Mortgage Cycling Secrets
By Steve Gillman - 2009
What is mortgage cycling? You may have seen the ads for books
on this "secret technique" for paying off your mortgage
sooner. There is undoubtedly some useful information in them
too, especially if you are not familiar with the basic premise
of the concept - pay extra principle every year and you'll pay
off the loan sooner and save thousands on interest.
Of course mortgage cycling is dressed up as a "new"
system. There are many little tricks to doing this most effectively,
and there are more risky techniques too, like using short-term
home-equity loans to pay down your primary mortgage now. In the
end, using this latter technique could cost you more in interest
or even put you into financial trouble that may lead towards
The safest method of "mortgage cycling" is just
to put large lump sums of money towards your mortgage loan every
few months to a year. Yes, if you pay thousands of dollars extra
per year, you will pay off your loan many years sooner. No surprise
there, but what if you don't have the few hundred dollars a month
extra needed to do this?
Funds for Mortgage Cycling
First, don't assume you can't come up with SOME extra money
each month or at least each year. Many people will say they can't,
and yet still add hundreds of dollars per month to credit card
payments buying anything from expensive shoes to snowmobiles.
There's nothing wrong with buying things, but the choice is yours
if you want to pay down that mortgage instead.
Other ways to pay off large chunks of principle include using
your annual tax refund, insurance settlements that are not otherwise
allocated, and any cash gifts or prizes you may receive.
How much sooner can you pay off your mortgage? That depends
on how much extra you pay and when. The sooner you put extra
towards the loan, the better. Let's look at an simple example,
just making an extra payment each month.
Suppose you have a $160,000 30-year mortgage at a 7% annual
interest rate, for example. The regular monthly payments will
be $1064.40. Look at your second payment and you would see that
it is composed of $932.57 interest and $131.83 principle (the
amount you actually pay down the loan). If you add $131.83 to
your normal payment of $1064.40, you have taken an entire month
off the time until your mortgage is paid off.
In other words, if you did this each month, you would cut
the time to pay off your loan in half. Of course, the principle
part of the payment would be growing with each payment, so the
extra payment would be a little more each month, but hopefully
we can assume that over the 15 years your income will rise enough
to afford that. Consider this: pay normally, and your last year
of the mortgage you'll be paying out $12,772.80 ($1064.40 x 12
months). If you pay about an extra $1600 that first year, in
the way shown above, you'll eliminate that entire last year -
a savings of over $11,000!
There are other ways to pay off extra principle. You have
to evaluate them carefully, though. For example, you could put
a few thousand in savings towards the loan right now and save
perhaps tens of thousands in interest over the years. The question
here, though, is will you need to pay even higher credit card
rates because you emptied your savings account and need some
money? You could cash in stocks, but will you be giving up a
9% return to pay down a 7% mortgage? Also, you may want to pay
off any debt that carries a higher interest rate than your mortgage,
before you start applying extra money to that.
If you want to keep it simple, just set aside extra money
every month and apply it to the loan. Also use any other money
that will likely be squandered (like tax refunds). Just do a
few simple things to pay something extra on the loan each year,
and you can forget about complicated mortgage cycling plans.
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