One of your largest investments is the home you live in. The advantage of home ownership is in the equity you build into your home. The impact is twofold: First you are reducing the amount you owe the bank and thereby increasing the amount of value you can eventually extract. Second, the value of your home increases over time providing more value that can be extracted.
Now granted in late 2007 through 2008, the housing market in the United States took a deep hit in terms of value. Housing princes fell and many people were left with mortgages that exceeded the value of their home and left many with no value at all. If you find yourself in this situation, don’t overreact. Over time the value of any investment will go up and down but over a longer period it will go up. Given time, the value of your home will increase.
Regardless of whether you have equity in your home or not, here are some very simple and easy techniques you can use to pay off your home faster and build your wealth.
- Accelerate your payments. Most mortgage lenders allow you the opportunity to make accelerated payments. If you are currently making monthly payments, consider weekly or bi-weekly payments.
Consider this. If you have a $200,000 30 year mortgage with a rate of 5.75% and are making monthly payments of $1,167 you’ll pay off your mortgage 24.5 years and saved nearly $46,000 in interest by making weekly payments of $292!
- Give your mortgage a raise. Your mortgage lender may allow you to make prepayments. In other words they will allow you to increase the amount of the payment you make without any penalty.
Many of us may receive annual salary increases. Consider this. If you receive annual salary increases of 3% every year and you increase your weekly mortgage payment every year by 3%, you will have paid off your mortgage in just over 16.5 years and saved over $96,900 in interest over monthly mortgage payments!
Still not convinced? If you make accelerated payments and give your mortgage payments an annual raise, your savings are almost $100,000. You will also be free of your mortgage payments to which you can then invest.
- Make lump sum payments. If you are allowed to make lump sum payments, take advantage of any savings you have or unexpected money you come across (i.e. tax returns, bonuses, & gifts). Those funds should be used to pay down your mortgage unless you can invest the funds and earn more, after tax, on your investment than you pay interest on your mortgage (again after tax).
If you still want to pay off your mortgage faster and are risk adverse your can try something that can really turn up the steam on paying off your mortgage. Keep in mind that this technique is the more sophisticated investor and you should seek professional advice before making any sort of investment decisions. The technique is simple: Take out a home equity line of credit and invest the entire amount of the line of credit. If your after tax cost of borrowing (that is, if the interest you pay on the line of credit can be deducted from your income) is less than the returns on your investment, then you are building additional wealth that you can then use to pay down your mortgage.