Welcome to the series of Posts from Your Archives, where bloggers put their trust in me. In this series, I dive into a blogger’s archives and select four posts to share here to my audience.
If you would like to know how it works here is the original post: https://smorgasbordinvitation.wordpress.com/2019/04/28/smorgasbord-posts-from-your-archives-newseries-pot-luck-and-do-you-trust-me/
Today’s contributor is financial expert and author Sharon Marchisello, who shares her down to earth and valuable insights into managing our assets. Sharon has two blogs and I will be focusing on her Countdown to Financial Freedom during this series.
Paying off your #Mortgage by Sharon Marchisello
Several months ago, I wrote a post about the pros and cons of paying off your mortgage early. I promised that in a future post, I’d tell you how to do it. Well, here goes.
The best forty dollars I ever spent was to attend a one-day class at a community college near my Seattle home on how to prepay your mortgage. My husband talked me into going.
I had heard people mention “making double payments” to accelerate repaying their mortgages. But our mortgage payment was already over a thousand dollars a month, a big chunk of our income; how could we possibly make double payments?
Early in the life of a mortgage, the bulk of your payment consists of interest. “Double payments” simply means paying two months’ worth of principal. When you make a principal payment before it is due, you cut out the interest associated with that payment.
When you purchase a house and secure a mortgage, you should receive an amortization schedule from your lender. If it’s not included in the huge packet of papers you receive at closing, ask for one or create your own. An amortization schedule states the amount borrowed, the terms, and the total amount of interest that will be paid by the loan’s end date (assuming you stay in the house and make regular payments throughout the life of the loan, without ever refinancing). There will be a breakdown of each month’s payment showing how much of the total goes to principal, and how much to interest, as well as the loan balance after each month’s payment.
Our teacher ran an amortization schedule for each student in the class, using the loan parameters we provided. We could then use this schedule to track our own prepayments and reconcile with our lender’s statement at the end of each year. Now it’s easy to create your own amortization schedule online, in Microsoft Excel, or using one of many other readily available computer programs or apps.
For example, let’s look at a thirty-year fixed loan for $200,000 with a five-percent interest rate. The payments would be $1073.64 a month, and you would have spent a total of $386,511.57 by the payoff date, assuming you never moved or refinanced. After thirty years, the total interest paid would be $186,511.57, almost as much as the original amount borrowed. Those numbers can be quite intimidating the first time you sign your life away to acquire a mortgage. When my husband and I bought our first home, our interest rate was 10.5 percent on a thirty-year loan, so the figures were even more dramatic.
Here’s what an amortization schedule for the thirty-year, five-percent loan for $200,000 with a monthly payment of $1073.64 would look like:
If you decide to make double payments, you don’t need to pay $1073.64 x 2. You simply pay next month’s principal along with this month’s payment: $1073.64 + 241.31. Now your loan balance has been reduced to $199,518.38 instead of $199,759.69, and you have saved $832.33 in interest. Next month, you will be on payment #3. If you send month #4’s principal (243.33) along with it, you’ll be on payment #5 by the third month of your loan. Continue these steps and in six months you’ll have knocked a full year off your loan payments and saved almost $5000 in interest over the life of the loan. Notice how much faster the loan balance declines; in this example, your balance after six months is the same as it would have been after one year of normal payments:
Of course, when you use this prepayment method, the principal payments increase a little each month, which could become difficult to manage eventually if your income is not going up. But the beauty of this system is that you are not locked into making the additional principal payment, so if money is tight one month, you can skip or reduce it, or you can stop any time and go back to your regular payment schedule. The initial savings has still been realized.
Think about this option when you first apply for a loan; the sooner you begin prepayments, the more interest you’ll save. As you can see from any amortization schedule, the lender collects the bulk of the interest up front, when the loan balance is highest. People who refinance over and over don’t reduce their loan balance much over time; most of what they pay is interest, and they perpetually carry a mortgage. (“But it’s tax deductible!” they argue.) If you’re afraid you might not be able to manage the payments on a fifteen-year loan, take out a thirty-year loan and prepay it, using the double-declining principal strategy to cut your repayment time in half.
You can also customize your amortization schedule to prepay a fixed amount each month, for example, sending your lender an extra $100 toward reducing the principal. Every little bit saves way more interest down the road.
Have you ever thought about pre-paying your mortgage? I’d love to hear your comments.
©Sharon Marchisello 2018
About Sharon Marchisello
Sharon Marchisello is the author of “The Ghost on Timber Way,” part of a short story anthology entitled Mystery, Atlanta Style, featuring fellow Sisters in Crime members. She has published a personal finance e-book entitled Live Cheaply, Be Happy, Grow Wealthy, as well as numerous travel articles, book reviews, and corporate training manuals.
Sharon grew up in Tyler, Texas, and earned her Bachelor of Arts from the University of Houston in French and English. She studied for a year in Tours, France, on a Rotary scholarship and then moved to Los Angeles to pursue her Masters in Professional Writing at the University of Southern California. Now she lives in Peachtree City, Georgia, with her husband and cat.
Retired from a 27-year career with Delta Air Lines, she does volunteer work for the Fayette Humane Society. Going Home is her first published novel. The murder mystery was inspired by her mother’s battle with Alzheimer’s, which prompted her to wonder what it would be like to interview a witness or a suspect who could not rely on her memory.
Books by Sharon Marchisello
One of the recent reviews for Live Well, Grow Wealth
Sometimes it can be hard for me to read books due too much going on with content, but Marchisello’s book was a really easy read for me. I can’t do complicated when it comes to books. She was really relate-able, because I didn’t grow up as a math centric person, and I also came from what would be considered a middle-class family. As a 27-year-old, her advice made me think about my life, and what I could be doing differently (therefore better!) with my money. She also changed the way I think about money. I don’t think a lot of people grow up to consider things like a big picture, or what’s going in and out. It kind of gave made better sense of what’s going on around me. A good perspective shift.
Read the reviews and buy the book: https://www.amazon.com/Sharon-Marchisello/e/B00NH6N4WK/
and Amazon UK: https://www.amazon.co.uk/Sharon-Marchisello/e/B00NH6N4WK/
Read other reviews and follow Sharon on Goodreads: https://www.goodreads.com/author/show/4297807.Sharon_Marchisello
About the book
Live Cheaply, Be Happy, Grow Wealthy is Personal Finance 101, a commonsense guide to shrinking your financial footprint. Sharon Marchisello compares managing your financial life to reaching and maintaining a healthy weight, and in ten easy-to-follow steps, she shows ordinary people how to build wealth by living within their means without compromising their values.
The book is available from Smashwords: Live Cheaply, Be Happy, Grow Wealthy
Connect to Sharon.
Blogspot : https://sharonmarchisello.blogspot.com/
Blog WordPress: https://smarchisello.wordpress.com/
My thanks to Sharon for opening up her files to enable me to share her posts… we can always use free and unbiased financial advice… Sally.