefit from making extra principle payments.
There is still much to know before you begin paying off your mortgage early…
Continue reading with part 2 here.