Build Equity

4 WAYS TO BUILD EQUITY FASTER + PAY DOWN YOUR MORTGAGE QUICKER This page has consumer information and resources to help you learn how to pay down your mortgage and build equity faster without paying lots of extra money to your existing home loan. This information is specific to loans in the state of Washington. 4 ways to save money on a home loan and build equity faster: 1. Mortgage accelerator systems. 2. Bi-weekly payments: 26 payments a year instead of 12. 3. Get a 15 year loan instead of a 30 year loan. 4. Pay extra principal. 1. MORTGAGE ACCELERATORS These systems are designed to pay down your mortgage and build equity faster, usually without paying any extra principal toward the loan. The general premise is to have your mortgage in the form of a home equity line of credit (Heloc), preferably in the first position. All your paychecks are deposited directly into the home equity account. You only transfer money from the equity line to your checking account once or twice a month to pay bills and get cash for general expenses. Since interest is compounded on the daily principal balance of your equity line, you will pay far less interest over the life of the loan because your paycheck income sits in your equity line rather than your checking account. Illustration A dozen or so years ago money market rates were 10% or more and I was managing a law firm. We used to deposit all client payments directly into a money market checking account. We only transferred money from the money market account to our regular business account twice a month to pay bills. We would have paid bills with checks directly from the money market account but the bank had a high per-check fee. So we wrote only two money market checks a month to fund our general business checking account. We earned a very nice amount of interest by having our deposits sit in the money market account until needed to pay bills. Mortgage accelerator systems work on the same principal as in the illustration above. But instead of parking your paychecks where they will earn interest, you are parking them where you avoid incurring interest on your home loan. This makes sense because current rates for home equity lines of credit are around 8% and money market accounts only pay around 3.5%. Even if you were able to secure an equity line a few years ago with a fixed interest rate of 5% or 6%, using a mortgage accelerator system still saves money. This is not a gimmick. This type of loan a powerful tool that must be used carefully. You must be in a positive cash flow situation for any accelerator to work properly. I know of only local source for these special equity lines in NW Washington: the office of Kimbler and Thomas in Bellingham. The loan officer has been a financial advisor for decades and works with clients to be certain these types of home equity loans are right for the situation and lifestyle. Call Dave Kimbler (360) 312-5104 or toll free (866) 305-5897 info@KimblerThomas.com 2. BIWEEKLY LOANS: 26 SMALLER PAYMENTS A YEAR INSTEAD OF 12 LARGE PAYMENTS Loans with 26 payments a year are known as bi-weekly loans. Each payment containing both principal and interest will reduce the principal amount. Since interest is compounded daily, making payments every other week makes a bigger dent in the principal than most people realize. If your monthly loan payments are $1,200, then switching to 26 payments a year only adds an average of $100 to your monthly budget. Example A 30 year loan at 7% fixed for $150,000 requires monthly payments of $997.95 Annual total of payments: $997.95 x 12 = $ Total cost of loan including interest = $359,263 A 30 year loan at 7% fixed for $150,000 requires biweekly payments of $498.98 Annual total of payments: $498.98 x 26 = $ Total cost of loan including interest = $305,938 Loan is paid off sometime in the 23rd year. Use the biweekly calculator at BankRate.com to see the effects of switching your loan payments to every other week: http://bankrate.com/brm/calc/biweekly-mtg/biweekly.asp 3. LOANS WITH FEWER YEARS Consider a 15 year loan rather than a 30 year loan. A 15 year loan will not require double the payment amount of a 30 year loan. If you have access to Quicken or Quickbooks, use their calculators to discover approximate payment amounts. Go to Planning, Calculators, Loans. If a 15-year loan sounds too aggressive, consider a 20 year loan. Example quoted from About. $250,000 mortgage at 7% for 30 years = $1,663 monthly payment Total interest you pay over 30 years = $348,772 Total amount paid = $598,772 (interest plus principal) $250,000 mortgage at 7% for 15 years = $2,247 monthly payment ($584/month more) Total interest you pay over 15 years = $154,473 Interest savings on a 15-year versus 30-year mortgage = $194,299 4. PAY EXTRA PRINCIPAL Paying even $100 a month extra on your loan can save you thousands of dollars in interest over the life of the loan. You can see the effect of extra principal payments on your loan by using the calculator at http://www.hsh.com/calc-amort.html Here is an example quoted from About. $250,000 mortgage at 7% for 30 years = $1,663 monthly payment $100 extra per month reduces mortgage term by almost five years Total interest you pay over 30 years = $291,992 Total amount paid = $541,992 (interest plus principal) Interest savings on a 30-year mortgage with a $100 per month additional principal payment = $56,780 Most lenders hate applying your payments to principal. Unless you specifically instruct them, they may apply the extra payment toward interest or something else. It is important to clearly designate these extra payments to be applied to principal. Lots of borrowers write a separate check for the additional amount and write in large letters "Toward principal only" along with their loan number on the check. Some use a highlighter on the words "principal only." Check your lender's statements carefully to be certain all your payments are allocated correctly toward principal and interest. Many loans have a clause that states you must let them know of any errors in writing within 60 days of date of statement or you will lose your consumer rights. Some borrowers make copies of their letters before mailing. Some mail the letters via Certified, Return Receipt for protection. A phone call to the lender will probably not protect you. The sole intent of this page is to pass along consumer information so you can make choices. My statements are not advice - they are my personal opinions based on my research only. RECOMMENDED SOFTWARE Below are 2 software programs talking about Do It Yourself mortgage accelerator systems. The mortgage accelerator home equity line of credit is the most powerful tool. MAXMYEQUITY MaxMyEquity's system uses lines of credit and other banking products. Having a home equity line of credit is optional. MyMaxEquity sells software that works on a PC only (not Mac). You enter your personal financial data into the program then use their software to run "what if" scenarios to see what actions are best for you. They do not originate loans or bank accounts. Software costs $99. No additional fees. MyMaxEquity Order Form Book with CD: Supercharge Your Mortgage This book has a program on a CD which helps you determine the impact of extra principal payments. You can create an infinite number of "what if" scenarios and see the results. You can change your strategy and extra principal paid any time.