Title:
Mortgage Cycling
Secrets Revealed
Word Count:
657
Summary:
You may have
heard of mortgage cycling, the latest plan for building equity faster by paying
off your mortgage loan sooner. What is it, and does it work? Find out here.
Keywords:
mortgage cycling,
mortgage, equity, real estate
Article Body:
Have you heard
about mortgage cycling? Maybe you've seen the ads for books on this
"secret technique" for paying off your mortgage sooner. Is there some
useful information in them? Yes, especially if you are not familiar with the
basic premise that you can pay extra principle every year and you'll pay off
the loan sooner and save thousands on interest.
Mortgage cycling is dressed up as a "new" system, and of course there
are many little tricks to doing this most effectively. There are more risky
techniques too, like using short-term home-equity loans to pay down your
primary mortgage now. This latter technique could cost you more in interest or
even put you into financial trouble that leads towards foreclosure.
The safest way of "mortgage cycling" is to just put large lump sums
of money towards your mortgage loan every few months to a year. Pay thousands
of dollars extra per year, and you will pay off your loan many years sooner. No
surprise there, right, but what if you don't have the hundreds of dollars a
month extra needed to do this?
<b>Money For Mortgage Cycling</b>
Don't assume you can't come up with SOME extra money, at least each year. Some
will say they can't, and yet still add hundreds of dollars per month to credit
card payments from buying anything from expensive shoes to snowmobiles. There's
nothing wrong with buying these things, but the choice is yours if you want to
pay down that mortgage instead.
You can also pay off large chunks of principle by using your annual tax refund,
insurance settlements that are not otherwise allocated, and any cash gifts or
prizes you may receive.
How much sooner you can pay off your mortgage depends on how much extra you pay
and when. The sooner you pay extra money towards the principle, the better.
Let's demonstrate with a simple example, just making an extra payment each
month.
Suppose you have a $160,000 30-year mortgage at a 7% annual interest rate.
Regular monthly payments would be $1064.40. If you looked at your second
payment you would see that it's composed of $932.57 interest and $131.83
principle (the amount you actually pay down the loan). Just add $131.83 to your
normal payment of $1064.40, and you have taken an entire month off the time it
will take to pay off your mortgage.
If you did this each month, you would cut the time to pay off your loan in
half. The principle part of the payment would be growing with each payment, so
the extra payment would be a little more each month (around $137 by the end of
the first year), but hopefully over the years your income will rise enough to
afford that. Consider that if you pay normally, your last year of the mortgage
you'll pay $12,772.80 ($1064.40 x 12 months). On the other hand, pay about an
extra $1600 that first year, in the way shown above, and you'll eliminate that
entire last year - a savings of over $11,000!
Other ways to pay off extra principle need to be evaluated carefully. You
could, for example, put a few thousand of your savings towards the loan now and
save perhaps tens of thousands in interest over the years. However, will you
then need to pay even higher credit card rates because you emptied your savings
account and need some money? You could cash in stocks and apply the money to
the loan, but will you be giving up a 9% return to pay down a 7% mortgage? You
may also want to consider paying off any debts with higher interest rates
before you apply extra money to your mortgage.
To keep it simple, set aside extra money every month and apply it to the loan.
Then use any other money that may otherwise be squandered (like tax refunds).
If you just do a few simple things to pay something extra on the loan each
year, and you can forget about complicated mortgage cycling plans.