A homeowner can change the term of their mortgage by simply paying extra each month because traditional mortgage loans allow the borrower to pay down their principle as they wish.
For example, a $600,000 mortgage at a 5% fixed rate would require a principal and interest payment of $3,221 per month. If the borrower sent in an extra $50 each month, the loan would be paid off in less than 29 years. If this same borrower wants the loan paid off in 20 years, they need to ignore the monthly mortgage statement and send in an extra $739 each month and take control of their amortization.
Here is a funny little tip: Nowadays, most borrowers have an impound account to pay the property taxes and insurance monthly. If a borrower is supposed to pay $3,911.33 per month to a mortgage company for their PITI, it’s not a terrible idea to pay an even $4,000 each month because the extra $88.67 goes straight to principle and reduces the term of the loan, and it is easier to write the check each month because writing out all those numbers on a personal check is a pain in the neck for those of us that have trouble writing with tiny font.
For borrowers in their 30s and 40s who were fortunate enough to purchase or refinance over the past two years into a 30-year fixed rate below 3.5%, most certified financial planners, CPAs and financial advisers would recommend paying the minimum required mortgage payment each month and invest $500 to $1,000 monthly because historically the American stock market has produced an annual rate of return of 8% to 10% on average, which is obviously better than paying down a 2.75% fixed-rate loan.
This “pay the minimum and invest the difference” strategy only pays off if the monthly investment actually happens and the homeowner not only maximizes their 401(k) and IRA contributions each year but also invests monthly into a diversified brokerage portfolio.
The key to financial security is getting to a point at 65 where your mortgage is either paid off or the monthly obligation has no effect on your ability to live comfortably for the balance of your life.
Jim Porter, NMLS No. 276412, is the branch manager of Solano Mortgage, NMLS No. 1515497, a division of American Pacific Mortgage Corporation, NMLS No. 1850, licensed in California by the Department of Financial Protection and Innovation under the CRMLA / Equal Housing Opportunity. Jim can be reached at 707-449-4777.
