When you have kids and an average job then you already know that pushing your limit to buy a home is not a good idea. If you have an existing car loan or a student loan then you have learnt your lesson – that goes without saying.
Advice for the relatively wealthy:
If you are bringing home a fat pay check regularly and your home price did not exceed your affordable limit then you should be comfortable to pay the following in order to reduce your mortgage faster;
- Double up your payment.
- Accelerate your mortgage payment interval.
- Make 10% or more lump sum payment each year.
- At the time of next renewal put some more cash to reduce the amount.
- Reduce your amortization period.
The GDS and TDS ratios defined by the lenders or insurers ensure that you can make the mortgage payment. Those numbers aren’t there to look after your standard of living. We often forget that the debt service ratios look at your pre-tax income. Our income-tax structure is not uniform across the table. The debt service calculation may be okay for one tax bracket but may pose serious problem for higher tax brackets.
It is your job – to carefully measure your daily needs and future plans – to take proper steps. If you are thinking that by getting an approval for a large amount will give you the power to buy an expensive home and to maintain your luxurious life style then you are making a huge mistake.
Let us re-define affordability first. It is not something that goes by a bunch of surveys or by studies released. It is a number which should and must match your earnings, expenses and debt carrying costs. You should go through all the calculations and make sure that you are and will be comfortable with them.
You have extra debt:
If you have debt then you are not alone. There are a number of fellow citizens who are in exact situation like you are. Our early mortgage retirement plan start from here and it is not going to be an easy task.
It is possible to pay your mortgage and all other debts off earlier if you plan it properly. The planning part should have only five simple steps.
Calculate Present Income.
Predict Future Expenses.
Evaluate Future Budget.
Define Savings and Retirement Target.
Implement Budget Cuts.
We are not talking about those four steps right now but they form the essential parts of your plan.
Paying The Mortgage Faster – With Debt.
Now that you are prepared with your plan let us look at the ways of shrinking the mortgage.
Have a separate mortgage pay-off account.
This is the first thing to do, separate the account – in which you will put the extra money to pay off your mortgage – from your household account. There are a lot of no-fee banks. Just open an account and let your spouse be the primary holder. It is important because when we are in too much of debt we tend to lose our financial focus. If this money remains in your regular account then there is a possibility that it will be spent after other needs.
Add an extra amount on each payment:
Add a few extra dollars in each payment. Let it be $12.99 to start with. You may think that it is a small amount – But this will save you a handful of money.
Let us take an example. If you have a $200,000.00 mortgage and it has a fixed interest rate of 3% – then by paying $12.99 extra per month makes significant difference – It shortens your amortization by 5 to 6 months. It will also save you about $60 in interest cost over five years. Put that money back into your mortgage.
Pay lump sum end of each year:
Buy your mortgage a holiday gift. Since it can not really accept any gift – just give it some money. Putting $100 as a lump sum in your mortgage will make a difference. Just keep doing it You shall be paying off your mortgage faster then you thought.
Reduced Amortization at each renewal:
After you complete your existing term, when you are renewing your mortgage, try to pick up a shorter term. As an example if you started with a 25 years amortizing mortgage and a 3 years term then after 3 years try to renew it for
25 – 3 = 22
20 years. Your payments will not change much but will help to cut the chain sooner.
Strictly No HELOC:
This goes without saying. Do not take any more extra loan against the home.
No Second Mortgage:
Same as before. You can keep that renovation plan in a freeze till you are comfortable with your mortgage loan.
Do not skip a payment:
You are supposed to pay the mortgage regularly. If you can not pay it even for a month then you should understand that this mortgage is not for you.
Save from home and pay the mortgage:
If you are trying to save money from home account like reducing the electricity and heating cost then pass the saving to the mortgage.
- Enjoy your home:
Dealing with debt can be stressful and while doing that we forget about the purpose of our home. You have bought this home to enjoy and to have a good time with your family. Do not let debt take those finer sides of your life away.
In the end it is all up to a borrower to decide what to do. We can only help. You have to stick to your plan and review it every month. Don’t worry you will make it to the finish line – if you really want so.