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Be Smart About Paying Off Your Mortgage Early

By Brian Kline | January 12, 2022

The second American Dream is owning your home free and clear. It comes right after buying a home in the first place. Millions of Americans take action to pay off their homes early instead of dragging it out for 30 years at an extra cost of tens of thousands of dollars. However, there is a right time and the right methods to go about this. For a primer on how to do it correctly, read the article: How to Pay Off Your Mortgage in a Few Short Years.

On the other hand, some methods don’t make good financial sense...

Don’t Pay Others to Pay Off Your Mortgage Faster

It doesn't make sense to pay a third party to arrange to pay off your mortgage early. As the housing market continues at a blistering pace, many different types of buyers are getting into the market. First-time buyers are getting in, some people are buying up, baby boomers are looking for retirement homes, along with people that have many other situations.

Also in the market are questionable businesses offering to shorten the length of your mortgage to save you tens of thousands of dollars by paying off your mortgage early. For the most part, you don't want to engage their services. In fact, back in 2015, the Consumer Financial Protection Bureau sued Nationwide BiWeekly Administration Inc. This company promotes a program called Interest Minimizer as a way for homeowners to save thousands of dollars over the life of their mortgages.

In September of 2017, a federal court in California rendered a judgment against Nationwide BiWeekly for a civil penalty of $7 million. The court also ordered both parties to work together towards a resolution that would allow Nationwide to resume the Interest Minimizer program but require it to correct certain misleading promotional aspects.

Pay Off Your Home Sooner

These theoretical money-saving programs seldom make sense for the average homeowner. The main goal of these programs is for you to make extra mortgage payments to reduce the outstanding balance on the loan. When you reduce the principal owed, less of your payment goes towards interest, and more goes towards reducing the loan balance. The result is you'll pay off your home sooner. Or have more equity in the home when you sell it.

In reality, few people pay off their entire mortgage, at least people that aren't near retirement don't. First-time buyers seldom own their dream house. Most families buy between five and seven homes during their lifetime. At a minimum, most people buy a starter home, then a growing family leads to a bigger home, then gaining financial security leads to a home for entertaining, and finally downsizing at retirement. That means 30-year mortgages are seldom paid off even if additional payments are made.

With interest rates still near record lows, you probably have better uses for the money rather than reducing a mortgage that you'll never pay off. Instead, apply it towards other high-interest debt that you can pay off early. Maybe a credit card or a car payment. Or even use the extra money to take a vacation. The bottom line is that gaining a few hundred dollars of equity isn't going to make much difference when you buy your next home.

Don't Pay Others to Save You Money

The reason Nationwide BiWeekly Administration Inc. was sued by the Consumer Financial Protection Bureau is because the program they offer was misleading to homeowners. The CFPB claims the fees charged by the program (average $1,200) will take up to nine years to pay off before any actual mortgage savings begin. Most people will have moved to another home before that happens.

How the program works is Nationwide BiWeekly Administration Inc. arranges with your lender to make half of a mortgage payment every two weeks because many people receive a paycheck every two weeks. You end up making about one extra monthly payment against your mortgage each year. Also, every time you make a payment, you pay down the principal a little, meaning the interest you pay on each future payment is a little less.

However, you can easily make this arrangement yourself. All you need to do is call up your lender and tell them you want to make a half payment every two weeks. They'll be glad to take the extra payment - without charging a $1,200 fee.

You also have several other options. It's easy to get a copy of your amortization schedule online or from your lender. It breaks down your monthly payments into the principal and interest part of each payment. You can then make an extra principal payment each month to build equity and remove a payment from the end of the amortization schedule. Most online mortgage calculators also have an "extra payment" feature. You can add an extra payment anytime you want. It can be anything you want - $25, $50, $100 extra each month, or $500 when you get a bonus. You don’t need your lender’s permission to make an extra payment at any time.

In the end, you can easily control how much and how fast you pay off your mortgage without handing over a ridiculous administration fee to a sham company. When you are in control, you can also stop extra payments at any time if the need arises. However, first consider if you even want to make extra payments or if you have a better use for that money.

Please share your insights by leaving a comment.

Also, our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions, inquiries, or article ideas to [email protected].

Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years with articles listed on Yahoo Finance, Benzinga, and uRBN. Brian is a regular contributor at Realty Biz News
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