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| Paying for a Home... |
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| Additional Resources: The Attorney's Guide to Credit Repair Mortgage Loan Tips Additional Reference Material |
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For example, when comparing to your
current rent, if you determine that you
can afford to pay somewhere around $750 a month for a larger house with
a
yard for the kids to play in, everyone having their own bathroom, and
so on, imagine what you could do if you bought a slightly larger
living space for $750 a month, but it was a duplex that allowed you
to rent out the other half? What if you were able to find a slightly
larger living space a little further away from work that only
required you to pay $550 a month?
That frame of mind tends to relax you a bit doesn't it? Did you know that over the course of your mortgage for the first several years you will pay more interest on your mortgage than you will on the loan (principal) itself? Imagine this, a home loan (mortgage) taken in mid 2002 at $94,000 at 6.75% interest rate, making the regular home payment month-to-month, today would still owe approximately $87,000? Six years of payments at approximately $610/a month (does NOT include insurance and taxes) only paid $7,000 off of the original amount of the loan. |
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Therefore,
it is the
strong opinion of
this site, to look for alternative housing options that will allow
one to pay more to the mortgage's principal as soon as possible.
The easiest way one can visibly see their way to paying down a loan, is by using an amortization calculator. Given certain criteria about a loan, one can see how much of their monthly payment, every month for the life of the loan, will go to interest and how much will go to principal. Most calculators will have two columns. One column has the interest paid for a given month and one has the principal amount. Notice that if you paid not only the current month's principal, but also the exact amount of the next month's principal, you will in essence shave off one month of the life of your loan. And in essence skipped having to pay next month's interest amount as well, as the next payment due to your lending company will be for the third month's payment. |
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NOTE about prepayment on mortgage loans: You will definitely need to to check with your mortgage lender or broker and specifically ask about prepayment options available on the loan. Have them show you in the paperwork where it specifically states that there is NO penalty. Also, if you prefer to use this method, you need to be very sure that you are specifying on the payment voucher that you send into your bank to put the extra funds towards principal. For example, some banks, if it is not specifically stated as extra principal payment, they will automatically put it in escrow (typically used to pay for taxes and insurance). Which really defeats your purpose!! |
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Let's practice this. Enter into your amortization calculator (some fields may not be on the calculator you are using): Principal (aka Loan Amount): 100,000 Annual Interest Rate: 6.0 Balloon Payment: (leave this blank) Payments per Year: 12 Number of Regular Payments (this is the number of months or years your loan is for): (if in months) 360; (if in years) 30 If there is an option to show amortization schedule select it, and then hit submit! You should see that your regular payments will be $599.95 (again, this does NOT include insurance and taxes). Your table for the first 12 months should look something like:
Note that for the first payment, you will be paying only $99.55 towards the principal and $500.00 goes towards interest. This is unavoidable if you need to buy a home using a mortgage loan. However, applying the concept previously described, if you can pay not only the $599.55 for pmt 1 PLUS the $100.05 for pmt 2's principal, the next payment your lender will ask you for is payment 3 which will be $100.55 for principal + $499.00 for interest. Notice that we skipped paying the payment 2's interest altogether! So far using this method, you would have saved $499.50 of interest! Notice that you also paid down the loan balance sooner. Notice that the interest column also becomes smaller and smaller in amount. If we were to skip to the end of the loan, you would see that these two columns would switch, paying more towards the principal than to interest. This is exactly why it was previously stated that the sooner you can begin to pay additional money towards your loan the better off you will be. After all, is it not better to be paying more money towards the principal (the loan amount) than to interest? The only way to do that is to get to the end of the loan faster. Of course you can pay more towards the principal than the amount shown for the next month. Make a payment or TWO, that's perfectly fine as well. On the other hand, if you find a house
that offers your budget the ability to pay an extra $100 or so a
month, then you have also found that another $100 a month or so is
available to put into your savings, 401k, etc. With this frame of mind in tact, let's move on to the next step which is covers the checklist of items that you can expect to need when applying for a loan. |
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