Independence Day... from your Mortgage!
June 19, 2021
As we near the celebration of America's Independence, it got me thinking about American's efforts to gain independence from their mortgage. You have heard me say it before, "no one actually wants a 'mortgage.'" They want a home and generally by default they have to have a mortgage to get one. We then spend the next 30 plus years working hard to become free and independent of owning a home and of having a mortgage. With this in mind, I thought I would navigate through some strategies that can help you accelerate your "mortgage independence" as well as how you can take charge of your savings.
Now before I go into how to gain this independence, I think it is important to point at that many advisors and business professionals would advise you to never pay off your mortgage. Why? Generally this is because the money that would be sitting in your home, considered dead equity, is not "alive" and working for you. It could be invested and making gains, it could be used to pay off other higher cost loans or debts or it could be used to purchase other homes that allow you to create passive income streams. All of these become arguments against mortgage independence, but the great thing is when you know all of your options, you are empowered to choose for yourself what fits your needs best. Now, back to gaining your freedom from a mortgage!
A general rule of thumb says that if you pay 1 extra payment a year, you will pay off your mortgage in half the time. It is not that simple, but an extra payment a year will definitely pay your mortgage off in less than the original term. For example, if you finance $300,000 for 30 years at a fixed rate of 2.75% and choose to pay just $100 extra per month (pretty close to a payment a year), you pay your mortgage off in 22 years and 5 months instead of 30 years. It also saves you over $10,000 in interest that you would have paid. Bump this up to $200 a month and you double your interest savings and shave off almost 5 more years.
Did you know that even if you lock in a specific interest rate, when you pay more than the set payment you are actually effectively changing the interest rate equivalent? This is another way to strategize your mortgage independence. Rates this past year have no doubt been incredible. I am still locking clients in with the lowest rates they have ever had, some cashing out to invest because they may make more on the money versus the interest cost they will pay. Once you are locked in, how can the rate be different? With any amount of money added to your payment, you are actually paying the equivalent amount of a lower rate. So if you lock in the above scenario at 2.75%, but pay extra at any time, you truly are paying less than 2.75% interest in the long term.
If you have any questions about how to accelerate your path to mortgage independence, I am happy to explore some of these calculations with you.
You can contact Alysha Boles at (661) 858-7214, or visit http://www.advisoralysha.com. See ad on this page.