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What secrets are you missing concerning your mortgage? I was surprised to learn that the word mortgage means death pledge. The wrong mortgage will mean near death for your financial health. Do you know if your bank approved a mortgage amount that will make you house poor? You probably know the payment amount and you might know the interest rate, but do you know how the interest and principal are repaid?

Dave Ramsey recommends that your mortgage payment be no more than 25% of your take-home pay. Most banks will lend you 28-30% of your gross income. That could keep you financially shackled for years.

Bigger homes have larger utility bills,  require more furniture, and other maintenance costs. Remember, the bank is in business to make a profit, not to look out for your interests. (Pun intended!)

How Interest Is Calculated

Each month you are charged 1/12 of the interest rate on the unpaid balance. If your rate is 4%, you will be charged 4% divided by 12 which equals 0.34% per month. So why does that matter? You are paying much more than you think!

Total Cost Of Your Mortgage

For example, Let’s look at a home mortgage of 200,000 at 5% for 30 years.

Monthly payment:  $1074

Total Overall Cost:  $386,512. ($1074 x 360 months)

Total Interest:         $186,512

Only $240 Of your first $1074 mortgage payment is principal. the rest is interest

Only $240 of your first $1074 payment will be applied to the principal!  So little of your payment goes to the principal because the bulk of the interest is paid in the early stages of the loan.

Additional Related Costs

If you did not put at least 20% for a downpayment, you will also be paying private mortgage insurance. This insurance is required to protect the loan in event of foreclosure. Once you have 20% of equity, you can request that the bank drop this coverage.

Why Wasn’t I Informed Of This?

Discovering this information is shocking! To be honest, I was more than a little upset! But that was my fault. The bank does tell you in all the documents they have you sign when processing the loan. But by that time, I was so excited to be approved and get my dream house, that I wasn’t focusing on the true costs. I was thinking about how my furniture would look in front of the fireplace instead of my financial future.

How Long Until Principal Is More Than The Interest?

Most of your payment each month until year 16 of this 30-year mortgage will go to the interest! You do not begin paying more principal than interest for over half the life of the loan.

Thinking of Selling?

What’s worse, if you sell your house after 5 years, you will only have $16,343 in equity after spending $64,440 on payments! If you buy another house with a 30-year mortgage you will simply start the painful process over, but most likely with higher interest because you probably purchased a more expensive home than your previous one.

What Now?

Okay, so what now? Do I stay in this mess? Sell? What? Here are some suggestions.

NEVER, NEVER, GET A 30 YEAR MORTGAGE AGAIN!

I mean it! Just don’t do it! Here is a much better way. Ideally, you would save and pay cash for your next home, but I know that is out of reach for most of us.

A Mortgage That Builds Your Equity Much Faster

Although not marketed much by banks, the fifteen-year mortgage will build equity far faster than a 30-year mortgage. “But I can’t afford double payments!”  Don’t freak out. Remember how the interest is calculated on the unpaid balance?

Same Loan Amount With A Fifteen Year Mortgage

Here is a $200,000 loan with a fifteen-year mortgage.

Monthly payment: $1,582.

Total overall cost: $284,686 ($1582 x180 months)

Total interest: $84,686

A Shorter Loan Term Means You Will Pay More Principal With Each Monthly Payment. The payments are not doubled! The 15-year mortgage is only $508 more per month, to save over $138,026 on the entire cost! Not only that, but the principal portion of the payment is larger than the interest portion just 14 months later!

Sell in 5 Years With 3 Times More Equity

So if you sell in 5 years you will have $51,846 in equity to put toward another house rather than only $16,343 mentioned in the 30-year example.

For both loans, you have paid in 60 payments (5 years)

On the 30-year $64,440 to gain $16,343 in equity

On the 15-year  $94.920 to gain $50,886 in equity.

Can you see which is a better option for the most expensive expenditure in your budget? If you get the biggest costs right in your financial plan your progress to prosperity will advance rapidly. Isn’t that what you want?

How To Fix It

So if you’re already in a 30-year mortgage how can you fix this mess? Several ways. If you are paying just 25% of your take-home pay on your fixed rate mortgage, and plan to stay in your home for more than 5 years then I recommend that you begin to pay additional principal payments as often as possible.

If you want to free up more money for your mortgage consider the debt-snowball method mentioned in this post.

Amortization

Get an amortization calculation for your rate and length of the mortgage. Locate the current payment, and start to put additional principal payments on the loan each month. Be sure to designate these funds to the principal. You may pay less than one month’s principal payment, but it will be more difficult to track. This assumes that you are already out of debt and have 3-6 months living expenses saved. One way to fund these extra principal payments is to start a side hustle.

Less Favorable Mortgages

If you have a less desirable mortgage such as a 30-year adjustable rate mortgage, an FHA,(Federal Housing Authority), a VA (Veteran’s Administration), I recommend checking into refinancing or even consider selling your home. If you have been paying more than 25% of your take-home pay, then I would seriously urge you to look at homes for which you could afford a fifteen-year mortgage at the 25% of take-home pay. It will be a slight step downward for a short time, but you will build equity more quickly, and if you are succeeding with your finances in other areas, you will soon be in a position to decide if you want to upgrade.

Reduced Stress

Can you put a value on the peace of mind you gain by stepping away from the financial edge? Dealing with less stress frees your mind to develop solutions to meet your goals more quickly, enjoy your family more, and sleep better at night.

Each time I was about to make a purchase, I began to calculate how much I would save on the mortgage by applying that money to the principal instead of spending it on something else.

Because your home is the most costly expense you will incur, you want to know how to make your money work most effectively for you. These mortgage secrets will put you ahead of the game. Then you can see whether you have made wise choices for vehicles because they are the most expensive items after the house.

If you find yourself in a similar situation, don’t beat yourself up. We all make mistakes. Just use this information to make better decisions. You could consider refinancing if you are in a higher rate mortgage than current rates, but at the very least, get a copy of the amortization schedule for your mortgage and start prepaying principal payments as often as you can.

What changes will you make to your mortgage?

 

 

 

 

 

 

 

 

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